The Taiwan earthquake is a stark reminder of the risks to the region's chipmaking industry

New York CNN –

The world's largest chipmaker is working to resume operations in the wake of Wednesday's devastating earthquake in Taiwan — a welcome sign for manufacturers of products ranging from iPhones and computers to cars and washing machines that rely on advanced semiconductors.

A 7.4-magnitude earthquake struck the eastern coast of the island on Wednesday morning, the strongest in 25 years, killing nine people and causing landslides and the collapse of buildings.

Taiwan Semiconductor Manufacturing Co., a leading chipmaker also known as TSMC, operates largely on the other side of the island, although the company said its facilities experienced some vibration. TSMC temporarily evacuated some manufacturing plants in the wake of the quake, but said later Wednesday that employees were fine and had returned to their workplaces.

“A small number of instruments were damaged at some facilities, partially impacting their operations. However, no damage occurred to our critical instruments,” TSMC said in a statement late Wednesday.

While Wednesday's earthquake seems unlikely to have any long-term effects on the semiconductor supply chain, it provided a stark reminder of the risks of concentrating critical microchip manufacturing on an earthquake-prone island and a hotspot of geopolitical tensions. Chipmakers and governments, including the US government, have in recent years invested billions in efforts to diversify chip production, but many experts worry the process is not happening fast enough.

TSMC produces an estimated 90% of the world's most advanced semiconductor chips, which power countless devices people rely on every day. Its chips are used by tech giants including Apple, Qualcomm, Nvidia and AMD, and are essential to the booming AI industry, where chip supply is already limited.

“I think it's an existential threat,” said David Bader, professor and director of the Data Science Institute at New Jersey Institute of Technology, speaking about the concentration of chip manufacturing in Taiwan.

Badr said: “The entire world is now working on semiconductor devices that power everything we do, whether we are driving our cars, talking on our cell phones, or even our military defenses or weapons systems, or airlines, everything uses chips.” . “If production stops… it will be devastating.”

TSMC has strengthened earthquake protection measures in the years following the last major earthquake in Taiwan in 1999.

As of late Wednesday, the company said more than 70% of the tools in its plants had been recovered within 10 hours of the quake, with recovery levels rising at some of the newer facilities. TSMC said the affected facilities were expected to resume production throughout Wednesday night.

However, even stopping the production of some chips for hours can take weeks to recover from.

“Some cutting-edge chips need smooth 24/7 operations in a vacuum for a few weeks,” Barclays analysts said in a note to investors on Wednesday, adding that a shutdown could mean that “some cutting-edge chips in production may fail.” They noted that TSMC could see a $60 million impact on Q2 earnings from the disruption.

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

“After consulting with our manufacturing partners, we do not expect any impact to our supplies from the Taiwan earthquake,” Nvidia, a leading designer of graphics processing units, said in a statement on Wednesday.

Some other semiconductor and technology makers — including the smaller United Microelectronics Corporation, memory and storage chip maker Micron, and Apple supplier Foxconn — said Wednesday they were also assessing the potential effects of the quake on their facilities in Taiwan, but indicated they expected repercussions. Few.

Wednesday's quake is likely to add further pressure on years-long efforts to grow chip-making capacity outside Taiwan.

Other disasters, including the COVID-19 pandemic and droughts, have previously affected semiconductor production in the region and caused chip shortages that drove up prices of consumer goods. Supply chain experts and US officials are also concerned that trade tensions between the US and China and military aggression from China against the island could lead to consequences for the industry.

“We believe the earthquake should serve as a reminder to investors of the risks associated with having too much exposure to foundries coming from one region,” CFRA research analyst Angelo Zino said in an investment note on Wednesday.

In 2022, US President Joe Biden signed the Chips and Science Act, allocating more than $200 billion in investments over the next five years to help the United States regain its leadership position in semiconductor manufacturing.

In recent years, TSMC has announced plans to establish new semiconductor factories in Japan, Germany and the United States. But plans for its second factory in Arizona — which was announced in 2022 and originally expected to come online this year — have been repeatedly postponed.

Experts say it's a sign that diversification of the chip supply chain is not moving fast enough to account for the risks of remaining centered in Taiwan. New factory locations must be companies or governments willing and able to invest billions to build facilities, as well as a large workforce with the skills needed to do advanced semiconductor manufacturing.

“I think we are in a critical period over the next few years to have a location for a major manufacturer like TSMC that is located in a less geopolitically hot zone than Taiwan,” Bader said. “We are really operating in a challenging arena for several more years while we wait for this to happen.”

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