Semiconductors – the tiny silicon chips that enable the functionality of smartphones, computers, autos, data centres, weapons and more – sit at the heart of our daily lives, but also at the heart of a battle between the world’s two largest economies.
In October 2022, the battle to be the winner in global computing power ramped up, when Washington introduced measures to restrict sales of computer chip technology to Chinese companies, on the grounds of national security. Under new rules, the U.S. cited concerns regarding China’s investments in supercomputers and artificial intelligence for military applications. These measures were intended to make it harder for China to obtain advanced chips for cutting-edge technologies.
Going into 2023, the Netherlands and Japan joined the U.S. in limiting China’s access to advanced semiconductor machinery, by restricting sales of advanced lithography equipment to China. This marked a significant escalation in U.S./ China tensions, as the U.S. looks to close out any loopholes that have enabled China’s technological progress to date, and ultimately reflects the U.S.’ deepening concerns over China’s strategic rivalry.
This rivalry, and the related restrictions of tech exports to China – often referred to as the ‘tech war’, is a trend that we predict is here to stay. It is therefore something that we feel is important to consider in terms of our investment positioning.
In this report, we look to assess the following potential implications of the ongoing tech war:
- From a macro perspective: we discuss why we believe the status quo will largely remain, based on an inability to recreate the current semiconductor ecosystem in the U.S., and the lack of credible U.S.-based competition.
- From a portfolio standpoint: we look at how companies, sectors and countries may be impacted, including emerging markets countries that we expect to benefit from changes to the global tech supply chain.
In our view, ongoing geopolitical events make our top-down, thematic research more important than ever. As long-term owners of the companies in which we invest, we seek to understand the broader implications of political and social change, and how these are likely to affect companies and supply chains across emerging markets.