Letter from Taiwan

As regular readers know, I mix looking at the numbers with on-the-ground research. Thus, Letter from Mississippi, Letter from Santiago, Letter from Tbilisi, Letter from Kyiv and today’s note. Also, for those of you who read and enjoyed Master, Minion, please submit a review on Amazon. Did I mention that books make great holiday gifts?

“We insist on striving for the prospect of peaceful reunification … but we will never promise to give up the use of force and reserve the option to take all necessary measures.”

Chinese President Xi Jinping, October 2022

“President Xi…underscored that this was the biggest, most potentially dangerous issue in the US-China relations …their preference was for peaceful reunification but then moved immediately to conditions that the potential use of force could be utilized.”

US official as reported by Reuters on the Biden, Xi talks this week

“From their standpoint…maybe it’s analogous to like Hawaii.”

Elon Musk, September 2023

NOTHING BELOW IS INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH. I MAY HOLD POSITIONS IN SOME SECURITIES DESCRIBED.

The Pacific thumps rhythmically outside my window. Japan is to the northeast, the Philippines due south, China to the west.  

On Taiwan’s East Coast, days of misty rain leave a dampness that browns the concrete and envelops the thick forest clawed into sheer cliffs. The ocean has a steep drop off that produces diabolical currents. Overhead, Taiwanese fighter jets fly in low and loud. It’s a geography that strongly favors defense, if there is a will to fight, which there might not be.  

What can we do? One person asked me.

This country of 23 million mostly ethnically Chinese is at the epicenter of the two most powerful waves rocking financial markets and geopolitics—-artificial intelligence and open versus closed societies. The incipient AI revolution significantly depends on chips this island produces. In coming weeks, you will hear more about a January Presidential election here that turns on how to respond to Xi’s increasing insistence on reunification. He has a track record of destroying wealth and extinguishing civil rights.  

Chips Not Ships

The odds look stacked against this tiny, prosperous, technologically sophisticated island. Taiwan is trying to make itself difficult to swallow, what is referred to as the porcupine strategy. The US is also pumping in $2 billion a year for defense, which is then spent to buy US weapons and probably explains why I ran across a clutch of burly Americans carrying oversized backpacks on the train from the airport. They didn’t look like tech nerds.

Like Poland or Czech before and after the Soviet Union, Taiwan is a test case of an open system. In 1949, Chinese who lost to Mao in the Civil War fled here. Martial law ended in 1987 and since the early 1990s Taiwan has functioned via vote. Now the Economist’s Democracy Index labels Taiwan higher than the US. Taiwan’s very existence is a cosmic threat to Beijing’s insistence that Democracy holds no universal appeal.

The chart below shows relative GDP per capita in Taiwan versus China. Same people, same culture, different incentive systems. Being forcibly taken over by Beijing will feel to many here like an awful step back to a past they thought they’d left behind. One example among many: I noticed many openly gay people in Taiwan. I never saw that in China.

Source: IMF

But the porcupine strategy faces obstacles, some of them cultural.

We would rather the US do the fighting, one person said to me.

In Israel, Ukraine or the US, special forces enjoy social cachet. Here the bad asses are “double Es,” electrical engineers, the brains behind the leading chip company in the world, Taiwan Semiconductor (TSMC), whose chips run the laptop I write on now. 

As an aside, it is interesting how sometimes small countries outwit larger ones. It seems improbable, for instance that Argentina with a population of 45 million produces better soccer teams than the US, population 330 million, yet that’s the case.  

Taiwan is the same, only with chips. They outcompete Intel and Qualcom, the top US manufacturers. I’m told the senior TSMC leadership are humble and hardworking.

Source: Blackridge Research

But a knack for engineering doesn’t necessarily translate into a warrior culture. Our top students don’t go into the military, one seasoned private equity investor told me.

Read more