Chip supply concerns tilted toward ‘what’s happening in China,’ strategist says

Baird Technology Strategist Ted Mortonson joins Yahoo Finance Live to discuss global chip supply chains and semiconductor stocks.

Video transcript

BRIAN CHEUNG: I want to zoom in now specifically to the tech sector. And for more on that, Ted Mortonson, Baird Technology desk senior-- sector strategist, joins us now. Ted, thanks so much for hopping on the show. An interesting thread with regards to chips because the US embargo on American semiconductors might, on the surface, sounds like that should be impactful to Russia. But when you consider that, that's a nation that buys about 70% of their chips from China. So how impactful are these measures? And what do you think it's going to do to the global chip market?

TED MORTONSON: It's really-- thanks for having me, by the way. It's really de minimis in the whole scheme of things. As you alluded to, the real focus in the tech sector is what's happening in China and Taiwan versus what's happening in China and Ukraine-- or Russia and Ukraine. The issue on the supply chain right now and the tightness you have is everybody's just building just in case inventories. And the real focus is more on what's happening in China. And if they decide to go forward with some kind of action with Taiwan, that would influence the tech market much more than the Russian-Ukraine situation.

AKIKO FUJITA: Well, Ted, with that said, I mean, this comes at a time when we have seen increasingly countries look-- I mean, I'm talking specifically about the US, but other countries, too-- look increasingly at localizing the manufacturing of chips, especially given what has played out during the pandemic. There's sort of this acceptance of the overreliance on those like Taiwan Semi, for example. And I wonder if you think this particular case, the US cutting off semiconductor supply and technology to Russia, does that put other countries more back in their corners? I mean, is that kind of the realignment that's happening here?

TED MORTONSON: I think if you look at our supply chain dependency on China right now, it's very obvious that not only through Biden-- the Biden Administration Chip Act, but bringing production back to US will happen. This is one of the reasons why you're seeing strength in GlobalFoundries, Texas Instruments, Micron, and specifically on Intel.

The government from a military perspective has to secure supply on that leading edge node. That's roughly 7 nanometers and below, which TSM dominates. And to have that production both in, I would say, friendly far east democratic countries like Japan and South Korea, or the EU or the US, that's where we're headed. It is really a game of risk arbitration and management of that supply chain.

BRIAN CHEUNG: Adjacent, interestingly, there's been a lot of global M&A when you take a look, for example, at the Intel tower semiconductor deal, which links, obviously, an American company to an Israeli company. So on that point then, would you expect the geopolitical tensions that we've seen to either accelerate that M&A trend or pare back on that M&A trend, or does that not affect any of that really at all?

TED MORTONSON: I think that's really an Intel-specific issue. I think as you look at these next generation chip designs, they're very, very specific. And if you look at Qualcomm, Nvidia, at AMD, who generally manufacture a fair amount of AMD, I'm sure they are not-- this is not going unnoticed, and I'm sure they're looking for alternative supplies. Like, the entire semi food chain right now is looking for alternative supply channels. But it's obvious that it has to migrate to sovereign entities.

And I think this is the new economic dynamic that we are seeing that not only do you have to control your data for AI, but you have to control your production from a sovereign perspective. And there are a myriad of new fabs being contemplated, whether it be in Europe or in the US. That doesn't happen, obviously, until 2025. These fabs do not get built overnight. It's a three to four-year process.