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

By Clare Duffy, CNN

New York (CNN) — The world’s biggest chipmaker is working to resume operations following the massive earthquake that struck Taiwan Wednesday — a welcome sign for makers of products ranging from iPhones and computers to cars and washing machines that rely on advanced semiconductors.

A 7.4 magnitude earthquake struck the island’s east coast Wednesday morning, the strongest in 25 years, killing nine and causing landslides and collapsed structures.

Taiwan Semiconductor Manufacturing Company, the leading chipmaker also known as TSMC, operates largely on the opposite side of the island, although the company said its facilities did experience some shaking. TSMC temporarily evacuated some manufacturing plants following the quake but said later Wednesday that staff were safe and had returned to their workplaces.

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

While Wednesday’s earthquake appears unlikely to have any long-term implications for the semiconductor supply chain, it gave a stark reminder of the risks of concentrating crucial microchip manufacturing on an island that is both prone to earthquakes and a hotspot for 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 that 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 daily. Its chips are used by tech giants including Apple, Qualcomm, Nvidia and AMD — and they’re essential for the burgeoning artificial intelligence industry, where chip supply is already constrained.

“I believe it’s an existential threat,” said David Bader, professor and director of the Institute for Data Science at New Jersey Institute of Technology, of the concentration of chipmaking in Taiwan.

“The entire world now works on semiconductor devices powering everything that we do, whether we’re driving in our cars, whether we are talking on our cell phones, even our military defenses or weapons systems, airlines, everything uses chips,” Bader said. “If production were to halt … this would be devastating.”

Recovery efforts underway

TSMC bolstered its earthquake protections in the years following Taiwan’s last major earthquake in 1999.

As of late Wednesday, the company said that more than 70% of the tools in its fabs had been recovered within 10 hours of the earthquake, with recovery levels higher in some newer facilities. TSMC said impacted facilities were expected to resume production throughout Wednesday night.

As of Thursday, TSMC said it expected to have fully recovered operations of all of its facilities by the end of the day. However, it noted that “certain production lines in areas which experienced greater seismic impact are expected to require more time for adjustment and calibration before returning to fully automated production.”

Even an hours-long shutdown of certain chip production could take weeks to recover from.

“Some of the high-end chips need 24/7 seamless operations in vacuum state for a few weeks,” Barclays analysts said in an investor note Wednesday, adding that operation halts could mean “some high-end chips in production may be spoiled.” They noted that TSMC could see a $60 million impact to its second quarter earnings from the disruption.

The potential broader ripple effects for the tech industry will also depend on what kind of chip manufacturing was affected, something that wasn’t immediately clear on Wednesday, according to Gartner analyst Joe Unsworth. Tech companies that rely on GPU chips that help power AI applications, which are already in short supply, will likely be watching closely for potential impacts on that area of production.

Nvidia, the leading designer of GPUs, said in a statement Wednesday that “after consulting with our manufacturing partners, we don’t expect any impact on our supply from the Taiwan earthquake.”

Some other semiconductor and technology manufacturers — including smaller chipmaker United Microelectronics Corporation, memory and storage chipmaker Micron and Apple supplier Foxconn — said Wednesday they were also evaluating the potential impacts of the earthquake on their Taiwan facilities but indicated that they expect little fallout.

The race to diversify chipmaking

Wednesday’s earthquake will likely only add pressure to efforts underway for years to grow chipmaking capacity outside of Taiwan.

Other disasters, including the Covid-19 pandemic and droughts, have previously weighed on semiconductor production in the region and caused chip shortages that raised the prices of consumer goods. Supply chain experts and US officials also worry that US-China trade tensions and military aggression from China against the island could bring consequences for the industry.

“We think the earthquake should serve as a reminder to investors of the risks associated with having so much foundry exposure coming from one region,” CFRA Research analyst Angelo Zino said in an investor note Wednesday.

In 2022, US President Joe Biden signed into law the CHIPS and Science Act, which allocated more than $200 billion in investment over the next five years to help the United States regain a leadership position in semiconductor manufacturing.

And in recent years, TSMC has announced plans for new semiconductor fabs in Japan, Germany and the United States. But plans for its second factory in Arizona — which was announced in 2022 and originally expected to be operational this year — have been repeatedly delayed.

Experts say it’s a sign that the diversification of the chip supply chain is not moving quickly enough to account for the risks of remaining concentrated in Taiwan. Locations for new fabs must have companies or governments willing and able to invest billions to construct the facilities, as well as a large workforce with the skills to do advanced semiconductor manufacturing.

“I think that we are in a critical period for the next several years, until there is a location for a major fab like TSMC that is in a less geopolitical hot zone than Taiwan,” Bader said. “We are really working in a challenging arena for several more years as we wait for that to happen.”

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