Chips are becoming the world's most strategic product. Credit: Handout.

Taiwan’s chipmakers are being hit simultaneously with drought, power shortages and a worst-yet wave of Covid-19, a confluence that threatens to undermine already strained global supply chains.

That threat is greatest to chip producer TSMC, the world’s leading supplier of cutting-edge semiconductors that power everything from iPhones to newfangled electric vehicles. 

At least one engineer employed by the chipmaker at its vital Taichung fab tested positive for the virus last weekend, while the central Taiwanese city grapples with a viral spread from Taipei with the confirmation of 11 fresh infections, according to Taiwanese papers. This has further fueled talk about TSMC taking precautions and shutting its plant in the city.

Taiwan is scrambling to close non-essential shops and government agencies and limit indoor gatherings to five people as it reinstates measures put in place when it staved off the Covid spillover from mainland China in the first quarter of 2020. 

But while other sectors can switch to working from home, lockdowns could be financially ruinous for TSMC and its many suppliers and buyers. Lockdowns could also hit earnings if the company is saddled with compensation for delayed deliveries.

A security staff stands next to a logo of TSMC. Photo: AFP / Sam Yeh

TSMC has long had contingency plans to shift and juggle production among its bases across Taiwanese cities including Hsinchu, Tainan and Taichung. Yet the chip-starved global economy will see more disruptions and prolonged delays if Taiwan fails to maintain normal production.

The Taiwanese chipmaker said on Monday its infected engineer had been hospitalized, with about a dozen of his close contacts isolated and their offices disinfected.

But the worst of the flare-up is likely yet to come after what started as sloppy quarantine arrangements for aircrew members at Taipei’s main airport ignited a community outbreak two weeks ago. The pathogen has spun out of control on the island, once praised for nearly vanquishing the virus.

The island logged 334 new cases on Monday, with another 256 infections reported but not instantly confirmed in the past week. The spike is steep given the island’s modest total of fewer than 5,000 cases so far. 

TSMC has sought to allay concerns, saying that only one infection among its technicians would not cause it to reduce output. With Taiwan slipping into a Covid crisis, however, more infections are feared among TSMC‘s army of engineers and workers in plants across the island.

A TSMC engineer inside the chipmaker’s fab in Taichung. Photo: Handout

In the meantime, the impact of Taiwan’s perennial power shortage has also had its toll on TSMC. Within five days in the past week, the island of 24 million residents was hit by two massive power outages when blackouts occurred in domino fashion.

In the second accident on May 18, 20 million industrial and household users from Taipei to Taichung were left without power. 

Taiwanese media speculated that the island’s Ministry of Economy could have asked TSMC’s power-guzzling chip plants to suspend operations and furlough staff.

The company then confirmed a “demand response” arrangement with authorities in which production lines would switch to backup power to ease the strain on the power grid in peak hours. 

A document submitted by the island’s grid operator Taipower to the Legislative Yuan revealed that TSMC’s power consumption had soared more than twofold between 2010 and 2019 to become the island’s largest non-residential electricity user, as the company boosted chip research and production to meet rising global demand.

TSMC’s cutting-edge 3-nanometer chip fab in Tainan, slated to be up and running next year, will be so energy-intensive that its power use is projected to be 3% of the island’s total. Its existing 5-nanometer chip plant used 6.3 billion kilowatt-hours last year. 

Power supplies are drying up further amid Taiwan’s longest spell of drought in more than half a century, with hydropower plants operating way below capacity and many reservoirs and rivers running dry.

Taiwan’s Economic Daily reported last week that TSMC had been hiring fire engines to deliver water to its headquarters campus and plants in Hsinchu. The city that is hailed as Taiwan’s Silicon Valley will start rationing water next month.

The paper said a fab would typically need 2-4 million gallons of pure water daily. 

Clients and end-users will now have to endure even longer waits of more than 17 weeks, the average time between an order is placed on TSMC and shipment, according to Taiwan’s semiofficial Central News Agency. 

TSMC founder Morris Chang with Taiwanese President Tsai Ing-wen. Tsai has been urged to deliver on her promise to help the company. Photo: Handout

It remains to be seen if TSMC’s previous pledges, including beefing up output of micro control units fitted in cars by 60% by the year’s end, are deliverable. The challenges facing TSMC and Taiwan’s broader chip and IT sectors may also snuff out the island’s economic recovery.  

Chen Cze-yao, a professor of economics at Taiwan’s Tamkang University, one of the island’s leading private tertiary institutions, told Asia Times that TSMC would risk becoming collateral damage when flanked by Covid and power outages.

It may have to shift more key production overseas, likely to its new fab taking shape in the American state of Arizona. 

“The problems TSMC is now grappling with all of a sudden and on multiple fronts in Taiwan can be symptomatic of the island’s constraints, complacency and vulnerability that will increasingly hamper the growth of its key companies in difficult and unsettled times,” Chen said.

“Taiwanese President Tsai Ing-wen previously talked up the global pre-eminence of Taiwan’s chip and IT sectors and the need to further entrench the lead. Now it’s time for her to deliver on her promise and help TSMC out, because the high stakes of the island’s economy and global chip supplies are attached to TSMC’s performance in crunch time.”

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