Taiwan can provide only limited help in global chip shortage: Analysts

Taiwan Semiconductor Manufacturing Company takes up the lion's share of more than 50 per cent in the global contract chipmaking market.
Taiwan Semiconductor Manufacturing Company takes up the lion's share of more than 50 per cent in the global contract chipmaking market.PHOTO: REUTERS

TAIPEI - As the world scrambles to tackle a shortage of semiconductor chips caused by a rise in demand for smart devices during the Covid-19 pandemic, the spotlight has fallen on Taiwan, a major global chip supplier.

Carmakers, in particular, are hoping that Taiwan could help plug the gap in the global supply of automotive chips. The island has received requests for help from countries including the United States and Germany.

But analysts say there is a limit to how much Taiwan can plug the shortage of semiconductor chips, as panic order may persist and the island's production capacity is already stretched.

The global market hit US$440.4 billion (S$590 billion) in 2020, compared with US$418.3 billion in 2019, as Covid-19 stay-home measures led to an increase in demand for personal smart devices and other electronics.

Taiwan's Industry, Science and Technology International Strategy Centre said last month that the global demand for semiconductor chips will likely stay strong through this year, and predicted that the island's semiconductor industry will see a record-high output of NT$3.49 trillion (S$167.4 billion).

"The semiconductor industry has been doing really well, which bodes well for Taiwan in the coming year as well," said Mr Yao Chia-yang, a senior semiconductor analyst at market consulting company Trendforce.

The island's semiconductor production plays a major role in its IT industry, with a robust supply chain and strong capabilities in wafer manufacturing giving Taiwan companies an edge over others.

Taiwan Semiconductor Manufacturing Company (TSMC) takes up the lion's share of more than 50 per cent of the global contract chipmaking market, having raked in NT$1.33 trillion last year - a 25 per cent growth from the year before.

TSMC and other local chipmakers decline to say how much they will boost their production this year, but Mr Yao believes the companies are already pushed to the limit with the extra orders.

TSMC and several other major chipmakers such as United Microelectronics Corporation and Powerchip have promised to help with the global automotive chip drought that has hit carmakers like Ford, Volkswagen, Nissan and more.

This is even though in January, TSMC reported that automotive chips brought in a mere 3 per cent of its fourth-quarter revenue in 2020. Its main earnings came from smartphones at 51 per cent, and high-performance computing chips at 31 per cent.

TSMC spokesman Nina Kao told The Straits Times: "(TSMC) understands that the chip supply shortage is a shared concern of the automotive industry and we have been working with all parties to alleviate the capacity supply issues."

To ensure that production is not disrupted as Taiwan's reservoir levels fall low due to a lack of rain, TSMC even began buying water by the truckload.

Ms Kao confirmed that the company is reallocating part of its production capacity to making automative chips and has also distributed production to its Tainan facilities. The other facilities are in Hsinchu and Taichung.

Mr Yao thinks TSMC is already being pushed to its limits, with orders lined up a year ahead of time.

"Companies like TSMC haven't been handling that many automotive chip orders in the first place, so these emergency orders would cause a great deal of stress for them in production," he said.

"But seeing that the Taiwanese government is maintaining friendly ties with other countries, these companies take these requests seriously and reallocate their production to help them out."

There has been panic ordering of chips by carmakers and original equipment manufacturers (OEMs) since early last year after world supply chains were disrupted because of Covid-19, said Mr Yao.

"In fear of running out of chips, these companies began pulling as much inventory as they can from foundries, but the foundries didn't have enough in stock," he explained.

And the panic ordering has continued into the first quarter of this year.

"These governments (seeking Taiwan's help) should be aware that it would be almost impossible to fulfil their urgent demands completely," said Mr Yao.

Research fellow Liu Pei-chen from Taiwan Institute of Economic Research (Tier) agrees with Mr Yao. She said: "We can't expect the foundries to scrap the orders that were already lined up a year ago. Taiwan can do its best to help, but the shortage will likely last a couple more quarters at least."

Mr Yao said the world would have to wait and see if car manufacturers cease panic ordering in the second half of 2021.

"Either that, or OEM companies see that they have enough chips for notebook computers and stop putting in as many orders for notebook chips."

Should that happen, the foundries would potentially be able to reallocate a part of their production capabilities to making automotive chips instead.

"But we would have to wait for Q2 or Q3 to see if this happens," said Mr Yao.