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Chip Industry Under Pressure Amid Taiwan Earthquake

Stavros Tousios | Wednesday 03 April 2024

Many Asian shares fell on Wednesday, April 3rd, morning due to higher US yields and an earthquake that hit Taiwan. The benchmark Nikkei 225 (Japan 225) index fell 387.06 points to close at 39,451.85, while the Topix index slipped 7.94 points to end at 2,706.51. 

Taiwan is a key hub for chip manufacturing, responsible for around  80% to 90% of the world's chips. The quake temporarily shut down operations at key factories, accelerating concerns about global chip shortages and cost increases at a time when tight supply is already hindering the Artificial Intelligence (AI) boom. 

The event rattled some investors, with Taiwan Semiconductor Manufacturing Company (TSM) shares down 1.39% for the day. In fact, stock indexes in Japan, Australia, South Korea, China, and Hong Kong all fell as the quake triggered tsunami warnings that were later lifted. However, some analysts believe the selloff is "overdone." (Source: Barron's)

An image of a semiconductor microchip

Taiwan Tremors Halt Semiconductor Production

The earthquake caused significant damage and disruption across the island. Operators at key semiconductor factories had to shut down production and evacuate factories, which could lead to delays and potential price increases for all sorts of electronic gadgets. Global supply chains may be under threat because the world relies largely on Taiwan for chips.

As a key chips supplier worldwide with some of its plants disrupting production, it may impact global firms relying on TSMC's chips. As such, companies like Intel (INTC), AMD (AMD), and Samsung could benefit from the AI boom.

Could Ripple Effects Impact Chip Dominance?

Semiconductor manufacturing is considered to be extremely delicate, and even slight tremors have cracked some wafers, resulting in an actual temporary shortage of chips and potentially higher electronics prices.

With TSMC a significant supplier to tech giants Apple (APPL) and Nvidia (NVDA), the disruptions could exacerbate existing shortages and impact product availability across the entire tech sector. It may take some time for chip factories in Taiwan to resume full production.

For context, the impact of the quake appeared smaller than the 1999 one, which caused significant damage to chip production. Taiwan's stock market fell by almost 2.7% back then, but it was producing just 10% of the world's computer chips. The disruption had prevented manufacturers from operating for one week. Although it is unclear when full production will resume now, the impact on the supply chain is expected to last 1-2 weeks.

The earthquake may also create some short-term uncertainty for 4th quarter results, but the overall impact is expected to be minimal. Chip assemblers had backlogs before the quake, so they can continue shipping chips in the near term. 

Interestingly, major earthquakes are known to increase volatility in Japan. The country only recently warned that it will act against large fluctuations in the yen. The currency has fallen sharply recently despite the BOJ ending negative interest rates, as markets expect the gap between US and Japanese rates to remain wide. 

With Taiwan's location in an earthquake-prone region, risks to the semiconductor industry may continue influencing the global supply chain and markets. However, governments are encouraging chip makers to diversify manufacturing to other locations to mitigate risks.

Chip Industry Remains Vulnerable From Reliance on Taiwan

Due to the concentration of chip production on the island, Taiwanese companies remain vulnerable to natural disasters and geopolitical tensions. Although the US has pushed Taiwanese chipmakers to diversify geographically to reduce risks, expansion projects will take time to ramp up fully. 

All the while, the US government has allocated $30 billion in subsidies to boost advanced semiconductor manufacturing and AI chip development in the US. Samsung has a new factory in Texas but has struggled to profitably manufacture large volumes of functional chips. Intel plans to use its most advanced chip manufacturing processes in the US but has not disclosed major customers for AI chips yet. Also, for Intel to become an AI chip powerhouse, it must regain its manufacturing lead from TSMC. However, executing this successfully remains to be seen.

On the other hand, TSMC and others' efforts to build chip manufacturing facilities outside Taiwan have faced delays. Their US-based Arizona plant opening has been pushed back by a year due to a lack of expertise, while a plant in Japan is ramping up more quickly. The company will open its first chip factory, Japan Advanced Semiconductor Manufacturing (JASM), later this year. 

Additionally, Japan is investing heavily in its semiconductor industry to compete with regional chipmaking leaders like TSMC. The government allocated around $13 billion to support the semiconductor and generative AI industry. However, Japan's chip industry is about a decade behind, with the focus still on TSMC's Japan plant.

The factory opening comes amid rising tensions between the US and China over chip manufacturing and imports. Some experts warn that the U.S.-China "chip war" could dampen growth for the global semiconductor industry. US President, John Biden, recently spoke with Chinese President, Xi Jinping, on the phone to discuss various issues and whether US sanctions against China amounted to "de-risking or decoupling."They also discussed progress on AI. This came just days before the first trilateral summit between President Joe Biden, Japanese Prime Minister, Fumio Kishida, and Philippine President, Ferdinand Marcos Jr., on April 11 at the White House.

Recent discussions between Nvidia founder, Jensen Huang, and TSMC founder, Morris Chang, on how to increase capacity to meet demand and scale AI capacity are also of interest. Huang warned that US export restrictions on Nvidia chips could drive Chinese firms to develop their own AI chip alternatives. With TSMC under pressure, it begs a political question of whether the US-Sino relations are due to ease or US TSMC production plans to ramp up. Ultimately, the AI chip boom could help the Biden administration achieve its goal of bringing more semiconductor manufacturing and jobs to the US.

Conclusion

The recent earthquake in Taiwan underscores the urgent need for diversification and the acceleration of alternative production facilities. Governments, notably the US, have been taking action to bolster domestic chip manufacturing, which could lead to a more secure supply chain in the long term. While consumer electronics may experience short-term disruptions and potential price hikes, countries or companies that can react quickly may capitalise on the AI boom. The quake might catalyse faster innovation and strategy revisions, particularly with the ongoing US-China tensions and the AI boom. 


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