What happens if China invades Taiwan?

All hell breaks loose for many large public companies

China has made it clear that it considers the island of Taiwan part of China proper and has done so since the days of Chiang Kai-Shek when the island was known as Formosa. Since that time, an independent Taiwanese democracy has flourished and become the source of 55% of the world’s semiconductor capacity, outpacing rival Intel (INTC) and all the other smaller companies that operate chip producing facilities or “fabs”.

American leaders say they would intervene if China invaded Taiwan but that seems a bit hollow. China has a massive armed forces, a sizeable navy and the benefit of its location during any conflict involving Taiwan and the United States, which holds itself out to be the protector of democracy globally, has been ineffective in stopping Russia from its invastion of Ukraine (now a two year old war) and other than bluster and selling weapons to the Zelensky regime as well as transferring billions of dollars of “aid” to Ukraine (without much control over where the money goes and whether there is corruption at either the U.S. or Ukraine end of those transfers) American has been seen by many as a weak country led by a weak leader. United States has had little success in intervening in the current Arab Israeli conflict except to implore the Israeli’s to treat Palestinians with kid gloves and send money and arms while watching from a distance as thousands lose their lives, most of them Palestinians.

The U.S. war machine today seems impotent under the leadership of inept Joe Biden who can barely string two sentences together and thinks he has a chance to be re-elected as the nominee of the leftist Democrat party which shows more sympathy for Palestine than ally Israel and can’t even protect the United States southern border from an invasion by millions of so-called “migrants” from all over the world who pretend to be fleeing persecution but in reality are just moving to a better economy where they are greeted with money, a place to live and free health care while homeless American citizens line the drug-ridden sidewalks of San Francisco, Los Angeles, Portland, New York City and Seattle, to name a few.

Investors generally ignore geopolitical risks until they manifest themselves in natioanalization of industries like the recent Panamanian action to stop First Quantum from operating the world’s largest copper mine (Cobre Panama) causing the company to lose half its market value in a few days.

The highest risk may be the risk to NVidia, now a $2 trillion company, that sources over half of the chips it designs from TSMC fabs. That $2 trillion could turn into a few hundred billion overnight. Other major publicly traded companies that depend on TSMC include Apple, Broadcom, AMD, Qualcomm, ARM Holdings, and SONY. The risk to these companies cannot be ignored.

Many countries do not recognize Taiwan’s independence owing to the risk they will offend China. As of 22, only 13 of 193 United Nations countries and the Vatican recognized Taiwan as a soveeign state and that list of 13 does not include the United States which as of today does not recognize Taiwan sovereignity.

China makes it clear that it considers Taiwan part of China. The writing is on the wall. This is an event that I believe is more than a remote possibility and the way for investors to protect themselves is to hold shares in TSMC competitors, primarily Intel. Intel is pouring capital into expansion of its fab capacity and the U.S. “Chips Act” is providing capital to repatriate production done offshore. Intel will benefit more than most from the geopolitical pressures and U.S. government policy framework. Even if you believe that NVidia is the best thing since sliced bread (and I know most readers are impressed by sliced bread) holding a few shares of Intel might be a good idea.