Posted at 10:01 p.m. PDT Tuesday, September 21, 1999
Taiwan tech operations are
paralyzed
Nationwide power outage shuts off manufacturing
BY CECILIA KANG AND TOM QUINLAN
Mercury News Staff Writers
The devastating earthquake that struck Taiwan early Tuesday has
cut power to the high-technology manufacturing base at Hsinchu
Science-based Industrial Park, paralyzing operations at some of the
world's largest chip production foundries and high-tech component
makers.
With Taiwan still reeling from the heavy human toll the earthquake
inflicted on the country -- with more than 1,700 dead and upwards
of 100,000 homeless -- most U.S. companies have focused on
locating employees based in Taiwan and making sure they were
safe.
But with that task nearly complete, high-tech companies are starting
to assess what impact the earthquake will have on their supply of
semiconductors, components and finished products. Taiwan is a
major source of the world's motherboards for personal computers, networking cards and an array
of high-tech goods including cellular phones, and desktop and portable computers.
Big American companies such as Apple Computer Inc., Dell Computer Corp. and a number of
Silicon Valley semiconductor companies -- Altera Corp., Xilink Inc., Lattice Semiconductor Corp.,
S3 Inc. and NeoMagic Corp. -- rely on Taiwanese contract manufacturers.
So far, with power out through most of the country, it's an almost impossible task to assess the
damage -- and how long it will take to repair.
While most buildings suffered minimal damage, power has been cut off to the Hsinchu area, 45
miles southwest of the capital of Taipei, where nearly all semiconductor and other high-technology
manufacturers are located.
Production impossible
Taiwan Semiconductor Manufacturing Corp., United Microelectronics Corp. and other Taiwanese
companies have back-up power sustaining the facilities but production is impossible. After power is
restored -- assuming the facilities and equipment are in fact largely undamaged -- it will take at least
two to three days to recalibrate and repair the high-precision machines that were shook by the
earthquake, industry sources say.
''We have back-up power in all of our plants,'' said Jock Ochiltree, president and CEO of
Winbond Electronics America, a subsidiary of one of Taiwan's largest semiconductor
manufacturers, Winbond. ''But we won't be able to really tell what the damage is until power's
restored and we can enter the facilities. Right now what we can say is that none of the equipment is
lying on the floor, and the roof hasn't fallen in.''
Magnus Ryde, president of TSMC North America said his company initially estimates a 10 percent
loss of output for September but that that number depends on when power is restored.
No structural damage
''We see no problem in terms of structural damage,'' Ryde said. ''We are running on an emergency
backup system to prevent accidents and damage. And we don't think the material waiting to be
processed will be hurt.''
That's enough information for companies to be cautiously optimistic that the effects of the temblor
and relatively mild, at least as far as the semiconductor industry is concerned.
''It's still far too early to tell,'' said Ken Potashner, president and CEO of Santa Clara-based S3.
''Our key concern was the status of the facilities and they seem to be undamaged.''
''It's still pretty early, but we've done some early assessment and so far the position of (the
Taiwanese companies) is that the facilities are largely undamaged,'' said Chuck Mulloy, a
spokesman for Intel Corp.
That's the position the Taiwanese government is starting to take.
According to Taiwan's state-run Central News Agency, the Taiwanese semiconductor industry.
Total economic damage is estimated at about $3.1 billion, Liu Tai-ying, chairman of the
Kuomintang Business Management Committee, said in a state news agency report.
With Taiwan accounting for about 10 percent of the world's semiconductor output -- roughly $16
billion in U.S. dollars -- the estimated loss is fairly minimal.
But according to analysts and industry observers, Taiwan's total importance to the industry goes far
beyond its market share numbers, and any long term disruption to Taiwan's high-tech industry could
ripple through the global economy.
''Taiwan is smack in the middle of the high-tech industry,'' noted Nathan Brookwood, founder of
the Saratoga-based market research firm Insight 64.
''They produce 80 percent of all of the motherboards used in desktop PCs, and they have about
one-third of the chip set business,'' Brookwood noted. They also produce significant amounts of
such key pieces of the PC as graphics processors, modems, and network interface cards.
Motherboards are the printed circuit boards that connect the various components of a PC -- such
as the processor, the keyboard, the graphics chip, and memory -- together into a cohesive device.
Chip sets are the specialized set of semiconductors that ensure those devices can communicate with
each other. If Taiwan's ability to produce those two components is seriously disrupted for any
significant period of time, it would have serious consequences on PC manufacturers in the United
States, Brookwood said.
Intel monitoring
That's one of the main reasons why Intel is monitoring the situation so closely, even though the
Santa Clara company has just minimal operations there.
''We consider it a strategic partner, because so many core technologies pass through there,''
Mulloy said. ''And obviously our partners rely on a number of components from Taiwan. That's
why were starting to contact our OEMs and see what they're needs and concerns are now.''
''Taiwan is very important for (Hewlett-Packard Co.). We get a lot of our components, a lot of our
board-level products, a lot of our finished goods from there,'' said company Chairman Lewis Platt.
''Right now it's too soon to assess the situation.''
Broadcom's chief financial officer Bill Ruehle said half of his communications company's wafer
production is contracted to TSMC and the other half to Chartered Semiconductor in Singapore.
Because of the earthquake, Broadcom has boosted its business with Chartered. 'We also maintain
an inventory of several weeks so we can ship out of our stock,'' said Ruehle.
Bruce Brough, a spokesman for Acer America, the subsidiary of Taiwan-based the Acer Group,
which manufactures PC under its own label and for other manufacturers, said the company has
suffered little damage to its facilities and that its production facilities continued operations. ''We
have a high level of inventory so we're okay for a couple weeks. The main problems we are facing
are electrical outages and intermittent phone connect problems,'' Brough said.
But the potential impact can already be felt as -- fearing the earthquake will put a crimp on
worldwide chip supply, which was already short before the earthquake -- traders are pushing
prices of dynamic random access memory (D-ram) chips higher in the spot market. Prices for
64-megabit DRAMs -- the stand memory chips used in PCs -- rose $1.51 Tuesday to $15.92
from Monday.
Spot prices soar
At one point, spot-market prices surpassed $17 per chip, an all time high.
Shares of U.S. semiconductor manufacturers that outsource their production to Taiwan fell
Tuesday.
''A good percentage of chips in the plants will have to be written off,'' said David Wu, an analyst at
ABN Amro in San Francisco. ''And after the shake of the earthquake, many (pieces of production
equipment) will have to be recalibrated.''
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