Taiwan's Chip Manufacturing Comes to a Standstill
The most powerful earthquake to hit Taiwan in the last 25 years could disrupt the global high-tech market, notably affecting the artificial intelligence segment.
The leading chip producers on the island are tallying their losses and have temporarily (temporarily?) ceased production.
Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), boasting a market cap of $630 billion, has paused its operations, evacuating parts of its production lines and workforce. Similarly, the smaller United Microelectronics Corp., with a market capitalization exceeding $20 billion, has followed suit.
Remarkably, Taiwan is responsible for producing around 80% of the world's high-tech chips, integral to various products and gadgets—ranging from computers and smartphones to household appliances, medical equipment, and automobiles. While Taiwanese factories are engineered to withstand earthquakes with minimal damage, analysts from the global financial conglomerate Barclays (as referenced by Asia Financial) highlight a significant challenge: assembling certain high-performance chips requires maintaining vacuum conditions for weeks (with ASML, a Dutch firm, being the sole supplier of lithography machines essential for creating advanced chips). There's a risk that entire batches of such products could be permanently damaged.
Inside the TSMC Factory. Source: tsmc.com
It's important to highlight that TSMC is the key manufacturing partner of Nvidia, which, in return, equips a wide array of notable AI projects with the necessary chips.
The focus here is on TSMC's facilities in Taiwan. Though the company has initiated the construction of manufacturing lines in Japan and the USA, these new factories were not intended for the production of high-tech chips. Additionally, TSMC has entered into a substantial contract with Apple Inc., with the Taiwanese manufacturer's chips being integral to Apple devices. TSMC also manufactures chips for a broad spectrum of leading entities in the global semiconductor market, including AMD, ARM, Broadcom, Marvell Technology, MediaTek, and Qualcomm, among others. Even enterprises possessing their manufacturing capacities, like Intel, avail services from TSMC.
Taiwan is potentially the most critical single point of failure in the entire semiconductor value chain,said Jan-Peter Kleinhans, director of the technology and geopolitics project at Berlin-based think tank Stiftung Neue Verantwortung.
Interestingly, Taiwan was the pioneer in adopting Earth-2—a high-resolution weather modeling platform powered by Nvidia's CorrDiff AI model. This initiative was introduced by Nvidia's President, Jensen Huang, at the recent GTC conference, which also saw the unveiling of Nvidia's newest invention, the Blackwell graphics processor. The Central Meteorological Administration of the island, along with The Weather Company, are leveraging Earth-2 to advance their early warning systems for natural disasters.
The recent disruptions at TSMC come amidst a global chip shortage. AI companies are pre-ordering batches of these essential components a year ahead. This scenario is poised to have detrimental impacts not just on the artificial intelligence industry but across numerous high-tech fields. The most immediate and foreseeable outcome is a further depletion of chip supplies and an escalation in prices.
Regarding the chip manufacturers, they are in the early stages of evaluating the earthquake's inflicted damages. Specific details on which facilities have been salvaged remain unclear. Nevertheless, as indicated in the aforementioned Barclays report, TSMC's net profit for the second quarter is anticipated to drop by approximately $60 million—a relatively modest loss, especially when compared to the company's net profit of $7.6 billion in the fourth quarter.
However, in forecasting the AI market's future amid dwindling chip production, the ambitions of other market players cannot be ignored. Notably, in early February, it was revealed that OpenAI's CEO, Sam Altman, intends to significantly expand global chip manufacturing capabilities. This initiative is currently in the negotiation stage with potential investors, with preliminary estimates indicating that the project could require up to $7 trillion in funding.
In addition, Intel's chip manufacturing arm is poised to receive up to $20 billion in government grants and loans to boost semiconductor production in the United States. This funding comes despite the substantial losses Intel has incurred in this business area, which escalated to $7 billion by the end of 2023.
The financial support from the government will be allocated towards upgrading Intel's existing facility in Arizona and constructing two new plants. These investments are part of the U.S. government's broader efforts under the 2022 CHIPS and Science Act, which aims to localize chip production within the country. With $52.7 billion earmarked for the industry by the government, the substantial funding allocated to Intel highlights the government's confidence in the corporation's potential to alter the dynamics of the global semiconductor market.
