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Taiwan Drought May Worsen Global Component Shortage

Semiconductors now play a critical role in global supply chains of various industries. Since 2020, a series of events including the COVID-19 pandemic and US-China trade war has led to a huge demand-supply mismatch for semiconductors. The shortage of supply has affected the production of almost all mainstream electronics segments, such as smartphones, automobiles and high-performance computing (HPC).

Taiwan dominates semiconductor production globally due to its unique position in the foundry and outsourced assembly and testing (OSAT) industry. Semiconductor mass production also uses some of the most advanced technologies which make setting up a production unit a high-investment and time-consuming affair. This is why the current drought in Taiwan has set alarm bells ringing the world ever.

According to Counterpoint’s Foundry Service, TSMC’s foundry market share reached 58.6% in 2020, equivalent to an HHI of 3,798. By production region, Taiwan’s foundry market share, including TSMC, UMC, VIS and PSMC, reached 68.9% in 2020, with an HHI of 5,098. In addition, there are memory fabs including Micron Technology, Nanya Technology, Macronix and Winbond. These semiconductor fabs are located in three major technology parks in the country (see Exhibit 1).

Exhibit 1: Reservoir Capacity of Taiwan’s Major Science Park Sites

Data source: Counterpoint semiconductor factory database

Reservoir data source: https://water.taiwanstat.com

A stable and quality source of water is essential for semiconductor production. However, Taiwan is currently suffering from its worst drought in 56 years due to less than usual rainfall during the past year. The main sources of water in Taiwan are (1) the plum rains that occur in spring and summer when hot and cold air meet, (2) the heavy rainfall from typhoons in summer, and (3) the light rainfall in the mountains from the northeast monsoon in fall and winter. The proportions here are about 12%, 39% and 6% respectively.

Taiwan usually receives 7-9 typhoons every year. However, only one typhoon landed in Taiwan in 2020. To make matters worse, last winter and spring’s rainfall was heavily deficient, causing a shortage of water in Taiwan. The country is topographically divided by the 3,000-metre-high Central Mountain Range, which separates Taiwan’s eastern and western parts. The rains brought by the northeast monsoon in autumn and winter are mostly concentrated in the eastern and northern catchment areas, which means abundant rainfall for Draco, though it is of limited help to the Central and Tainan science parks. Therefore, water shortage becomes a serious problem for Taiwan’s technology industry in 2021. It may also have a serious impact on the global supply chain.

Exhibit 2: Major Reservoir Capacity Data

Map Templates from https://landslide.geologycloud.tw/

Reservoir data source: https://water.taiwanstat.com

The Taiwanese government has taken many measures to address the water shortage problem, including transferring water between reservoirs, stopping water supply for agriculture, reducing water supply for households, drilling groundwater wells, and desalinating seawater. Besides, industrial users, including semiconductor manufacturers, have been asked to reduce their water consumption. TSMC, for example, has significantly increased the water recycling rate. The water level in the northern reservoirs has reached a multi-year low, though still sufficient for the continued use by Hsinchu Science Park (HSP). However, the average effective water storage of the reservoirs supplying the Central Taiwan Science Park (CTSP) and Southern Taiwan Science Park (STSP) on April 30 was only 8.9% and 14.3% respectively (Exhibit 2). According to Counterpoint estimates, if there is no heavy rainfall or the rainfall does not fall in the catchment area, CTSP will face a water outage in July and STSP around August. Given that the current capacity utilization rate of most semiconductor fabs is close to 100%, this is bound to worsen the ongoing semiconductor shortage. Semiconductor manufacturing vendors should (1) consider relocating their production to other regions to mitigate the impact and (2) prioritize the production sequence to avoid a disconnected electronic supply chain.

Brady Wang has more than 20 years working experience in high-technology companies from semiconductor manufacturing to market intelligence, and strategy advisory. Brady’s major coverage in Counterpoint is semiconductors. Prior to joining Counterpoint, Brady Wang worked for Gartner for 11 years. He started his career at TSMC as an engineer for 6 years.

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