Madmaxer/iStock via Getty Images

Madmaxer/iStock via Getty Images

The United States, along with Allies and partners, is imposing severe and immediate economic costs on Russia in response to Putin's war of choice against Ukraine. This includes Russia-wide restrictions on semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies. These severe and sustained controls will cut off Russia's access to cutting-edge technology.

As with previous sanctions by the Trump and Biden administrations in Mainland China, western companies are complying with sanctions. TSMC (TSM), Intel (INTC), and GlobalFoundries, for example, have announced publicly that they have suspended all sales to Russia and to third parties known to supply products to Russia.

TSMC has begun to tell Russian companies that they will not make chips for them. These companies include Baikal Electronics, which in late 2021 received 5,000 Baikal-M (BE-M1000) SoCs from TSMC Baikal chips. Other compliances to sanctions include chips made by TSMC for MCST (Moscow Center of SPARC Technologies), to server manufacture Yadro, and to Scientific and Technical Center (STC) Modul.

In FY2021, sales to TSMC represented 15% of Applied Materials' (NASDAQ:AMAT ) revenues, down from 18% in 2020 but up from 14% in 2019 in 2021, as shown in Table 1. Only Korea's Samsung Electronics (OTC:SSNLF) purchased more equipment, representing 20% of AMAT's revenues, up from 18% in 2020.

In addition to AMAT, TSMC is a large customer of ASML's (NASDAQ:ASML ) DUV and EUV lithography equipment. TSMC predicts that they have ~50% of all the active EUV machines installed worldwide. Beyond that, the company also has ~60% of cumulative EUV wafer production as shown in Chart 1.

TSMC was in the crosshairs of the U.S. Government's sanctions against China's Huawei in 2019, and in 2020, TSMC stopped supplying semiconductor chips to Alchip Technologies, a fabless chip designer headquartered in Taipei, Taiwan. Alchip is a member of TSMC's Design Center Alliance.

Alchip halted shipments to Phytium, which made up 39% of its revenue in 2020, when the U.S. Government blacklisted the supercomputer company in April 2021. Of interest, shares of Alchip (a Taiwan-listed firm) fell by nearly 50% since the Phytium sanctions. TSMC, on the other hand, dropped 4% in the few days after the sanctions and then recovered. Likewise, AMAT dropped 3% and recovered and ASML dropped 9% and recovered.

Although Beijing now regularly sends warplanes toward Taiwan, there is no sign that an attack on the island is imminent. According to a March 1, 2022 New York Times article:

"Taiwan, like Ukraine, has long lived in the shadow of a large and overbearing neighbor. Both China's leader, Xi Jinping, and President Vladimir V. Putin of Russia have appealed to nationalistic historical narratives to justify their present-day territorial claims. And Mr. Xi has in recent years intensified his warnings to Taiwan not to seek formal independence from China, similar to the ways in which Mr. Putin had threatened to punish Ukraine if it sought to strengthen security ties with the West, for instance by joining NATO."

According to a December 21, 2021 article in the Washington Times:

"China's military is actively preparing for a potential attack against Taiwan and the Pentagon is working closely with the island's military to deter a direct assault and develop asymmetric weapons to fight off Beijing, senior Biden administration officials told Congress on Wednesday [Dec 15, 2021]. Ely Ratner, assistant defense secretary for Indo-Pacific security affairs, said Taiwan remains a "beacon of democracy" and is a vital outpost in a network of U.S. allies and partners in the western Pacific.

Amid growing military coercion toward Taiwan, [Mainland] China is preparing "to unify Taiwan with the PRC by force while simultaneously attempting to deter, delay or deny third-party intervention on Taiwan's behalf," Mr. Ratner told the Senate Foreign Relations Committee. The hearing was one of the first this year to explore the state of U.S. relations with Taiwan and was held at a time of increasing tensions between Washington and Beijing on a wide range of fronts."

