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Taiwan’s semiconductor industry is responsible for 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 could be catastrophic to the world’s supply of this technology, worsen the global semiconductor shortage, and spell disaster for The Global Economy.

So, what does the Taiwan drought have to do with the production of microchips? In short, everything!

The production of semiconductors 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 semiconductor shortage.

More than just a Dry Spell.

Taiwan is home to the globe’s biggest semiconductor manufacturing company, TSMC. This single entity manufactures 50% of all semiconductors 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 chips are not easy to produce. Each chip can take up to six months to manufacture and requires conditions significantly more sterile than a hospital operating room. To create these sterile conditions, TSMC uses upwards of 150 000 metric tons of water a year.

As one of the planet’s wettest countries, Taiwan has 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.

Semiconductor chip IOR

Semiconductor chip

Taiwan Tightens the Taps

According to meteorologists, the Island’s water problems are far from over. The Island’s wet season becoming dryer looks unlikely to change and is the result of climate change. These changes mean Taiwan can expect fewer but worse monsoons and extended rain-less periods.

To keep the countries position as a top semiconductor producer, 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, the Nanhua and Tsengwen Reservoirs, which sit at just 11% and 6%, to realize the true magnitude of the situation. Additionally, extreme measures such as cutting off water to farms, stopping irrigation, and effectively halting the countries other largest industries have failed to slow dwindling water levels. This has further solidified speculation over the certainty of slowed semiconductor production.

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

While the measures mentioned above may be enough to keep semiconductor 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.

A Skills Drought

Drought is not the only challenge faced by Taiwan semiconductor producers. Over the last few years, the Island their 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 semiconductor power, has enticed hundreds of thousands of engineers to move over, 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, there are a few significant problems with the current trajectory.

The biggest reason for China being unable to replace Taiwan as the top semiconductor producer is their lack of access to equipment. SMIC, China’s largest semiconductor 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 comes in 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 semiconductor shortage 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 semiconductor 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 semiconductor industry and preventing a more extreme shortage.

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