Rising tensions in the Taiwan Strait : All Eyes On AI

The Taiwan Strait is a 180-kilometer-wide body of water separating the island of Taiwan from the mainland of China. It acts as a crucial international waterway, connecting the South China Sea to the East China Sea.

the Taiwan Strait is a strategically important and complex body of water with potential consequences for global trade, political stability, and the environment. Its future remains uncertain, with the need for peaceful resolution of tensions and sustainable management of resources.

With this the Taiwan Semiconductor Manufacturing Company Limited (TSMC) stock may face additional pressure due to rising tensions in the Taiwan Strait and worsening Sino-American relations.

The demand for AI chips has helped mitigate geopolitical risks so far, but there are concerns about the long-term balance between risks and growth opportunities.

TSMC's upcoming earnings report for Q4 is expected to be better due to increasing demand for AI chips and partnerships with companies like Nvidia and Apple.

The good news though is that the rising demand for AI chips was able to mitigate the geopolitical risks so far. That’s why TSMC has been able to outperform the broader market . While supply constraints are expected to remain for a while and help the company improve its performance next year, there are questions about whether it makes sense to cash out and realize the profits given the fact that geopolitical risks could start to outweigh growth opportunities in the long run.

To this day, the backlog for Nvidia’s H100 GPUs continues to increase while the release of H200 and AMD’s MI300X GPUs next year will make it possible for TSMC to greatly improve its performance given the current supply constraints.

What’s more is that Apple is currently under pressure to revive growth after several quarters of sales decreases and to improve its own performance it has already committed to ordering the production of 3nm chips from TSMC for next year. It is also currently testing TSMC’s 2nm chips, which are expected to enter the volume production stage in 2025 and give the Taiwanese-based foundry an additional edge against its foundry competitors.

While the rising demand for AI chips is certainly going to help TSMC improve its performance next year, the rising geopolitical risks could start to outweigh growth opportunities in the foreseeable future.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA