Implications of a Taiwan Disruption – Perspectives from the Recent Earthquake
USGS.gov; M 7.4 – 18 km SSW of Hualien City, Taiwan
(2024-04-02 23:58:11 (UTC); 23.819°N 121.562°E; 34.8 km depth)
On April 3rd, Taiwan suffered a 7.4 magnitude earthquake, the largest one in 25 years. Global manufacturers using machinery, chemicals, or electronics from Taiwan as a critical part of their process were paying close attention to the extent of the supply chain disruption resulting from this unexpected event.
The earthquake in Taiwan initially sent shockwaves through the global semiconductor supply chain, highlighting the vulnerability of the industry to natural disasters. With Taiwan being a central hub for semiconductor manufacturing, disruptions in the region can have far-reaching consequences, including prolonged lead times, port congestion, and increased shipping costs. This event serves as a stark reminder of the risks inherent in concentrating critical production in areas prone to seismic activity and other disasters.
In this case, the disruptions were mainly caused by the damage suffered at the Port of Hualien, rendering all exports impossible until repairs are completed. This may result in extended lead-times and congestion in other ports. Aftershocks can add to these – on April 22nd, five earthquakes, from 4.4M to 5.5M, shook eastern Taiwan in rapid succession, continuing the impact on Hualien County.
It could have been much worse if the production sites themselves, or even the sites of key subcontractors, had been affected. Major semiconductor manufacturers such as TSMC and UMC evaluated their facilities and 80% of the operation was resumed within hours. We can expect disruptions in the near-term as the strict operating conditions are brought back online. However, the impact is estimated to be limited. This follows another recent event, an earthquake, in Japan, where companies resumed operations in a few days.
If reverting to normal operations takes longer or if there are upstream impacts, we anticipate a scenario of tighter supply of advanced chips and price increases in the short term, which can vary based on the subsegment. On April 18th, 2024, TSMC said the earthquake caused estimated losses of $92.44 million to the company in the second quarter. The quake is also expected to bring a 50-basis point drop to TSMC’s Q2 gross margin, it said in a filing to the Taiwan Stock Exchange.
Taiwan Preparedness:
It is important to note the three areas that worked effectively after the Taiwan earthquake:
(i) The advanced anti-seismic construction standards and building codes are credited to have limited the number of casualties who mostly took place in non-urban areas.
(ii) Location of the event in the east whereas most of the semiconductor facilities are on the west coast.
(iii) Effective risk management process and business continuity planning of each company. According to Nikkei Asia, after the 1999 earthquake, TSMC gradually installed shock absorbers at its facilities that can help reduce vibrations by 15% to 20%. The main structures of all its plants built after the 2016 Kaohsiung earthquake, moreover, have a seismic resistance coefficient 125% higher than the Taiwanese government requires.
A large-scale disruption can come from an earthquake, a typhoon, or a sudden geopolitical shift. Taiwan currently has 48% of global foundry capacity for 12 inch wafer foundry production capacity and around 60% for the advanced processes below 16nm, per Trendforce. Even with geographical expansion prompted by government subsidies, Taiwan will still control 44% of the world’s foundry capacity by 2025 and 58% of the world’s capacity for advanced processes, continuing its dominance.
Broader View of Disruption
The seismic event is a reminder of the ever-present risks facing chip makers in disaster-prone areas. It is imperative for companies, both upstream and downstream, to bolster their resilience and preparedness against such disruptions. Proactive measures must be taken to mitigate risks and minimize the impact of future events. This includes diversifying supply chains, investing in robust contingency plans, and leveraging technology and data analytics (AI/ML) to enhance risk assessment and response capabilities in advance.
The earthquake in Taiwan underscores the broader implications for the global tech industry. The potential ripple effects might extend beyond semiconductor manufacturing, affecting various sectors reliant on electronic components. Other industries depending on a steady supply of substrates, packaging, machinery, and chemicals are also strongly relying on Taiwan’s ability to maintain “business as usual”. This is true for any raw material and semi-finished goods of strategic importance to the US and other countries.
Advanced Mitigation Planning Vital!
While such events cannot be prevented by nature, they often can be anticipated, assessed for impact, and prepared for in the event it happens. With each event, proactive risk monitoring and mitigation can be refined per company risk tolerance. Contingency plans can be put in place with affected suppliers in the area.
As an example, supplier mapping and sub-tier mapping can give you an instant picture of the affected sites. Vertaeon’s SaaS tool has capability to map 10,000s of sites globally for multiple disasters and other catastrophes. This intelligence gathering can give you granular visibility on the extent of a specific disruption and most importantly, support you with a ready-to-go contingency plan which would have preemptively been developed on specific risks areas.
Another example is Vertaeon’s capability to assess climate risks and disasters. A third is around the extensive risk event capture, with millions of data points, and AI analytics to sift through for insights. This is combined with the domain expertise of our team.
As companies reassess their supply chain strategies in light of this event, there is an opportunity to build more resilient and agile supply chains that can withstand unforeseen disruptions. Collaboration across industries and regions will be key in developing holistic solutions to mitigate risks and ensure the continuity of critical supply chains in an increasingly interconnected world.
Contact Us to access a more detailed report on the reliance on Taiwan for the industrial and automotive sectors.
Disclaimer: The content in this blog is intended for informational purposes only. Vertaeon provides no endorsement and makes no representations as to accuracy, completeness, or validity of any information or content on, distributed through or downloaded, or accessed for this article. All rights and credit go to original content owners from various sources. No copyright infringement is intended. Vertaeon will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis without any obligation to make improvements or to correct errors or omissions. Vertaeon makes no guarantees or promises regarding the sources and does not necessarily endorse or approve of their content. Please contact us with any questions.