Blueprint for the Semiconductor War Profits

A nanometer (nm) denotes the size of transistors - the backbone of microprocessors.

Human hair has a diameter of 100,000 nm. So, you can imagine how microscopic will a 7 nm semiconductor microchip be!

The smaller the size of a transistor, the more of them can be squeezed into a chip.

Chinese behemoth SMIC recently developed a 7 nm semiconductor, placing it in the league of Intel, Samsung, and Taiwan Semiconductor Manufacturing Company (TSMC) and other global semiconductor chip behemoths.

Originally the US was the Mecca of semiconductor chip R&D. This means the research for making the tiniest of the chips were all owned by the US.

US still continues to be the hub of advanced (smaller sized) semiconductor chip research. Taiwan's TSMC, the world's largest chip maker, is nothing but a contract manufacturer for companies like Apple and Nvidia.

But at the centre of the US-China tussle are newer generations of semiconductors, which power everyday electronics ranging from mobile phones to electric cars and home appliances.

Over past few decades, China's tech companies have, to a large extent, relied on semiconductor imports. But as Beijing tries to move up the technology supply chain with billions of dollars in investment, the US is getting wary.

Sensing stiff competition from China, the US has mounted a global effort backed by billions of dollars and deployed intense diplomacy. Also, it's trying to block China from acquiring technology for developing super-fast computers and cutting-edge weapons.

But despite multiple roadblocks, China's SMIC has powered ahead with the production of advanced processing chips.

So, the US recently passed the CHIPS and Science Act, to offer subsidies and tax cuts for the companies which set up chip facilities in the US. The law imposes curbs on such companies from doing business in China.

In the last few years, successive US administrations have imposed restrictions on transfer of technology to China. While China wants to move beyond its status as the world's contract manufacturer, the US accuses it of technology theft.

This is the era of semiconductor wars.

The recent supply chain disruptions have made semiconductor self-sufficiency a national priority for India.

First, it was the covid lockdowns. Then the Russia-Ukraine war. The semiconductor shortages affected many industries all over the world. In India, auto firms were badly affected by supply constraints.

We must ensure this never happens again. India must become a major semiconductor manufacturing hub by the end of the decade.

China only accounts for 7.6% of global semiconductor sales. It has planned massive investments in the sector over the next decade. As semiconductor production requires considerable water resources, which China lacks, it's frantically looking for alternative water sources.

Controlling advanced chip manufacturing in the 21st century with water resources may prove to be like controlling oil supplies in the 20th. The country that controls this manufacturing can throttle the military and economic power of others.

India's plans to be a global supply chain hub depends on chip availability. This is even more so for the EV ecosystem in the country. Also, these Taiwanese chip foundries risk losing business amid the US China standoff.

So, it turns out, the chip crisis has brought an unforeseen opportunity for India.

The ambitions of Indian manufacturers are no longer limited to designing and outsourcing chip making to Taiwan. They desire to take a big tech leap. This is the right thing to do if India is to position itself firmly in the global supply chain.

In December 2021, the Indian government also announced incentives worth Rs 760 bn for semiconductor companies in the product linked incentive (PLI) scheme.

The government received 23 applications for this scheme. The Tata group and the Vedanta group expressed interest in setting up chip facilities in India. International firms have also shown interest in setting up chip manufacturing plants in India and making India a semiconductor hub.

A notable partnership in this space was of Vedanta and Foxconn. In February 2022, Taiwanese electronics seller Foxconn and Indian conglomerate Vedanta joined their hands for a semiconductor foray.

They announced a JV between Vedanta Resources with Taiwan's Foxconn for a semiconductor facility in Gujarat. Vedanta Resources - the largest mining company in India - will setup the display and chipset manufacturing plant sites. Foxconn will serve as the technical partner.

Semiconductors are now a key focal point of China-US geopolitical war. If data is the new oil and artificial intelligence (AI) is the new electricity, then it makes sense to view semiconductors as the must have resource.

No wonder semiconductor manufacturers are hot stocks. Apart from Vedanta, there are already quite a few listed Indian companies in the semiconductor sector.

Mind you these are not recommendations. These are merely few semiconductor related stocks that could be considered for a watchlist. So you have companies like...

• Tata Elxsi
• Dixon Technologies...and also smaller ones like
• ASM Technologies
• SPEL Semiconductor
• Moschip Technologies
• Ruttonsha International

Before you decide to invest in any stock to capitalise on the semiconductor megatrend, follow this blueprint...

• Understand the demand supply dynamics of the semiconductor ecosystem.
• Be patient to track niche companies and their execution risks in the ecosystem. Yet another reason to take a closer look at the semiconductor ecosystem is its strong linkages to the defence ecosystem.
• Reject companies over dependent on leverage.
• And most importantly, look for managements that have a track record of creating wealth for minority shareholders.

You need tools to create such a semiconductor watchlist for yourself. Check out the free Equitymaster Screener.

Here apart from getting access to readymade watchlist following various themes you can also create your own watchlist and track some of the highest potential stocks set to make the most of the Semiconductor War Profits.

Stay tuned for more...

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)