If Ely Stefansky Ratner, Assistant Secretary of Defense for Indo-Pacific Security Affairs in the Biden administration is correct that Mainland China is preparing to unify Taiwan with the PRC (People's Republic of China) by force, it will have a significant impact on the semiconductor industry in Mainland China and Taiwan, and repercussions throughout the global semiconductor industry.

As with sanctions against Russia on the Ukraine incursion, as mentioned above, severe sanctions would most likely be imposed. These sanctions on Russia would also interconnect with sanctions on Mainland China, since Russia is China's largest arms supplier, providing 70% of China's arms imports between 2014 and 2018.

Table 2 shows exposure by equipment suppliers to Mainland China. AMAT has been increasing its exposure to Mainland China as a percentage of revenues and hence on revenue. AMAT's revenues are nearly twice that of ASML and Japan's Tokyo Electron Ltd. ("TEL") (OTCPK:TOELY), according to The Information Network's report entitled "Global Semiconductor Equipment: Markets, Market Share, Market Forecasts."

Table 3 shows revenue exposure on equipment sales to Taiwan. ASML, on sales of $150 million EUV lithography systems to TSMC, has the greatest exposure with revenues and percentage of revenues nearly twice that of AMAT in second place.

KLA (KLAC) has a high exposure of 30% of revenues to Taiwan, based on sales of sophisticated metrology/inspection equipment at <7nm nodes to TSMC enabled by using EUV lithography, according to The Information Network's report entitled "Metrology, Inspection, and Process Control in VLSI Manufacturing."

So far, sanctions on Mainland China have had minimal impact on revenues of semiconductor equipment suppliers. The country is moving to self-sufficiency in production, and capabilities are limited to chip nodes >14 nm. The main impact is on sanctions on EUV lithography systems from ASML, which are not able to be exported to the country.

It remains to be seen what the impact of semiconductor sanctions will be on Russia.

However, if some prognostications about Mainland China reuniting Taiwan as being imminent, there are several scenarios on how the semiconductor industry would be impacted, which is not the focus of the article. Regardless of what happens, semiconductor manufacturing in Taiwan will undoubtedly be negatively impacted, and stronger sanctions will be imposed on Mainland China and its semiconductor industry. In fact, the U.S. could also place sanctions on China if the country aids and abets Russia in circumventing U.S. sanctions.

TSMC alone was responsible for 24% of the world's semiconductor output in 2020, up from 21% in 2019, and as a result of geopolitical concerns, TSMC is building new fabs in Arizona and Japan instead of Taiwan.

AMAT and ASML will be the most impacted equipment companies. AMAT's combined revenues to Mainland China and Taiwan represented 53% of its semiconductor revenues in 2021, while ASML's combined revenues represented 64% of revenues.

While these high exposures have been profitable for the two companies, it will rapidly become a liability if they cannot ship to Mainland China because of sanctions and to Taiwan because of incursions by the PRC.

Investors need to monitor the geopolitical activity and utilize the data I present in this article which could be catastrophic for the semiconductor industry (and their stock portfolio) as a consequence of an incursion of Mainland China into Taiwan in an attempt at unification.

This free article presents my analysis of this semiconductor equipment sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.

This article was written by

Dr. Robert N. Castellano, is president of The Information Network www.theinformationnet.com. Most of the data, as well as tables and charts I use in my articles, come from my market research reports. If you need additional information about any article, please go to my website.

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I received a Ph.D. degree in chemistry from Oxford University (England) under Dr. John Goodenough, inventor of the lithium ion battery and 2019 Nobel Prize winner in Chemistry. I've had ten years experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University.

I have been Editor-in-Chief of the peer-reviewed Journal of Active and Passive Electronic Devices since 2000. I authored the book "Technology Trends in VLSI Manufacturing" (Gordon and Breach), "Solar Panel Processing" (Old City Publishing), "Alternative Energy Technology" (Old City Publishing). Also in the solar area, I am CEO of SolarPA, which uses a proprietary nanomaterial to coat solar cells, increasing the efficiency by up to 10%. I recently published a fictional novel Blessed, available on Amazon and other sites.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.