Chip Wars or the Geopolitics of Tech Investing

The tectonic plates of global technology are shifting. For decades, the model was clearly defined and stable: the West designed semiconductors, the East manufactured them. Now, geopolitical tensions and national security concerns are fracturing that supply chain into two competing ecosystems, one led by the US, the other by China. 

Figure 1. US share of global semiconductor manufacturing has been declining since the 1990s

Source: BCG and Semiconductor Industry Association, as of end 2020.

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Chips battleground

While in the past geopolitics was merely an area of interest for many tech investors, it’s now a vital part of the job. For European investors, there is a unique advantage: they can assess the progress of both the US and China from a relatively neutral position, relatively free from import tariffs or trade barriers that might distort performance and cost comparisons.

Over the past decade, technological leadership has become increasingly intertwined with geopolitics. Today, in the race for AI supremacy, semiconductor design and manufacturing has emerged as the definitive battleground. AI chips today are no longer de minimis components; they have become critical strategic assets. The US has been increasingly tightening export controls on advanced chips, aiming to slow China's technological ascent. 

Tech sovereignty

In response, China has doubled down on self-sufficiency, investing heavily in domestic semiconductor capabilities over the past decade. This is not the scattergun approach of its earlier push into solar panels. China's tech sovereignty strategy is increasingly focused, sophisticated, and backed by vast resources – and this is already delivering significant results, that are plain to see: Chinese firms, once decades behind their Western counterparts, are rapidly closing the gap. In chipmaking equipment, for instance, China’s leading companies have narrowed the technology deficit with the US’s Applied Materials (AMAT) from over a decade to just seven years in a matter of years.

This acceleration is driven by a targeted approach combining imitation, research, and indigenous talent development. Without access to established manuals or templates, local firms are devising novel solutions to complex physics and chemistry challenges – often more efficient and thoughtful than those of incumbent players.

At IMEC, a leading research institute in Belgium, the majority of recent PhD graduates in relevant fields were Chinese, many of whom have returned to China to drive domestic innovation.

Investment implications

For investors, the implications are clear. China’s rise in chipmaking offers long opportunities in its emerging semiconductor leaders. Meanwhile, the West’s leading semiconductor equipment makers are facing intensifying competition and declining revenue streams from China, which currently represents a third of their sales.

This creates a shorting opportunity on one side of the geopolitical divide and a buying opportunity on the other.

Bringing it all back home

The US is not standing idle. Localisation efforts are transforming its semiconductor landscape, with billions being invested in domestic chipmaking capacity. New factories from the likes of Intel and Texas Instruments signal a long-term shift towards reshoring. This trend extends beyond semiconductors to include the tools and equipment required to build these facilities, creating a ripple effect of investment opportunities.

This localisation push is not confined to the US and China. Europe, the Middle East, and India are also pursuing their own efforts, though they remain significantly behind the two leaders. These regions are navigating a delicate balancing act, striving to build domestic capabilities without alienating the dominant technology players on either side of the geopolitical divide.

Follow the patents

But this isn’t just about semiconductors. The geopolitical fracture is reshaping investment patterns across the tech sector. Venture capital (VC) flows and patent filings indicate where the next opportunities lie. Robotics, quantum computing, and even AI-enabling hardware are all areas to watch. Robotics patent filings, for example, are rising exponentially, with China leading the charge. Quantum computing, still early in its development, is attracting significant VC money, suggesting long-term growth potential despite cost-performance challenges.

Figure 2. China has overtaken the US in patent applications

Source: Man Group calculations based on data from the European Patent Office and the United States Patent and Trademark Office, as at 31 December 2024.

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Investors who follow these signals – patent filings, R&D spending, and the shifting priorities of sovereign policies – may be better positioned to spot both short-term disruptions and longer-term structural trends. This is not a momentary pivot. The bifurcation of global tech supply chains is a decade-long trend that will redefine how and where value is created.

For tech investors, the question is not whether the supply chain will split, but how to profit from the fracture.

Trump budget may raise probability of recession

Now that the House has approved the White House’s proposed budget for next year, it increases the likelihood that the US is headed on a path towards ever-larger deficits.

The Moody’s downgrade the week before last was a warning about US fiscal prudence and worsening outlook— and the House’s passage of this bill only serves to support that view. 

We believe the direction the US is going in may jeopardise the US safe harbour premium. The US is not comparable to countries such as Germany and Switzerland in terms of debt-to-GDP levels or fiscal prudence

It’s also important to consider the multiplier effect of different line items of government spending. Historically, tax cuts for the wealthy have had a lower multiplier effect than transfer payments to states or tax cuts targeted at lower-income families. And so, if the budget passes in full, it could also raise the probability of a recession.

That said, this budget is far from passing in the Senate, which is currently scheduled for August. Unlike the House, senators in the Senate serve six-year terms, which often leads to different priorities and approaches compared to their two-year-term counterparts in the House.

They are less likely to come under political pressure because most don’t have an election around the corner. It is worth noting though that about one-third of the Senate will come up for re-election in 2026.

That means that there will likely be significant revisions to the bill that hopefully will lessen the increase in the deficit. 
 

All data sourced from Bloomberg unless otherwise stated.

With contributions from Sumant Wahi, Portfolio Manager at Man Group, Kristina Hooper, Chief Market Strategist at Man Group and Gabrielle FitzSimons, Associate Engineer, Discretionary Technology at Man Group,