Taiwan earthquake raises concerns about computer chip supplies

A 7.4-magnitude earthquake rocked Taiwan on Wednesday, killing nine people, injuring thousands more and causing landslides and damage to infrastructure across the island.

It is not surprising that there has been an outburst of concern around the world, given that the earthquake was the worst to hit Taiwan in a quarter of a century. But I can't remember anyone mentioning the last quake, a 7.6-magnitude quake in 1999 that killed more than 2,000 people and tore down the sidewalk outside my uncle's 7-Eleven store in Taichung. Taiwan was so low-profile at the time that when I told people my family was from Taiwan, most assumed I was mispronouncing Thai.

What's different now? It largely concerns Taiwan Semiconductor Manufacturing Company, which produces more than a third of the world's computing power each year, according to the book “The Chip Wars: The Fight for the World's Most Important Technology.”

TSMC is the most advanced and efficient producer of what is arguably the world's most valuable resource: computer chips. Every product, service or commodity that uses computers or the Internet relies on the production of chips, and this includes the world's militaries. Even a minor interruption in the Taiwanese company's operations could cause economic and geopolitical shocks around the world.

The world is now holding its breath if Taiwan trends on social media. Politicians from both the right and left are planning official visits to Taiwan to show their support for democracy, the most recent of which was a visit by a congressional delegation led by Mike Gallagher (R-Wis.) in February. Journalists from around the world closely followed Taiwan's presidential elections, calling it an event that could reshape global politics.

National security analysts are laying out battle scenarios for a possible war between the United States and China over Taiwan, counting ships, missiles and bombs on both sides. As the US presidential election season heats up, it will become important for all of us to educate ourselves about Taiwan.

I have no doubt that the world's concern for democracy and the people of Taiwan is genuine. But this is at least offset by concern for chip foundries in Taiwan, where even a minor outage could seriously disrupt global supply chains.

Fortunately, Reuters reported on Thursday that the chip manufacturer suffered little major damage in the quake. After the earthquake struck the coast of Taiwan's Hualien County on Wednesday morning, TSMC briefly evacuated some of its workers from its factory in Hsinchu, more than 100 miles from the epicenter. They returned to work a few hours later. But even that brief disruption could cost the company up to $60 million in revenue along with more losses for companies that rely on TSMC's chips, according to an investor report released by Barclays on Wednesday.

TMSC's main chip foundries are located just over a mile from my late grandmother's house in Hsinchu. The company is notoriously media-shy, but offers an on-site museum for the curious. When I was visiting my relatives in February, I visited them to see what I could learn.

It turns out, not so much. The museum consists of four rooms containing various interactive touch screens and audio presentations and focuses mainly on explaining the technology and history of semiconductor chips. It was like walking through a high-tech science textbook.

The museum was located on a regular business campus without any of the ostentation and excess branding of an American tech campus. National security analysts call TSMC the most important company in the world, but it looks a lot like an Encino office complex.

This modesty serves a strategic purpose, according to Raymond Kuo, who analyzes security issues between the United States and China for the Rand Corporation with a focus on Taiwan.

TSMC has grown to a position of dominance in semiconductor manufacturing by staying out of the spotlight, Kuo said. The company does not design any of its own chips and therefore does not compete with any of its customers, including Intel, Apple, Sony, Dell and Hewlett-Packard.

In Taiwan, highly qualified engineers and scientists accept relatively lower Taiwanese salaries because they see a job at TSMC as a higher-end career, which helps keep labor costs low and factories running at all times. The company's role in keeping the island safe is widely recognized – President Tsai Ing-wen has called the company Taiwan's “silicon shield.”

“Part of what sets TSMC apart from its competitors is not its technology, but its organization,” Kuo said. “If the machine breaks down at 5 a.m., people with master’s degrees are assigned three shifts to keep them constantly working.”

An invading nation cannot easily seize chip manufacturing as a war prize, like oil rigs or mines, Kuo said. War risks damaging machinery, which itself costs hundreds of millions of dollars and is beyond repair. Operating it effectively requires decades of experience. Manufacturing chips requires huge investments and government coordination of technological resources, not much different from the depiction of the race to produce the atomic bomb in Oppenheimer's film.

The world's governments have spent the past three decades racing to capture the exploding market for computing power and prevent political enemies from obtaining the advanced chips used to wage war. For the countries in this race, TSMC, and by extension Taiwan, represents the winning hand.

In 2022, the Biden administration restricted the export of US chip technology to China and banned US residents, citizens, and green card holders from working for Chinese chip companies. The move represents an existential threat to China's semiconductor sector, which relies on American-designed chips from TSMC.

But efforts to stifle Chinese chipmakers make Taiwan more valuable in the eyes of China's leaders, especially in light of an unprecedented economic downturn.

Wednesday's earthquake showed that Taiwan is capable of preparing for disaster. After 1999, planners set strict requirements for retrofitting and wrapped the island in a dense network of alarm systems. The earthquake stopped traffic throughout Taiwan, but deaths and damage were much less than what happened 25 years ago.

TSMC's facilities had restored most of their capacity by the next day, and after the company told its investors it would continue to meet its revenue expectations for the year, shares rose 3% Thursday morning.

But there are no chips or computerized warning systems sophisticated enough to predict the greatest threat facing Taiwan: the growing political and economic rivalry between the United States and China that threatens to engulf the entire world.

Not now anyway.

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