Factory Fires and Droughts to Further Exacerbate Global Semiconductor Supply ShortagesEverstream Team
The widespread global shortage of semiconductors that emerged in late 2020 and caused mass production stoppages in the automotive sector is now threatening to impact a wide range of other industries from consumer electronics and home appliances to critical network infrastructure and medical device manufacturing. Over recent weeks, an additional series of unforeseen disruptions are expected to further exacerbate global chip supply challenges: a major plant fire at a leading Japanese automotive chipmaker that could halt production for months and drought-like conditions in Taiwan that could undermine global chip supply recovery efforts.
Everstream Analytics takes a look at the supply chain challenges that the automotive sector could face in light of the Renesas plant fire and what challenging environmental conditions could mean for Taiwan’s semiconductor industry. It also explores what companies can do to cope with the mounting supply chain challenges amid the persistent threat of rising chip prices and supply shortages.
Renesas fire adds to the chip supply shortages for global automakers
On March 19, a major industrial fire at Japanese chip manufacturer Renesas Electronics broke out at its Naka factory in Hitachinaka, Ibaraki Prefecture that resulted in damages to the company’s state-of-the-art 300-mm semiconductor wafer line. Around two-thirds of the chips made on the damaged production line are for the automotive industry.
As one of the world’s leading producers of automotive chips, Renesas announced that it would restart its chip-making factory by April 19 but warned that it could take around 100-120 days for production at the Naka factory to normalize. The announcement came after previously announcing that operations could resume within a month with damages appearing much worse than originally feared with 23 machines, including plating machines used for wiring, being impacted by the fire rather than 11 as initially counted. The company has since stated that it was planning to shift production to its Ehime factory in northeast Japan while it works to bring its fire-hit Naka factory back to normal operations.
The Renesas factory fire has already proven challenging for global automakers on a number of fronts. The Japanese chipmaker alone accounts for around 30 percent of the world’s global market for microcontroller units that are used in cars. Although short-term, alternative chip production is not possible, the company is aiming to recuperate its losses through alternative production both in-house and via outsourcing. However, chip supplies from Renesas to automakers are expected to stop around end of April and that impact could be felt for 1.5 to 2 months.
The situation comes after Renesas already pledged in January to offer part of its capacity to produce 8-inch silicon wafers for automakers designed by its domestic rival, Asahi Kasei, which was forced to idle production itself due to a fire in October 2020. The Renesas fire is likely to place further pressures on Japanese automotive giants Nissan Motor and Toyota, with the latter reliant on auto parts suppliers Denso and JTEKT that use semiconductors produced at Asahi’s fire-damaged factory. To date, Toyota has largely been able to avoid the brunt of the global chip crisis due to exhaustive monitoring of smaller suppliers that led it to stockpile semiconductors early while other automakers canceled the vast majority of their orders at the height of the COVID-19 pandemic.
Worst drought in decades poses challenges for Taiwan’s semiconductor industry
In midst of the global chip crisis, Taiwan’s leading semiconductor industry has also been hit with a challenging obstacle of its own: the worst drought conditions in 56 years that have persisted since mid-2020 and now threatens to curb industrial production in key sectors.
Much of the drought conditions can be linked to a significant drop in rainfall last year that has been exacerbated by the fact that no typhoons made landfall in Taiwan in 2020 – well off the pace of 3-4 typhoons that have hit the island on average each year prior to last year. Everstream Analytics found that Taiwan’s water reservoirs have been low due to rainfall generally being less than 75 percent of normal rates from February-March 2021 and less than 50 percent of normal precipitation from December 2020 to March 2021 over a 90-day period. According to the Taiwan’s Central Weather Bureau, overall precipitation in Hsinchu — home to the Hsinchu Industrial Park which hosts semiconductor foundries of TSMC and United Microelectronics Corporation (UMC) — fell by half in 2020 compared to the previous year.
The drought-like conditions have prompted Taiwan to take proactive measures to manage its water usage. On April 6, Taiwanese authorities imposed additional water rationing measures in the territory’s heavily industrialized central regions including Taichung, Miaoli, northern Changhua County, and part of Hsinchu in the north. This falls in line with similar moves adopted in late February when the Taiwan government already tightened water usage in several cities that are home to a cluster of important manufacturers including the semiconductor sector. For instance, plants in Taoyuan, Taichung, Hsinchu, and Miaoli were ordered to cut up to 11 percent on top of a 7 percent that was requested in January 2021. Manufacturers in Chiayi and Tainan, where TSMC builds its iPhone processors, were also asked to reduce water use by 7 percent from February 25.
The prolonged drought could pose a considerable threat and undermine Taiwan’s indispensable role in advanced semiconductor manufacturing. To put this into perspective, Taiwan is home to TSMC, which is the world’s largest contract chip maker in the world with a market share of more than 55 percent. But what makes TSMC unique from its competitors is that it is often the only viable option for chip design companies that are looking to develop leading-edge logic chips — the types being used for automobiles, data centers, laptops, smartphones, and military applications. While Samsung, TSMC’s main rival for 10nm processes and below, is engaged in contract chip manufacturing, it is not a ‘pure-play foundry’ like TSMC in the sense that it also designs and sells its own logic chips — which means that fabless chipmakers may be more reluctant to employ Samsung’s foundry business given the close collaboration that would be required throughout the manufacturing process.
In response to the ongoing water shortages, TSMC has ordered water trucks for some of their foundries in a move to plan for worst-case scenarios and rising chip orders from abroad. TSMC’s own corporate social responsibility reports have previously noted that the company needs roughly 156,000 metric tons of water each day to support its production facilities in Taiwan. Taiwanese government officials pledged in early March that the island has sufficient water reserves to keep its technology manufacturing companies running until late May when monsoon rains are expected to alleviate the worst drought in decades.
The recent cases of the Renesas plant fire and severe drought in Taiwan will exacerbate the ongoing turbulence that global supply chains will continue to face amid ongoing global semiconductor shortages and constraints posed by COVID-19. The incidents come on the heels of the Texas winter storm earlier this year that forced major semiconductor foundries offline and an unexpected surge in consumer demand for automotive products that has contributed to the chip supply challenges.
While the global auto industry could lose up to USD 60 million (EUR 50.4 million) in sales due to the scarcity of semiconductors alone, the threat of industrial production being forced to halt due to chip shortages is already spreading to other key industries. For instance, spot prices for dynamic random-access memory (DRAM) chips — widely used in personal computers and other types of consumer electronics — have already seen 60 percent increase from earlier this year due to tight supply and rising demand.
While not every supply chain disruption can be completely anticipated, companies may need to consider revamping their inventory and operational strategies amid challenging circumstances. In particular, supply chain managers can consider using real-time supply chain risk monitoring tools to continuously keep abreast of such potential disruptions, use supply chain mapping technologies to identify important suppliers for key components, and assess any possible signs of financial stress from mid-tier suppliers.