Taiwan now dominates the chip industry and has emerged as a major player in technology manufacturing
Kaylie Pferten advises astute investors to invest right away.
Given that Taiwan is a tiny island with a population that is less than half that of Britain, it would seem improbable for a tech giant to locate there.
However, according to Isaac Thong, lead manager of the Aberdeen Asian Income Fund, "just as some small countries have managed to dominate a single sport, such as New Zealand in rugby, Taiwan and its companies have managed to dominate semiconductors and manufacturing".
According to Iain Barnes, chief investment officer of Netwealth, Taiwans exports to the US "to grow by more than 150 percent in the year to January, putting it on a par with China" as an export powerhouse due to the demand for chips created by the AI boom. Share prices have skyrocketed as a result. In terms of market capitalization, the Taiwans stock exchange is currently among the biggest in Asia.
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According to Chetan Sehgal, lead portfolio manager at Templeton Emerging Markets Investment Trust, Taiwans' success "is essentially a story about what a huge investment in science and technology can do for a country over a period of time."
According to Usha Haley, director of Wichita State University's Center for International Business Advancement, the state provided the first impetus for Taiwans' development.
"Through export promotion policies, land reform and state-backed research, and development institutions like the Industrial Technology Research Institute, all of which encouraged small and medium-sized companies to gain technical mastery," the nation's industrial policy promoted development.
Taiwan eventually benefited from two lucky breaks from that early start. The first was its physical proximity to China, which allowed Taiwanese entrepreneurs to act as a bridge between the US and China when China began to open up its economy in the 1980s and 1990s thanks to their advanced education, easy access to capital, and fluency in Chinese, according to Sehgal.
In order to provide "technological solutions for the problems that China's growing manufacturing sector faced," Taiwanese companies set up factories in China.
Initially, this mostly involved components, but it eventually grew to include complex electronic chips.
According to Chris Chan, a portfolio manager at EFG Asset Management, "the second stroke of luck was that Japan had a major falling out with the US at the same time Taiwan was benefiting from China's move towards a market economy."
Japan's use of tariffs to give its then-dominant semiconductor industry an unfair advantage infuriated the US. Taiwanese companies were able "to build up Taiwans chip industry to the point where it became the major chip supplier to the rest of the world" as a result of the ensuing trade war, which gave them a significant advantage over the US.
A self-reinforcing tech "ecosystem" that Steve Brotman, founder of Alpha Partners, compares to Silicon Valley in the US, has been made possible by the physical proximity of numerous tech companies in Taiwan, which has resulted in a positive feedback loop.
According to Chan, "you have these industrial parks where all the main tech firms are located together, so they can cross the road to have a coffee with their main customer, or lunch with their main supplier."
Because of this, Taiwanese tech companies are able to collaborate and anticipate each other's needs, which lowers costs and helps them stay ahead of competitors worldwide.
According to Chan, Taiwan's education system and culture still place a high importance on science and technology. It's not like in the US or Europe, where a lot of the best students want to work in investment banking or law.
Instead, the status that comes with working in technology or engineering "is still incredibly powerful, probably more than in any country I have been in," so Taiwanese college graduates want to work for organizations like TSMC.
The key to the success of TSMC.
Taiwan Semiconductor Manufacturing Company (TSMC) is the single business at the center of Taiwan's technology industry. It is so significant to the Taiwanese stock market that it makes up slightly more than half of indices like MSCI Taiwan and slightly more than 40 percent of the Taiwan Stock Exchange.
This is more than the entire Magnificent Seven (Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, and Nvidia), which make up 35% of the S&P 500, according to Lucy Smith, senior investment manager at Killik and Co. Thus, "just one company's performance" is what drives a large portion of the Taiwanese stock market.
According to Thong, TSMC's hegemony results from Intel's choice to "try to do everything itself, from chip design to fabrication, without any outside help," which effectively founded the sector under co-founder Gordon Moore. TSMC, on the other hand, made the decision to focus solely on the production of the chips. It developed a reputation for large-scale dependable manufacturing, "attracting business from companies that wouldn't work with Intel because they didn't want to risk losing their intellectual property," thanks to its reputation for safeguarding the specifics of each chipmaker it works for.
According to Brotman, TSMC's focus on manufacturing has proven wise in recent years as it has enabled the company to profit from producing the graphical processing units (GPUs) that are now crucial to the modern computer industry.
