Taiwan Drought Threatens to Make Chip Shortage Worse

Taiwan Drought Threatens to Make Chip Shortage Worse

Island's worst dry spell in half a century has added to the challenges facing a center of semiconductor manufacturing

The worst drought in half a century is hitting Taiwan, adding strain to an island that is home to two-thirds of the world semiconductor manufacturing capacity during the worst global chip shortage in recent memory.

The drought's impact on semiconductor producers, which require voluminous quantities of water to churn out chips, is so far modest as the government creates exceptions for these manufacturers. But companies are starting to make adjustments, and officials have warned that the water shortage could worsen without adequate rainfall.

Taiwan's semiconductor wafer-fabrication factories, or fabs, account for 65% of global production, according to the research firm TrendForce. Most of that capacity belongs to Taiwan Semiconductor Manufacturing Co., the world's biggest contract chip maker.

"Taiwan is the center of gravity for semiconductor manufacturing," said Syed Alam, global lead of the semiconductors practice at Accenture. "This is one thing you don't need adding more pressure on the situation."

Seasonal typhoons provide Taiwan with much of its water reserves. But a lack of storms last year has strained supplies, prompting the government to start rationing water for more than a million businesses and residents.

The heightened risk comes as the global chip supply has been battered by a series of natural disasters just as demand for semiconductors has soared from auto makers and electronics companies around the world.

Taiwan's three science industrial parks, which house most of the island's chip-making facilities, have had to curb their water intake but are so far exempt from stoppages, which has helped stave off disruptions. Still, some companies are feeling the pinch.

Micron Technology Inc., a U.S. chip maker with Taiwan facilities in Taichung and Taoyuan, said securing alternative sources of water and speeding up conservation would increase production costs after supply to one of its Taiwan-based memory-chip facilities was reduced.

Meantime, TSMC and United Microelectronics Corp., both of which are based in Hsinchu, Taiwan, have arranged for trucks to bring in additional water supplies. TSMC said it is also in talks with some companies to use groundwater from their construction sites.

TSMC chief executive C.C. Wei said last Thursday that while Taiwan water supplies are currently tight, the company doesn't expect to see any material impact on operations.

Taiwan officials and scholars have warned that water scarcity could become a more persistent problem in the years to come because of climate change, a worrying possibility for the global semiconductor industry given the concentration of chip production in Taiwan.

More than half of Taiwan's water supply comes from typhoons, said Yuei-An Liou, a professor at the National Central University's Center for Space and Remote Sensing Research in Taoyuan, Taiwan.

As global temperatures rise, typhoons will become stronger over the Pacific Ocean but also are more likely to change course before reaching Taiwan, he said.

Taiwan launched a drought disaster response agency in October and has been working to alleviate water constraints through reservoir dredging, desalination and piping water in from various parts of the island.

This month the government halted water supply for two days each week to some parts of the island, affecting residents and businesses including restaurants, hair salons and carwashes.

Taiwan's Ministry of Health and Welfare has encouraged citizens to conserve water while still washing their hands during the Covid-19 pandemic.

Semiconductor facilities are voracious consumers of water, which is needed to clean the wafer base, etch patterns, polish layers and rinse components throughout the manufacturing process.

According to TSMC's most recent report on corporate social responsibility, published in June of last year, the company used 156,000 metric tonnes of water a day across Taiwan's three science industrial parks in 2019 -- enough to fill more than 60 Olympic-size swimming pools.

UMC used 31,500 metric tonnes a day in 2019 at its Taiwan facilities, according to a company report.

Given the uncertainty regarding water supply, TSMC has aimed by 2030 to reduce the amount of water it uses per unit by 30% from 2010 levels. In 2019, it had reduced water per unit by 5.2% from 2010 levels.

The company said it was able to conserve more than 3 million metric tonnes of water in 2019 through conservation and water reuse.

In times of scarcity, water allocation has become a point of contention in Taiwan, particularly for farmers who have had to give up irrigation even as industrial zones continue to operate.

Jennifer Nien, director of the Taiwan Water Resources Conservation Union, a nonprofit, said that while the government has provided subsidies this year for farmers without water, many are concerned that a prolonged shortage could leave their lands barren.

"The industrial sector is like a bottomless pit, always needing water," Ms. Nien said. "We know that Taiwan's government is earnestly looking for more water, but we are also worried."

Semiconductor companies are a crucial part of the self-ruled island's economy and diplomatic relations, particularly as supplies have become sparse.

In 2018, TSMC accounted for some 4.5% of Taiwan's gross domestic product. On average over the past five years, chip sales have accounted for 64% of Taiwan's export growth, according to the research firm TS Lombard.

"The importance of semiconductors is like Taiwan consensus now, everyone understands that," said Terry Tsao, global chief marketing officer and president of SEMI Taiwan, an industry group. "People will make sure there's enough of the water to keep the competitiveness of semiconductor manufacturing."

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