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Taiwan‘s AI chip industry is responsible for over 90% of the world’s high-tech microchips and is a critical player in the global tech market. Any significant interruption to the region’s production of AI chips could have catastrophic implications for the global supply of this technology, exacerbate the worldwide chip shortage, and potentially trigger economic disaster on a global scale.

So, what does the Taiwan drought have to do with the production of semiconductors?

In short, everything!

The production of AI chips is a highly water-intensive process. As one of the world’s wettest countries, the region is ideal for its production and houses the top producer, Taiwan Semiconductor Manufacturing Company (TSMC). Ultimately, this means that the current drought, which is the worst the country has faced in 60 years, and the resulting water restrictions have threatened a severe AI chip shortage.

AI Chip Shortage | More Than Just a Dry Spell

Taiwan is home to the globe’s biggest AI chip manufacturing company, TSMC, which manufactures 50% of all AI chips used around the world. TSMC is also one of only two companies capable of manufacturing cutting-edge 5-nanometer chips, which are crucial in technologies produced by world leaders, such as Apple, Huawei, and Qualcomm.

But these AI chips are not easy to produce. Each chip can take up to six months to manufacture and requires conditions far more sterile than a hospital operating room. To achieve these sterile conditions, TSMC uses over 150 000 metric tons of water a year.

As one of the planet’s wettest countries, Taiwan has previously been able to meet these high-water demands. However, in 2020 the country had only 40% of its usual rainfall, and 2021 is not looking much better.

Semiconductors chip IOR
Semiconductor chip

Taiwan Tightens the Taps

According to meteorologists, Taiwan’s water problems are far from over. It appears likely that the wet season on the island will become drier, a trend attributable to climate change. This shift indicates that Taiwan can anticipate fewer yet more severe monsoons, along with prolonged periods devoid of rain.

To keep the countries position as a top producer of AI chips, the government has developed plans for a new desalination plant and the process of shipping in water from wetter parts of the island.

Yet you need only look to two of the vital water sources for the Tainan Science park to realize the true magnitude of the situation. The Nanhua and Tsengwen Reservoirs sit at just 11% and 6% respectively. Additionally, extreme measures such as halting water to farms and other large industries as well as stopping irrigation have failed to slow dwindling water levels.

Despite constant reassurance from government officials insisting that the water situation will not affect TSMCs AI chip stock production, this is somehow hard to believe.

While the measures mentioned above may be enough to keep AI chip producers afloat, a more sustainable and permanent solution to the problem is required to keep the Taiwanese market viable.

Unless Taiwan can make severe changes in its water-wasting practices and raise its extremely low water tariffs, the country will likely continue to struggle to support this water-intensive industry as well as its general population.

Not Just a Dip in AI Chips, But a Skills Drought Too

The water drought is not the only challenge faced by Taiwan AI chip producers. Over the last few years, the island’s woes have been compounded by a brain drain of engineers involved in the production of chips. China, desperate to catch up to South Korea and Taiwan and become a AI chip powerhouse, has enticed hundreds of thousands of Taiwanese engineers to relocate to the country, offering significantly higher salaries.

The situation has become so extreme that Taiwan’s labor ministers have ordered online job boards to remove Chinese listings.

Although introducing a new competitor into this sparse market may be a positive for consumers, it poses significant problems for Taiwan.

The biggest reason for China being unable to replace Taiwan as the top producer of AI chips is their lack of access to equipment. SMIC, China’s largest AI chip producer, is effectively cut off from acquiring the cutting-edge technologies required to produce high-tech chips. ASML, a Dutch producer of the necessary ultraviolet lithography equipment, has been pressured into restricting trade with China. This follows the Trump administration placing SMIC on “the entry list.”

Another hurdle for China is setting up production lines which takes an extremely long time. If Taiwan reaches breaking point and can no longer put out products at the necessary rate, it is unlikely that SMIC will fill the gap in time, even with access to the critical technologies. This could lead to the already prominent global shortage of AI chips becoming worse over the next few years.

So, Where Does This Leave Us?

There is no question that the situation in Taiwan deserves the attention it is getting. However, the humanitarian impact aside, a collapse in the AI chip industry would be catastrophic to both the tech and automotive industries.

As top tech players like Samsung, Apple, and Nintendo already start to feel the pinch, the need for more sustainable and less time-consuming production methods grows increasingly apparent. And while innovators are unlikely to address the Taiwanese drought directly, developing new strategies to increase the portion of water that companies can recycle could be crucial to saving the Taiwanese AI chip industry and preventing the water crisis from worsening.

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