Semiconductor chips are pivotal in modern technology as they are integral in microprocessing, memory and integrated circuits. However, the industry faces challenges from global supply chain disruptions stemming from the pandemic and escalating geopolitical tensions. This convergence of issues has led governments worldwide to adopt reshoring strategies, aiming to bolster supply chain resilience and protect technological independence. Although the semiconductor index stormed higher by over 60% in 2023, investors should also appreciate that future returns will likely be volatility and take patience.

Semiconductor manufacturing can be characterized by a highly intricate and globally dispersed supply chain. Due to the pandemic and the many geopolitical conflicts, governments have begun to prioritize the access and use of chips as a national security issue. Concerns have arisen over the concentration of critical elements within the supply chain, such as advanced lithography machines. The dominance of specific countries in chip production has also raised alarm. For example, geopolitical tensions have risen surrounding Taiwan, a major hub responsible for manufacturing a substantial portion of chips that are essential for cutting-edge processing.

In response to these challenges, governments are deploying reshoring strategies that offer substantial incentives and subsidies to fortify their domestic semiconductor industry. Ultimately, the goal is to achieve technological self-reliance and diminish one’s dependence on foreign-made chips. As a result, supply chain resilience comes at the expense of cost efficiencies as the cost to manufacture domestically is markedly higher relative to manufacturing abroad.

In an effort to maintain technological superiority, Governments are also aiming to thwart and delay the progress of chip development in other countries. Export restrictions on advanced chips and equipment underscore this strategic approach. These actions not only motivate countries to reduce their reliance on imported technology, but also cause retaliatory policies. China’s order of state firm agencies to stop bringing iPhones and foreign devices to work is one example of a ripple effect from these budding tensions. Export and import bans can be sudden and may alter the profit outlook on any given quarter.

The semiconductor industry is inherently cyclical and its fortunes often rises and falls with the health of the economy. Moreover, the construction timelines for new facilities may not align with demand trends which will pose challenges for companies engaged in reshoring. Yet, the industry anticipates growth through 2030, propelled by emerging applications like artificial intelligence and the ‘internet of things’. Therefore, despite its’ vulnerability to geopolitical and cyclical factors, the robust order books of these manufacturers offer a measure of resilience. Long term investors can consider the semiconductor sector for inclusion in global portfolios, while recognizing that the evolving dynamics of supply chain diversification will certainly bring volatility.  Speak to us about the degree to which semiconductors should be a part of your portfolio.