BriefCASE: Taiwan earthquake puts the spotlight back on chip supply chain diversification

The automotive industry faced one of its worst crises during the
years following the Covid-19 pandemic in 2020 when the
semiconductor shortage caused disruptions and delays in light
vehicle production globally on an unprecedented scale. So, on April
3, 2024, when an earthquake of magnitude 7.4 hit Taiwan, the
strongest in 25 years, there was a sense of trepidation in the
industry. Taiwan dominates advanced logic chip production,
manufacturing over 90% of leading-edge semiconductors globally.

With almost all complex automotive chips relying on Taiwanese
foundries like Taiwan Semiconductor Manufacturing Co (TSMC), Taiwan
is an irreplaceable player in the automotive electronics supply
chain. While the geographic concentration of production in Taiwan
allows impressive economies of scale, it also poses supply
continuity risks. Natural disasters or geopolitical tensions
involving Taiwan could quickly ripple through the automotive
industry.

Impact of earthquake on semiconductor
production

Semiconductor production is a delicate process, highly
susceptible to even the slightest vibrations. A single tremor can
potentially ruin entire batches of precision-made chips, posing
significant challenges for firms located in quake-prone regions
like Taiwan.

The industry highly depends on companies like TSMC, one of the
largest contract chipmakers, for 7nm and lower leading-edge process
nodes. Any disruption in TSMC's supply of these advanced nodes
could ripple across multiple sectors, disrupting production
schedules and delaying product launches.

The good news for the supply chain is that most semiconductor
firms have reported no significant damage and have begun resuming
operations. TSMC was among those affected. The firm immediately
halted some chipmaking machinery and evacuated staff from certain
areas. TSMC said in a statement,

“Overall tool recovery of our fabs reached more than 70% within
10 hours of the April 3 earthquake, with new fabs such as the Fab
18 facility reaching more than 80%. Apart from certain production
lines in areas that experienced a greater seismic impact, equipment
in Taiwan fabs have largely been fully recovered as of April 5
thanks to the collaborative efforts of TSMC colleagues and our
supplier partners.”

Several semiconductor and technology manufacturers, such as UMC;
Micron, a company specializing in memory and storage chips; and
Foxconn, a key supplier for Apple, stated they were assessing the
potential effects of the earthquake on their facilities in Taiwan.
However, they expressed optimism, suggesting that any consequences
would be minimal.

Specialty memory IC company Windbound said in a press release
that the seismic event triggered self-protection mechanisms in
certain machinery at Winbond's CTSP Fab and Kaohsiung Fab
facilities, but there were no significant disruptions to its
operations.

Nvidia, which relies heavily on TSMC for sourcing many of its
chips, announced that it anticipated no disruptions to its supply
chain. “After consulting with our manufacturing partners, we don't
expect any impact on our supply from the Taiwan earthquake,” Nvidia
said in a statement.

Heavy reliance on Taiwan foundries

The recent earthquake further highlights the electronics
industry's vulnerability to regionally concentrated parts of the
semiconductor supply chain. In recent years, chipmakers and
governments, including the US government, have announced
substantial investments aimed at diversifying chip production.

However, the reliance on Taiwan will not diminish anytime
soon.
Despite TSMC's plans to establish new semiconductor fabs in Japan,
Germany, and the United States in recent years, the realization of
these plans has encountered delays. Particularly, the anticipated
second factory in Arizona, initially slated for operation this year
following its announcement in 2022, has faced repeated setbacks.
TSMC's chips are integral to tech giants like Apple, Qualcomm,
Nvidia and AMD, underpinning crucial sectors such as AI where chip
supply is already strained.

While the sector has escaped repercussions this time thanks to
well-established disaster recovery and risk mitigation the quake
served as a timely reminder of the fragility of semiconductor
supply. A few minds will no doubt be refocused on dispersing
semiconductor supply chain risk following the events of April
3.

Author:
Rohan Hazarika – Senior Research Analyst, Supply Chain &
Technology, S&P Global Mobility

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