Compass Money: Droughts Threaten Further Shortages in Semiconductor Manufacturing in Taiwan

Semiconductor manufacturers in Taiwan are struggling as a result of the severe drought in Taiwan. (Seeking Alpha)

Taiwan, home to 63 percent of the global output of semiconductors foundry, currently faces the worst drought in half a century. Authorities have reduced water reserves to the central area of the island to prevent reserves from running dry. Major chipmakers with foundries in Taiwan, such as Taiwan Semiconductor Manufacturing Company (TSMC) and Micron Technology, seek ways to secure alternative water supply. While current operations have not yet been affected due to water shortage, production costs might increase and exacerbate the chip shortage that has continued since 2020. 

Several players in the automotive industry have forecasted a loss in revenue targets in 2021 due to chip shortages. Automakers cut back on orders for semiconductors after projecting lowered sales early in the pandemic. As demand for cars rebounded in the third quarter, automakers such as GM and Ford found themselves unable to schedule orders as manufacturers were already committed to supplying other customers in electronics and IT. Unlike the automotive demand, the COVID-19 pandemic boosted demand for technological devices that made quarantine more bearable—such as laptops for distance learning, game consoles, 4K televisions, and air fryers.

Besides the increase in demand, power outages in Texas caused Samsung to shut its foundries in Austin until late March. Renesas Electronics Corp, one of the top producers, suffered heavy damages in its important chip-producing machines from a fire in early March. TSMC also cited stockpiling of chips as having added to the shortages—the U.S.’s blacklisting of Huawei caused it to stockpile chips to ensure sustained production.

The global reliance on Taiwanese TSMC and South Korean Samsung foundries have prompted Intel, the largest global vendor of semiconductor, to revive chip manufacturing in the U.S. and enter the foundry business. For years, Intel has fallen behind TSMC for new production technologies, which led Intel to outsource lower-end chips for cost-effectiveness and keep higher-end ones in-house as its competitive advantage. CEO Pat Gelsinger says the company will invest $20 billion in two new Arizona plants to serve outside customers, such as Apple and Qualcomm. The decision is likely to receive favorable responses as the Biden administration plans to invest $50 billion in semiconductor manufacturing as a part of the bigger Infrastructure Bill. With the rising demand for semiconductors for technologies such as 5G, governments will seek to decouple the supply chain of the semiconductor to avoid over-reliance on the relatively uncompetitive semiconductor manufacturing sector.