The largest earthquake in Taiwan in 25 years could affect Nvidia supplier TSMC

The 7.4-magnitude earthquake that struck Taiwan on Wednesday morning could shake AI darling Nvidia after major Taiwan Semiconductor Manufacturing Co (TSMC) temporarily halted production and evacuated its factories.

TSMC said it moved employees from some production centers after its science parks in Hsinchu, Longtan, Zunan and Taichung were hit by 5.0-magnitude earthquakes. Initial inspections of TSMC's construction sites were normal, but it said a “small number” of tools were damaged in certain production areas, partially affecting operations. The manufacturing plant's tool recovery rate reached more than 70% within 10 hours of the quake, and none of TSMC's critical tools were affected, the company reported. The chip manufacturer's local rival United Microelectronics Corporation (UMC) also took action to evacuate some facilities and halt some operations.

“TSMC’s safety systems are operating normally,” the company said in a statement to Fortune. “Preventive measures were initiated to ensure the safety and well-being of employees at that time in accordance with procedure, and some factories were evacuated. All employees are safe and returned to their workplaces soon after the incident.

UMC did not respond to Fortune's request for comment. An Nvidia spokesperson told Fortune that the company is monitoring the situation and ensuring employee safety, but has not issued an official statement.

Nvidia is TSMC's second-largest customer, behind only Apple, and relies on the manufacturer to produce the semiconductor chips it designs for chip systems that run artificial intelligence software and advanced graphics processing units. Last year, Nvidia paid the chipmaker $7.73 billion for its services, representing 11% of TSMC's revenue, according to financial analyst Dan Nystedt. With a market capitalization of $2.2 trillion, Nvidia is the third largest company in the United States, effectively leading the AI ​​revolution.

Shares of TSMC and UMC stumbled about 1.3% and 1%, respectively, early Wednesday, while Nvidia shares remained flat.

Industry dependencies

The earthquake that struck Taiwan on Wednesday was the country's largest in 25 years, leaving more than 100 buildings damaged. Nine people were confirmed dead and more than 960 injured. While the earthquake struck the east coast of the island — with several TSMC plants on the west coast — there were more than 29 aftershocks across the island with magnitudes greater than 4.0, capable of causing moderate damage.

Semiconductor chips are known for their fine electrical properties, and are also more sensitive to light, dust, and molecular pollutants. It requires clean rooms with filtered air, an environment similar to a surgical table.

While TSMC reported normal operations and did not disclose the results of its ongoing inspection of the facilities, analysts warn that it will take time for the company to return to normal.

“Mitigating the effects of the earthquake requires careful measures and time to restore production and maintain quality standards, which presents additional impacts and obstacles,” consulting firm Isaiah Research said in a note.

Costs of doing business in Taiwan

Taiwan experiences about 2,200 earthquakes a year, according to the Central Weather Administration's Earthquake Center, and TSMC has taken precautions over the years to mitigate damage from natural disasters. After a 6.6-magnitude earthquake struck its manufacturing plants in Tainan in February 2016, TSMC added additional roof supports and stoppers on storage shelves to prevent slippage.

Experts say Nvidia's central operations in Taiwan are the company's primary weakness. Its almost sole reliance on TSMC makes it vulnerable to any supply chain or production hurdles the manufacturer faces. Although there are a few other chip manufacturers, TSMC has the advantage over competitors through its ability to stack and package chips for heavy data processing.

Taiwan is under increasing military threat from China, which claims Taiwan as part of its republic despite the Taiwan independence movement, and this unrest represents another threat to the security of TSMC's operations.

Nvidia founder and CEO Jensen Huang emphasized Taiwan's central role in chipmaking amid fears of political strife at a technology event in Taipei last June. Nvidia is currently building factories in the United States, and TSMC is preparing to begin operations at a factory in Arizona, although its opening has been postponed.

“When I was here, in all our supply chain discussions, we felt completely safe,” he said.

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