Although TSMC was pleased to assist Intel's competitors in filling the void, Intel considered GPUs to be a "sideshow, only of interest to those playing computer games."
This proved to be wise, as demand for these specialized chips has skyrocketed, first from bitcoin miners and then from artificial intelligence (AI), which requires powerful chips to function.
Naturally, no business can maintain its dominance forever, and TSMC may eventually follow in Intel's footsteps due to changes in the chip industry's economics or a technological shift toward quantum computing, for instance, according to Brotman.
Many telecom companies briefly became Wall Street darlings during the .com era because they could profit greatly from the construction of fiber-optic cables, but the fiber industry later became commoditized. However, it is unlikely that computer chips will be replaced in the near future.
Over the next ten to twenty years, Brotman anticipates a "proliferation" of chip manufacturers and suppliers, giving TSMC ample opportunity to profit handsomely.
In fact, "TSMC's technology position has only got stronger in the last few years," according to Schroder AsiaPacific Fund portfolio manager Abbas Barkhordar. No other business is investing nearly as much in R&D as TSMC, and the difference "is only getting wider" between TSMC and the two companies that could conceivably be its competitors, Samsung in Korea and Intel in the US.
Samsung is reducing its foundry business "because it hasn't made Samsung as much money as it expected," while Intel "is struggling in implementing its technological road map."
Technology isn't the only factor.
According to Alex Holmes, a regional director at the Economist Intelligence Unit, Taiwan's stock market and broader economy may be dominated by technology, but it also boasts globally competitive firms in a number of other areas.
Taiwan is especially strong in consumer goods, from some of the world's top "activewear" companies to relatively niche specialty goods like "bubble tea," which are popular throughout Asia, the US, and Europe.
Additionally, Taiwan boasts a thriving precision machine-tools sector that manufactures machinery used in automated factories across Europe and the United States.
According to Sehgal, many Taiwanese businesses in other industries have achieved a similar feat, just as Taiwan's technology sector has been able to grow outside of its tiny domestic market.
"If you're a serious cyclist, you'll be aware that Taiwanese businesses actually own the top two brands in the world: Giant and Merida. The "
With "quite a few innovative biotechnology companies, some of which have come up with some interesting treatments that have been able to win approval from the Food and Drug Administration," the US regulator, Taiwan boasts a sizable medical drug industry as well.
Haley concurs that there are many (and increasing) businesses in the nation that have "strong brand equity and vertical integration." Companies like this "reward patient, research-oriented investors rather than momentum traders swept up by narratives about a booming market."
Furthermore, "Taiwan is unique in that the quality of its corporate governance is very high," according to Sehgal, despite the fact that Asian businesses may have a negative reputation for being opaque and favoring insiders over investors. Barkhordar concurred. According to him, Taiwanese businesses "tick all the boxes that you'd like to see as an investor."
They "generally have good shareholder returns as well, a great focus on capital allocation, and a really good record of looking after minority and foreign shareholders."
The geopolitical dangers are exaggerated.
The geopolitical risks of a possible confrontation with China, which has long viewed Taiwan as a rogue province, must be taken into consideration in any discussion of Taiwan.
But Beijing's likelihood of taking any direct action in the next ten years is "very low," according to Chan. "What happened to Russia in Ukraine will be at the forefront of the Chinese leadership's minds," particularly considering that Taiwan is an island nation and would be far more difficult for China to attack logistically than Ukraine was for Russia.
According to Chan, the consequences of any attack could be catastrophic for China's economic strategy, even if China were to overcome the military obstacles. China is currently more dependent than ever on exports, the majority of which are transported by sea, due to its weak domestic economy and collapsing real estate market.
Therefore, if the US, Japan, and the Philippines blockaded China in response to an attack on Taiwan, they could immediately stop this sea-borne trade and deprive it of vital resources like oil.
Foreign investors would almost certainly sell Chinese assets in response to an invasion of Taiwan, which would result in a collapse of the Chinese renminbi.
The Chinese leadership's goal of having the renminbi take the place of the dollar as the world's reserve currency would be severely damaged as a result.
Thong concurs, believing that a diplomatic solution that maintains de facto Taiwanese autonomy is the most likely long-term solution and that military action is highly unlikely in the near future.
For starters, a Chinese invasion would unavoidably result in the destruction of the very chip factories China needs to produce the majority of its electronics.
