A significant percentage of the world’s semiconductors are made exclusively in Taiwan.
It is there that two of the biggest independent foundries - TSMC and UMC - are located.
Taiwan also happens to have a whole lot of earthquakes.
The island is extremely earthquake prone. Smaller tremors are more frequent than you think.
I remember being outside one day on a crowded street for lunch when one hit.
It was like a scene from a movie. What you first hear is the early earthquake warning system
triggering. Instantaneously, your phone and that of everybody else around you starts screeching.
It is a loud, terrifying, inorganic sound that screams danger. Everyone stops in their
tracks. Cars, motorbikes, and pedestrians brace themselves. It is a scene right out of a movie.
And then the earthquake hits. In the movies they give earthquakes a sound. A low
bass-like rumble like as if the Earth's stomach is growling. But my earthquake
was quiet. Dead silent except for the rattle of the dishes inside the restaurants shaking.
Nobody on the street makes a sound because we are all just bracing and holding on,
waiting for it to be over. It felt like it would never end.
The earthquake threat to TSMC and the rest of Taiwan's electronics industry is very real.
In this video we are going to look at one of Taiwan's most dangerous threats
as well as what TSMC has done about it over the years.
Some 9 million years ago, a tectonic plate met with another tectonic plate
and sparked love. The Eurasia Plate, a tectonic plate that includes most
of the continent of Europe and Asia, collided with the Philippine Sea plate.
The Eurasia plate pushed the Philippine Sea plate downwards into the Earth's mantle,
a process known as subduction. This same action pushed a portion of the Eurasian plate upwards,
creating Taiwan's many mountains. The tectonic traffic pileup would also
create Taiwan's western plains where many of its people live.
All this happened rather quickly and recently on a geological scale.
In fact it continues right now as of this very moment.
Taiwan's geological youth thus makes it very seismically active. Taiwan's Central Weather
Bureau Seismic Network records some 18,000 small earthquakes a year within the island's vicinity.
All of this to say that Taiwan is quite earthquake prone.
Okay now what does that mean for the rest of the world’s supply chain?
Covid and the Chinese American trade war have demonstrated the delicacy of our
global supply chains. How did they become seemingly so vulnerable to disruption?
To answer that, we can point to a number of major ongoing trends.
The first is the rise of lean supply chain practices. It means that companies do not want
to have large stocks of inventory and raw goods just lying around. One of CEO Tim Apple's first
achievements at the electronics giant was to cut the amount of inventory at hand to a bare minimum.
This left Apple with more cash at hand and less worries about managing piles of raw stuffs
like aluminum. When working, it’s extremely profitable. Car companies like Toyota and General
Motors are also fervent practitioners. It is basically a tenet of American corporate practice.
The second is the outsourcing of "low-value" activities to off-shore centers and companies.
Again, everyone skewers Apple for doing this, but they are not alone. Foxconn puts together
goods for dozens of companies including Microsoft and Amazon. It lets those companies focus on what
they consider to be "high-value", and it puts this dirty manufacturing stuff out of their mind.
Third has to do with the centralization of supply vendors. A certain number of companies - the names
of which most people have never heard of - have risen to become the best in the world in what
they do. For example, automotive companies making diesel engines need a certain ceramic particulate
filter to finish their engine. Only two companies in the world make it, and they are both in Japan.
And fourth, technology products have gotten so complicated and sophisticated that no one company
makes everything from beginning to end. Your average gadget has dozens of components made
over thousands of steps, sourced from all over the world. Nobody designs and makes
it all from scratch. Same as nobody plants their own beans for their morning coffee.
These factors combine to make supply chains extremely vulnerable to disruption from incidents
like natural disasters. It has happened time and time again. Remember that time when Thailand had
a bunch of floods and then suddenly nobody can buy hard drives? That kind of thing.
But the TSMC earthquake threat is especially concerning because TSMC is no ordinary supplier.
Tier one vendors (meaning those first in line to a big company like Dell) themselves have their
own vendors, and TSMC is more often than not the vendor to those vendors. So you got management
at a company like Dell thinking that their supply chain is a nice conga line of isolated companies,
when the reality is that it is a tangled, interconnected web with TSMC a critical node.
So what happens when the very ground underneath those billion dollar fabs starts to shake?
On September 21, 1999, a major earthquake struck the small urban town of Chi-chi in Nantou County.
Nantou is located in the middle of Taiwan island and is famous for their bamboo and pork dishes.
The 921 earthquake as it was called was very strong, registering a 7.7 in the Richter scale.
2,415 people died in the earthquake and nearly 150,000 were left homeless.
Major bridges were damaged. Buildings as far north as Taipei collapsed,
trapping and killing the residents inside. Power was cut throughout the entire island.
