It surprised the investment world when Berkshire Hathaway announced a $4.1bn investment in TSMC in 2022.
Buffett rarely ventures out of the US and even if he did, the stake isn’t huge typically. So it seems unusual when TSMC was one of the top holdings in Berkshire’s portfolio.
That said, it is not difficult to guess why TSMC is a Buffett stock. TSMC is a clear leader in semiconductor manufacturing and currently cornered more than 50% market share in the world.
The technology know-how to make the world’s most advanced chips and the ability to produce at scale are the competitive advantages of TSMC.
If so, why did Berkshire Hathaway sell majority of its TSMC stake in less than six months? He didn’t explain and didn’t need to, so we can only speculate why he did it.
Berkshire bought TSMC shares in the third quarter of 2022 at an average price of $68.
In the last three months of 2022, Berkshire sold 86% of its position in TSMC at an average price of $71.
Although he realized some gains, the Buffett we know is not a trader – he didn’t sell TSMC to lock in a short-term gain.
It is also unlikely that his deputies have made this investment call. This is because it is a huge amount and Buffett should have presided over the decision.
Buffett wouldn’t have sold TSMC because of a chip demand slowdown since he looks beyond quarterly results; he goes by decades which the long-term demand for chips is expected to rise.
It should be a change in his investment thesis.
One possible reason is about the geopolitical risk. The rising US and China tension is neither healthy nor good for businesses.
TSMC is caught in between the two powers and the US has been more successful in influencing it than China – due to revenue contribution and access to technology.
The US has succeeded in preventing TSMC from making high-end chips for China companies such as Huawei, which really crippled the latter.
In Oct 2022, after Berkshire invested in TSMC, the US set new export rules to restrict the sale of high-end chips used in artificial intelligence and supercomputing to any Chinese firm.
China is the world’s largest importer of semiconductor chips and losing that part of the business is going to hurt.
According to TSMC, 10% of its revenue were from China companies. It may not seem a lot but it didn’t account for the chips that were shipped to China for assembling Apple products. We aren’t sure if future restrictions may impact this demand.
TSMC is in the midst of spending more money to build new plants in the US so as to reduce its geopolitical risk.
Less revenue and higher costs don’t sound like a great business after all.
The strain between the US and China is unlikely to be resolved and the balloon incident just showed how fragile their relationship has become.
Buffett avoids risk and it is possible that the additional measures and increasing geopolitical risk have caused him to rethink his TSMC investment.