Since "you don't just need machinery, tools and equipment, but also the people, know-how and experience," Beijing's efforts to establish its own chip industry in order to reduce its reliance on Taiwan will take time to show results.
Because of this, businesses like Huawei are still having difficulty producing high-end chips at scale in a way that is effective enough to challenge Taiwan's hegemony.
Naturally, China is not the only nation trying to develop its own chip-making capabilities. In response to pressure from the Trump administration, TSMC is moving a portion of its production to the United States. However, according to Chan, "a TSMC plant in the US will have 30 percent-40 percent higher operating costs and will require 30 percent-40 percent higher capital spending costs than a comparable plant in Taiwan" due to a lack of experience and a shortage of qualified engineers in that country.
"It tends to be the lower-end products, with the high-value work remaining in Taiwan" when TSMC and other Taiwanese companies relocate their factories outside of Taiwan to locations like Mexico and Thailand.
All of this indicates that the concentration of upscale manufacturing, which is so essential to Taiwan's tech sector's success, won't be threatened anytime soon.
In any event, Chan claims that Taiwanese companies' geopolitical risk decreases as more of their production is moved abroad. "In terms of the actual concentration of factories in Taiwan, investing in the country is less risky than it was maybe five or ten years ago. The "
Taiwanese stocks are the best to purchase right now.
Investing in the Taiwanese stock market through an exchange-traded fund, like the iShares MSCI Taiwan UCITS ETF (LSE: ITWN), may be the simplest option.
This makes investments in the MSCI 20/35 Taiwan index, which represents about 85% of the market and includes 87 large- and medium-cap Taiwanese stocks. The largest holding is limited to 35% of the index, while all other holdings are capped at 20%.
In contrast to the MSCI Taiwan index, which makes up more than half of the portfolio, TSMC makes up just over a third. The yield is 1.38 percent, the total expense ratio is 0.74, and the average price/earnings ratio is 22.9.
The industry leader in computer chip production is TSMC (Taipei: 2330). It starts the year "in a position that few industrial companies ever reach: simultaneously capacity-constrained, margin-expanding and structurally indispensable" because of the AI boom, according to Saurav Sen of Gimme Credit.
Despite efforts to geographically diversify production outside of Taiwan, TSMC's capital allocation remains disciplined despite the boom, with a return on capital employed of almost thirty percent. The fact that the stock is trading at 21 times expected 2027 earnings is more than justified by the nearly threefold increase in revenue between 2020 and 2025.
ASE Technology Holding Co. has profited from TSMC's success (Taipei: 3711). ASE has created a lucrative niche for packaging and testing the chips produced by TSMC's foundry.
Aberdeen Asian Income Fund's Isaac Thong is pleased with the company's "timeliness as well as being trustworthy and producing high-quality work" reputation. ASE's sales increased by approximately 40% between 2020 and 2025, and its earnings per share increased by a comparable amount. The shares have a dividend yield of 2.42 percent and are trading at 17.4 times projected 2027 earnings.
MediaTek is another Taiwanese tech company with positive ties to TSMC (Taipei: 2454). It currently specializes in creating the blueprints for the chips found in entry-level smartphones.
Sales more than doubled between 2019 and 2024 as a result of this strategy, which also produced high returns on capital. Thong is especially pleased that MediaTek is now making significant progress in breaking into the market for high-end computer chips, particularly with regard to data center chips, which have far greater growth potential. The shares are trading at 28.5 times the projected earnings for 2026.
According to Morton Lo, chief analyst, APAC at international broker FXTM, Delta Electronics (Taipei: 2308), a leader in power-management and thermal technologies, will profit from the surge in demand for servers for artificial intelligence that must be cooled.
Between 2019 and 2024, Delta's revenue increased by about 55%, and its earnings per share increased by 63% during that time. Although the stock is currently trading at 63 times trailing earnings, it is anticipated to drop to a much more manageable 36 times earnings in 2027 due to strong growth.
Eclat Textile Company (Taipei: 1476) is an example of a prosperous Taiwanese business that has attained international success outside of the technology sector. It is one of the biggest producers of upscale sportswear worldwide, producing goods for well-known companies like Nike and Lululemon.
Between 2019 and 2024, its earnings per share increased by more than half, while its revenue increased by slightly less than 30%. Simultaneously, it has been recognized with sustainability awards. The stock has a strong dividend yield of 3.8 percent and is currently trading at 17.8 times projected 2026 earnings.
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