In addition to the incalculable human loss was the economic damage done
to the companies within the Hsinchu Science Park including TSMC and UMC.
Back then, TSMC had not reached the dominant levels it enjoys today.
Even so, it still had an extremely important role in the global electronics supply chain.
At the time, some 10% of the world's memory chips were fabbed in Hsinchu.
Two thirds of the world's motherboards. A sizable share of notebook displays and more.
Fortunately, the earthquake epicenter was 68 miles south of Hsinchu.
Structural damage to the buildings themselves was minimal,
with just one fab seriously damaged. Better yet, no hazardous gases or chemicals had been released.
However, TSMC lost between 20-28,000 wafers to the shaking. UMC lost 10% of their entire production.
Together, the two companies took over $100 million of damage.
With great effort and strong government backing, TSMC and UMC returned to partial operations.
Lithography steppers had to be recalibrated. Broken tubes and other equipment had to be
replaced. But TSMC was back to 85% production capacity just 7 days after the quake hit.
Nevertheless there were global consequences. Spot pricing on memory chips went up 50% year
over year, up 25% in October 1999 alone. PC component prices rose in similar fashion.
Dell Computers and PC sellers missed on Q3 earnings and their stocks fell.
TSMC of course recognizes the potential risk that large earthquakes might have
for its business and the global electronics supply chain at large. And of the years,
they have developed a series of mitigation techniques to prepare and deal with a bad tremor.
First, the company has expanded up and down Taiwan island. Back in 1999,
all of the company's fabs were clustered in a single area - the Hsinchu Science Park. Today,
TSMC has massive Giga-Fabs in the north, center, and south of Taiwan. Each of these are hundreds
of miles apart from each other. I guess you can call it a form of geographical diversification.
Second, earthquake early warning systems have improved over the years.
A network of seismic stations in Hsinchu,
Taichung and Tainan can send warnings of up to 15-20 seconds before the major shaking hits.
Third, TSMC has implemented a number of anti-seismic systems to prevent
potential damage done to wafers and equipment inside the fab cleanroom. One such system
automatically detects seismic shaking and intervenes to stop the fabrication process
to protect both the etching equipment and the wafers they are working on.
Another system involves lifting the fab cleanroom onto sliding dampers that absorb
shaking energy. Such systems can reduce shake damage by up to 25%.
Fourth is a series of contingency plans and procedures that TSMC staff know to activate
in the event of an earthquake. These are reinforced with simulations and training drills.
There is one final backstop that I should also mention. And that is the strong backing of the
state, which seeks to protect the survival of its critical industry. While the government does
not intervene on behalf of a single firm, it does take action on an industry-level.
Here is an example. After the 1999 quake,
the state ordered the public utility Taiwan Power Company to prioritize the
restoration of electricity to the companies in Hsinchu Science Park. This took priority
over restoring power to small business and residential communities. So some 20 million
Taiwanese households had their power rationed for several hours a day for several weeks.
Of course. None of these eliminates the risk entirely. There’s always the chance
of a mega quake that nobody before can plan for. That risk will always exist.
In February 2016, another very large earthquake hit the southern part
of Taiwan island. The 6.4 earthquake caused damage to various counties in Taiwan's
south including Yunlin, Kaohsiung and Tainan.
Tainan is important because it hosts the Tainan Science Park and TSMC's second major manufacturing
center after Hsinchu. First built in 2001, the science park hosts several major cutting-edge fabs
that churn out thousands of chips for the Apple iPhone and more.
The 2016 earthquake cut water to 400,000 people, electricity to 173,000 more and broke gas lines
for 1,241 households. 116 died, 115 of them residents in a collapsed Tainan building.
It could have damaged supply chains to the same extent as the 921 earthquake.
But as a result of this preparation, TSMC lost relatively few wafers to the earthquake.
Only 1% of the foundry's deliveries to customers like Apple would be disrupted,
though there were a few delays.
Of course, there are many foundries outside of Taiwan. You got Samsung in South Korea and Austin,
Texas. Intel in the USA and Israel. And even TSMC’s subsidiary fabs in mainland China and the
USA. Those are all higher-end foundries capable of making very powerful chips. It is not like the
world is going to return to the stone age if TSMC were to be struck by a devastating earthquake.
But the latest, most cutting-edge chips are made only in Taiwan. The N7 and N5 processes
that make the Apple A14, top line Nvidia cards, and Amazon's Graviton2 processors.
Currently, those process nodes are only found on the home island.
For political and economic reasons, the leading-edge process node will stay in Taiwan.
The company has dedicated engineering effort and resources into minimizing the risks to
its equipment and product output. And the government implicitly backs those efforts
with state-level resources. But the risk of another Taiwanese Big One will always remain.