Date: 01/21/2020
Author: Mr. X

A few years ago, I was driving to the Capitol for work. (This is before we had to worry about mobs breaking in. These were also the days when I physically had to go to an office.)

Suddenly, right in the middle of the Key Bridge, my new car stopped. The engine didn’t choke. There was no sound of struggling machinery. It just died abruptly, like someone had denotated a mini-EMP right over my head.

I was stuck in the middle of the bridge.

I know little about auto maintenance but popped the hood to save face. I don’t know who I was trying to impress. My fellow commuters were not appeased. Bloodcurdling oaths and creative obscenities filled the morning air.

What few tricks I knew failed utterly. There was no smoke, no wires askew, nothing there that shouldn’t be. Returning to the driver’s seat, I then repeated many of the curses I had heard, directing them against the universe rather than myself.

Eyes closed, head resting against the steering wheel, a perfect image of utter defeat, I turned the key one more time. It was an act of spite against existence.

The car started.

My heart pounded as I drove to the Hill. I felt like a pilot trying to reach an aircraft carrier when he is already out of fuel. I arrived, parked, and out of curiosity, tried to restart it again. It was dead. There was nothing to be done for it. I rushed inside for work.

That night, I paused briefly outside my car, wondering if the miracle would duplicate. God had done enough for me that day. The car was useless.

A tow and a few days later, I reported to the mechanic to pick up my vehicle. I expected the vaguely condescending explanation you get from a skilled worker who has just saved you from the consequences of your own ignorance. The lecture wasn’t forthcoming.

The problem was a computer chip in the car. It had simply stopped working. Why? This trained professional had no idea. Expecting a ruinous bill, I instead paid for the replacement chip with the petty cash I had on hand. It had taken the mechanic seconds to replace once the new chip arrived.

The repairman noted that if he had been driving the car, he would have been just as helpless as me. The failure of this tiny part rendered the machine useless and any mechanical knowledge pointless.

Why did it suddenly work one last time so I could get to the Capitol? He shrugged and posited divine intervention. As good an explanation as any.

Being able to fix your own car when something goes wrong is one of those things men should just know how to do. Mechanical expertise can even rise to the level of art. Cubans are renowned for their ability to keep positively ancient pre-Communist era American cars ferrying tourists on the streets of Havana.

Not being able to fix your car when something goes wrong is considered almost a moral failing.

If this is true, then we are all lesser men compared to our sires. New cars don’t just require mechanics, but computer programmers. Computer chips are integral parts of most modern cars. There are few “workarounds” for faulty or absent chips, the way you can temporarily plug a hole in a tire. As I learned on that Washington morning, if the chip breaks down, you’re at the whim of the gods.

Well, that and the global supply chain. Automobile construction, perhaps the most stereotypical high skilled, blue-collar, union job Americans once has come to a screeching halt because there aren’t enough chips and semiconductors. A Ford plant in Kentucky shut down because of supply problems. Volkswagen is facing slowdowns on three continents. Fiat Chrysler is holding production at its plants in Canada and Mexico. Japanese companies face the same problems.

As with many other issues, the COVID-19 crisis is to blame. When the pandemic shut down factories, chipmakers shifted production to other sectors. Now that the automotive industry is trying to renew production, there simply aren’t enough chips and semiconductors to go around.

The semiconductor business is also going to be a key battleground in what I believe is an economic Cold War between the United States in China. Since Rogue Investing Daily issued a Special Report on Taiwan Semiconducting Manufacturing [TSM] in May recommending a buy, the stock is up about 160 percent.

This wasn’t because I claim some special wisdom decoding technical charts or because an old political buddy gave me a heads-up. It’s simply because Taiwan has made the strategic choice to prioritize semiconductor manufacturing, and neither the People’s Republic of China or the United States can do without it.

Of course, as we see with mining companies when gold and silver prices increase and with fracking when oil prices increase, a rise in price makes it feasible for new competitors to enter the market. TSM, even at its current price, may be a sensible play for the long-term. However, other companies stand to benefit from the shortage.

Avnet [AVT] has not benefitted from the bull market of the past year, but it is showing signs of life, rising almost 20 percent in the last month. The company is also engaging in a partnership with Xilinx [XLNX] to build chips for self-guiding cars. Both these may be well-placed for the long-term, as some suggest the Chinese demand for semiconductors will exceed supply for as long as a decade.

Other companies include Dutch NXP Semiconductors [NXPI], up more than 25 percent in the last three months and Infineon Technologies [IFNNY]. Sector ETFs including VanEck Vectors Semiconductor ETF [SMH] is up more than 30 percent in the last three months and Direxion Daily Semiconductor Bull ETF [SOXL] more than 110 percent over the same time period.

The supply shortages won’t go away soon. Semiconductors will be in huge demand across the entire economy as production restarts following the pandemic. Remote working, if anything, will increase demand for semiconductors.

Though (as I learned) semiconductors and computer chips are critical to automobiles, cars are just a tiny part of the market. Semiconductor companies and chipmakers will face more intense pressure to supply other industries, meaning that there will be more economic space for other semiconductor companies to move in and claim profits.

TSM has performed very well for Rogue Investing Daily subscribers over the last six months. However, this entire sector may be the place to be for the next six years. The pandemic will only increase our dependence on semiconductors and computer technology. More importantly, within a decade, we’ll start seeing the self-driving vehicles start entering the market in a big way, further increasing the demand for high-tech electronics.

That’s probably not a great thing for society. We lose something human and essential when ordinary people can’t fix the machines we work with every day. It renders us hapless and passive. If your car starts having problems on the road, whatever you remember your father teaching you on the family Chevy 30 years ago probably won’t do you much good.

However, if you stake out a position here, there’s a silver lining. You can at least comfort yourself with your soaring earnings statements as you wait for the tow.