Taiwan not moving 40% of chip production to US: vice premier

Taiwanese negotiators rejected U.S. requests to relocate 40% of Taiwan’s semiconductor production, saying advanced R&D and manufacturing must remain in Taiwan even as Taipei agreed in principle to a tariff deal that would lower U.S. tariffs on Taiwanese goods from 20% to 15%. The outline ties private-sector commitments of roughly US$250 billion in U.S. investment to a further US$250 billion in Taiwanese government credit guarantees to facilitate the build-out of supply chains; the pact still requires final terms and Legislative Yuan approval. Separately, TSMC has upgraded plans for its second Kumamoto fab to produce advanced 3nm chips, while Taiwan’s CSBC released footage of submerged trials of its indigenous Hai Kun submarine and reports note U.S. force posture shifts in the region, underscoring persistent geopolitics risks to supply chains and defense-related industries.

Analysis

Market structure: The US–Taiwan outline (US tariff cut to 15% + $250bn private investment, $250bn Taiwan guarantees) preserves Taiwan’s leading-edge concentration and effectively funnels a multi-hundred‑billion, multi‑year capex cycle into semicap/equipment demand and selective US/Japan fab builds. Immediate winners are advanced‑equipment suppliers (ASML, KLAC, AMAT) and Taiwan fabs (TSM) for node leadership; losers are firms banking on wholesale node relocation (some Korean/Chinese foundry plays) and lower‑end OEMs facing renewed Taiwanese competitiveness. Expect pricing power to remain with leading‑edge wafer producers and EUV/inspection toolmakers; incremental demand could raise tool lead times and pricing 10–30% over 12–36 months.

Risk assessment: Tail risks include Legislative Yuan rejection (weeks–3 months), PRC export/retaliatory measures (mid/high impact), or a Taiwan cross‑strait shock that halts production (low probability but catastrophic). Near term (days–weeks) markets will reprice on signings and vote outcomes; medium term (6–18 months) depends on concrete capex announcements and fab commissioning; long term (2–7 years) is equipment/worker supply constraints and geopolitically driven reshoring. Hidden dependencies: power, water, and specialized talent bottlenecks in Taiwan/Japan; credit‑guarantee execution risk if guarantees aren’t deployed as planned.

Trade implications: Favor semicap and EUV exposure: overweight ASML (ASML), KLAC (KLAC), AMAT (AMAT) with 2–3% NAV each over 3–18 months; tactically buy TSM (TSM) call spreads (9–12 months, 20–40% OTM) to express nodal advantage without full equity exposure. Add a modest 1–2% tactical allocation to US defense primes (LMT, NOC) on increased Indo‑Pacific basing signals; hedge Taiwan equity exposure with short‑dated puts around key legislative/capex milestones (30–90 days).

Contrarian angles: Consensus understates that keeping R&D in Taiwan preserves a structural moat — not a temporary transfer — which favors equipment over fabs moving geography; markets may be underpricing multi‑year tool demand. Conversely, the headline $250bn company figure is likely staggered across 5–7 years; immediate stock moves that assume front‑loaded cash flow are probably overdone. Watch for unintended consequences: Taiwan credit guarantees could inflate domestic labor costs, raising per‑wafer OPEX and creating opportunities for firms optimizing cost structures elsewhere.

Key Decisions for Investors

• Establish a 2–3% NAV long position in ASML (ASML) and 2% in KLAC (KLAC) over the next 2–6 weeks to capture multi‑year equipment demand; trim 50% if either rallies >25% or company order‑backlog disclosures fail to rise QoQ.
• Deploy a 1% NAV 9–12 month TSMC directional trade via call spread (buy 20–40% OTM call, sell 50–70% OTM call) within 30 days of official signing; aim to capture node‑premium revaluation while limiting theta; cut if Legislative Yuan vote is rejected or if TSM guidance cuts capex by >20%.
• Initiate a long‑short regional pair: long 2% NAV Taiwan exposure via TSM (TSM) or EWT vs short 1.5% NAV Samsung OTC (SSNLF) to express Taiwan’s preserved node advantage; enter post‑signing and unwind after 6–12 months or upon material market‑share announcements (>5% node share change).
• Allocate 1–2% NAV to defense primes (split LMT/NOC) as a tactical hedge on increased Indo‑Pacific basing; add another 1% if Australia/US confirm submarine deployments or treaty milestones, and take profits if defense names outperform the S&P by >10% in 6 months.
• Buy 30–90 day puts equal to 3–5% NAV protection on Taiwanese equity exposure (EWT or TSM) ahead of the Legislative Yuan vote and major capex announcements; exercise hedge if vote fails or if cross‑strait military incidents occur within the hedge window.