Taiwan quake spurs demand for diverse supply chains

Korean semiconductor companies such as Samsung Electronics and SK hynix stand to gain from the escalating demand to diversify global chip supply chains in response to the recent earthquake in Taiwan on April 3, according to industry experts, Sunday.

The production disruption in Taiwan’s semiconductor industry, which holds a pivotal position in the global chip market, is anticipated to raise concerns about the vulnerability of a single supply chain. Consequently, experts suggest that this event may drive a push for supply diversification in the future.

Taiwan hosts semiconductor giants like TSMC, UMC, and the U.S.-based memory chip manufacturer Micron Technology. Following the earthquake, some of these companies have suspended operations at certain production lines.

TSMC, the world’s leader in the chip foundry business, said a day after the earthquake that it had resumed operations at its facilities that were temporarily halted in the aftermath of the powerful earthquake, saying “overall tool recovery of its fabrication facilities exceeded 80 percent.” But it added, “certain production lines in areas that faced greater impact were likely to take more time to return to fully automated production.”

With TSMC commanding over 60 percent of the global foundry market share and serving major U.S. chip design firms like Apple and Nvidia, experts are voicing concerns regarding the need for diversification in chip supply chains. The halt of some of TSMC’s production lines could potentially inflict significant damage on the entire industry.

“We believe this could lead to supply disruptions in the tech supply chain. While we note some companies have reported limited damage and many of the semiconductor fabs should have been designed to withstand strong earthquakes, halts in some operations at high-tech semiconductor fabs could mean disruptions,” Bum Ki Son and Brian Tan, analysts at British investment bank Barclays, said in a report.

“Some of the high-end chips need 24/7 seamless operations in a vacuum state for a few weeks. Operation halts in Taiwan’s northern industrial areas could mean some high-end chips in production may be spoiled,” they added.

Kim Dae-jong, a professor of business administration at Sejong University, also said that global chipmakers need to diversify the semiconductor supply chain concentrated in Taiwan to reduce risks.

“Chip companies need to reduce their dependency on Taiwan and diversify their orders to other countries to lower the risk when facing a special crisis like this earthquake,” the professor said. “Chip design companies should diversify their non-memory demand to Taiwan, Korea and the U.S. as a way to prepare for crises.”

The professor said prices of memory semiconductors are also on a rising trend due to the Taiwan earthquake, adding that Samsung and SK hynix have reportedly halted memory chip price negotiations with clients because the supply of memory chips will decrease, leading to higher prices.

Kim Dong-won, an analyst at KB Securities, said in a report released after the Taiwan earthquake, “The production disruption in foundries caused by this earthquake is poised to serve as a pivotal moment, shedding light on the industry’s structure. With 69 percent of global foundry production concentrated in Taiwan, it underscores the risk associated with relying on a single supply chain.”

“TSMC’s Fab12 plant, where all production personnel evacuated following the earthquake, is encountering operational uncertainty due to damaged water pipes and system errors in certain front-end equipment. As a result, further inspections are necessary to assess the situation,” the analyst said. “The Korean semiconductor ecosystem is emerging as the optimal alternative for diversifying the memory and foundry supply chain, with long-term benefits expected.”

However, another expert predicts that while TSMC did sustain some damage from the earthquake, it is not likely to have a substantial impact on the foundry industry’s market share. This is because the foundry industry has long-term contracts with chip design companies, and it is difficult to suddenly change the order and design of the chips to be produced.

“The foundry business needs to supply products tailored to the design requirements of chip design companies. Stable supply is key in maintaining long-term cooperative relationships with customers, so it is difficult for TSMC to lose its customers just because of the earthquake damage,” said Lee Jong-hwan, a professor of the department of system semiconductor engineering at Sangmyung University.

The professor also forecast that in the memory semiconductor industry, Samsung and SK could benefit from the earthquake as the industry has a different structure.

“The memory semiconductor industry may be affected by the earthquake. As production facilities of Micron Technology and Nanya Technology were reported to have suffered damage, rival memory semiconductor companies, Samsung Electronics and SK hynix, are likely to benefit from the market where chip production and supply are more directly connected,” the chip professor added. Korea Times