Just about a month ago, an earthquake that registered 6.4 on the Richter Scale shook Tainan in Southern Taiwan, a hub for many global electronics OEMs. Now, however, the quake remains a talking point for global electronics OEMs who are hoping to leverage the event as a cautionary tale for risk planning.
"These events always seem to catch people by surprise but the surprise might be lessening," Eric Jones, vice president and global manager of Business Risk Consulting (BRC) at global insurance company FM Global told EBN in an interview. "Companies, particularly those who depend on suppliers in that part of the world, are getting more savvy and aggressive in trying to manage these risks."
Only time will tell how Taiwan's earthquake last month will impact semiconductor supplies. In the meantime, it's an important reminder of the importance of risk management.
Early reports put the death toll of the earthquake at several dozen, with hundreds of people still missing. The weeks following, stories of supply chain disruptions have been added to the tales of woe. "Facilities for Taiwan Semiconductor Manufacturing (TSMC), Apple's sole supplier for the A10 processor integral to its forthcoming iPhone 7, were impacted," Forbes reported. "Fortunately stocks of delicate wafers, which are central to semiconductor production, survived relatively unscathed and only 1% of deliveries were expected to be disrupted. But some orders face delays of 10 – 50 days."
The story doesn't end there, since supply chain disruptions have a ripple effect that can last days and even months. "While initial reports of the quake emphasized minimal damage and interruption to the major chip foundries concentrated in southern Taiwan, there are less apparent global supply chain impacts that will likely be felt in the near future," Resilinc wrote in its February 2016 report titled Case Study: 2016 Taiwan Earthquake, Assessing the Foreseeable Supply Chain Impact.
Taiwan delivers a huge number of semiconductors and integrated circuits (ICs) to OEMs around the world. And the country is earthquake prone. In 2014, the worldwide semiconductor foundry market grew 16.1% to reach $46.9 billion in revenue, according to market research firm Gartner. Two Taiwanese chipmakers, Taiwan Semiconductor Manufacturing Corporation (TSMC) and United Microelectronics Corporation (UMC), account for 63.6% of that total. In addition to the most recent earthquake, another earthquake in 1999 in the region put DRAMs in short supply and increased prices substantially.
The combination of semiconductor manufacturing and earthquakes offers a unique recipe for disaster. "Considering it requires billions of dollars to simply establish a chip fab, it is understandable how even a brief shutdown and no idle capacity can cost the plant millions of dollars to recalibrate, potentially affecting future shipments," the Resilinc report explained.
TSMC, for example, estimated that one percent or less of it's Q1 shipments would be affected by the event, a company report said. It sounds minimal, but real numbers tell a different story. "It is important to recognize that even 1% of TSMC's revenue is a very large number and can have deeper supply chain ramifications and result in shipment delays beyond its Q1," Resilinc said in its report. "Since TSMC's annual revenue is approximately $50 billion (2014), the company's quarterly revenue is around $12.5 billion. Therefore, 1% of that quarterly revenue amounts to a significant $125 million." That is just one of dozens of companies that may have been impacted—the total impact is much larger.