Taiwan Earthquake Highlights Vulnerabilities in the Chipmaking Industry

The world’s largest chipmaker is currently working on getting back to normal operations after a huge earthquake hit Taiwan on Wednesday. This is good news for companies that make products like iPhones, computers, cars, and washing machines, as they depend on advanced semiconductors.

A powerful earthquake with a magnitude of 7.4 hit the east coast of the island on Wednesday morning, which was the strongest earthquake in 25 years. Unfortunately, the earthquake resulted in nine fatalities and led to landslides and buildings collapsing.

Taiwan Semiconductor Manufacturing Company, also known as TSMC, is the top chipmaker in the industry. Despite operating on the opposite side of the island, the company did feel some shaking at its facilities. Following the earthquake, TSMC temporarily evacuated some manufacturing plants. However, they later confirmed that all staff were safe and had returned to work.

In a statement released on Wednesday, TSMC mentioned that a small number of tools were damaged at certain facilities, affecting their operations to some extent. Fortunately, the company assured that there was no damage to their critical tools.

In this image taken from a video footage run by TVBS, a partially collapsed building is seen in Hualien, eastern Taiwan on Wednesday, April 3, 2024.

In this image taken from a video footage run by TVBS, a partially collapsed building is seen in Hualien, eastern Taiwan on Wednesday, April 3, 2024.

TVBS/AP

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A 7.4 magnitude earthquake struck Taiwan, marking the strongest quake in 25 years. Although this recent earthquake is not expected to have a lasting impact on the semiconductor supply chain, it serves as a clear reminder of the dangers of having essential microchip manufacturing concentrated on an island susceptible to earthquakes and geopolitical conflicts.

Chip manufacturers and various governments, including the US government, have been making significant investments in diversifying chip production in recent years. However, there is growing concern among experts that the progress of this diversification process may not be happening quickly enough to mitigate potential risks in the future.

TSMC is responsible for manufacturing around 90% of the world's most advanced semiconductor chips. These chips are crucial for powering the devices that people use in their everyday lives. Big tech companies like Apple, Qualcomm, Nvidia, and AMD rely on TSMC's chips. The chips are also vital for the growing artificial intelligence industry, where there is already a shortage of supply.

David Bader, a professor and director at the Institute for Data Science at New Jersey Institute of Technology, expressed concerns about the heavy concentration of chip production in Taiwan. He believes that this situation poses a significant threat.

Semiconductor devices are crucial in our daily lives, from driving cars to using cell phones and even military and airline operations. Bader emphasized the importance of these chips, stating that a halt in production would have devastating effects.

Efforts are currently being made to recover from any potential disruptions in semiconductor device production.

TSMC improved its earthquake safety measures after Taiwan's significant earthquake in 1999.

As of Wednesday, over 70% of the equipment in its fabs was back online within 10 hours of the earthquake, especially in newer facilities. TSMC anticipated that affected facilities would resume production by Wednesday night.

Even a temporary shutdown of chip production, lasting just a few hours, could lead to weeks of recovery time needed. According to Barclays analysts, certain high-end chips require continuous operation in a vacuum state for weeks on end. They warned that any halts in operation could result in the spoiling of high-end chips currently in production. The analysts also estimated that TSMC could face a $60 million impact on its second-quarter earnings due to the disruption.

The potential broader ripple effects for the tech industry will also depend on the type of chip manufacturing that was affected, which was not immediately clear on Wednesday, according to Gartner analyst Joe Unsworth. Tech companies that rely on GPU chips to power AI applications, which are already in short supply, will likely be monitoring closely for any potential impacts on production in that area.

Some other semiconductor and technology manufacturers, such as smaller chipmaker United Microelectronics Corporation, memory and storage chipmaker Micron, and Apple supplier Foxconn, stated on Wednesday that they were assessing the potential impacts of the earthquake on their Taiwan facilities. However, they mentioned that they anticipate minimal consequences.

The race to diversify chipmaking

Wednesday’s earthquake will likely only add pressure to efforts underway for years to grow chipmaking capacity outside of Taiwan.

Other events such as the Covid-19 pandemic and droughts have impacted semiconductor production in the region in the past, leading to chip shortages and increased prices of consumer goods. Supply chain experts and US officials are concerned about the potential effects of US-China trade tensions and military actions by China on the industry.

TSMC's building in Taichung, Taiwan

TSMC's building in Taichung, Taiwan

I-Hwa Cheng/Bloomberg/Getty Images

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"We believe that the recent earthquake should be a wake-up call for investors regarding the potential risks of relying heavily on one region for foundry exposure," stated CFRA Research analyst Angelo Zino in a note to investors on Wednesday.

In 2022, President Joe Biden approved the CHIPS and Science Act, which involves investing over $200 billion in the next five years to support the United States in reclaiming a leading role in semiconductor manufacturing.

In recent years, TSMC has announced plans for new semiconductor fabs in Japan, Germany, and the United States. However, the plans for its second factory in Arizona, which was announced in 2022 and originally set to be operational this year, have faced multiple delays.

According to experts, the slow progress in diversifying the chip supply chain indicates the need to reduce the risks associated with Taiwan's concentrated presence. New fab locations require significant investments from companies or governments to build the facilities, along with a skilled workforce capable of advanced semiconductor manufacturing.

Bader believes that we are currently in a crucial time period, lasting for the next few years, until a suitable location for a major fab like TSMC is found in a less geopolitically tense area than Taiwan. He mentions that we are facing challenges in this industry for the next few years while we wait for this development to occur.

Editor's P/S:

The recent earthquake in Taiwan highlights the pressing need to diversify the global semiconductor supply chain. Taiwan's TSMC, the world's largest chipmaker, accounts for a disproportionate share of advanced semiconductor production, making the industry vulnerable to disruptions from natural disasters or geopolitical conflicts.

While TSMC has taken steps to mitigate the impact of earthquakes and other disruptions, the industry's heavy reliance on Taiwan remains a concern. The CHIPS and Science Act in the United States and similar initiatives in other countries aim to address this issue by investing in domestic chip manufacturing capacity. However, the process of diversifying the supply chain is complex and time-consuming, requiring significant investments and the development of a skilled workforce. Until a suitable location for a major fab like TSMC is found in a less geopolitically tense area, the industry will continue to face challenges in ensuring a resilient and secure supply of semiconductors.