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Taiwan quake could disrupt computer, chip markets

The huge earthquake in Taiwan could disrupt crucial segments of the computer industry, underscoring the country's importance as a major world base for computer and chip production.

The huge earthquake in Taiwan could disrupt crucial segments of the high-tech industry, underscoring the country's importance as a major world base for computer and chip production.

The estimates of delays from earthquake damage and power outages range from a few days to weeks, but a ripple effect of some degree appears certain. The quake registered 7.6 on the Richter scale, with an epicenter some 145 kilometers south of Taipei.

In the last decade, Taiwan has become the hub for computer production worldwide and major base for chip manufacture. Compaq Computer, IBM, Hewlett-Packard, Dell Computer, Gateway, Toshiba, Fujitsu, and just about every other large computer manufacturer consign notebook and desktop PC production to Taiwanese companies. Also, Hsinchu Science Park commands a large chunk of worldwide production of certain types of chips, including chipsets and graphics.

Right now, computer manufacturers are trying to assess the gravity of the situation, though initial reports say damage is not massive.

"We really don't know [about damage]. We're just trying to confirm the safety of our engineering and sales staff," said a spokesperson at Dell, which commissions production of notebooks to Taiwanese companies. Dell has assembled a team to talk to suppliers, he said.

Although Hewlett-Packard has accounted for all but two of its 1,500 employees in Taiwan, communications remain difficult, spokeswoman Anne McGrath said. "At this point, all our offices in Taiwan are closed because there's a power outage throughout the country," she said. HP has sales, support, marketing, and procurement offices in three locations in Taiwan--Chungli, Taichung, and Kaohsiung.

The quake could hurt supplies of notebook computers, said International Data Corporation analyst Randy Giusto. About 40 percent of all notebooks are made in Taiwan, he said, and even if manufacturers aren't affected, there still are supply questions with the smaller manufacturers of the myriad components that go into the computers.

Although details still are sketchy, computer companies have told Giusto that the factories of the two largest notebook manufacturers, Compal and Quanta, are unscathed. However, they don't have power and their generators have only enough fuel to last three days, he said.

Taiwan Semiconductor Manufacturing Company, one of the country's largest chipmakers, fared relatively well. "There was no loss of life and buildings are in good shape," said Magnus Ryde, president of TSMC North America. The company makes graphics processors and chips for networking and wireless products and is a large maker of chipsets, one of the core semiconductor components in a PC.

Back-up power systems came online, Ryde said, "but you can't run a factory on back-up for very long." He said power was still out based on the most recent information he had.

On a more ominous note, he said that "there is some damage to equipment at wafer [plants]. We already factored in a loss of wafers. This is very preliminary but output loss for this month may be 10 percent."

Wafers are the building blocks of semiconductor chips. Ryde speculated that some production equipment may have to be "realigned," a process that can take days.

The potential for a disruption when such a big chunk of worldwide personal computer assembly and component production is concentrated in one place is great. "This clearly has a major impact on semiconductor production because of all the foundry work done there," said Nathan Brookwood, an analyst at Insight 64.

"These guys also make a lot of motherboards. A lot of what's in process right now is targeted for the fourth quarter and could be very detrimental for the world," he added. Taiwanese companies make the lion's share of the PC's main circuit board, called a motherboard.

"It will ripple through the whole supply chain," TSMC's Ryde said. For example, he said, customers who rely on TSMC for graphics chips may not be able to get them immediately.

Ryde also pointed out that the current power outage is much more serious than the one Taiwan experienced in July. That blackout caused memory chip prices to rise, according to analysts, boding ill for stable chip pricing in the future.

But Wall Street analysts are leaning toward caution rather than alarm. "We detected a distinct undertone of 'this is probably closer to a blip than a major supply problem,' and that's our guess as to how it will come out," said J.P. Morgan Securities analyst Terry Ragsdale in a bulletin.

"Taiwan has had a few power disruptions already this year, and stopping a fab even for a few minutes generally is not a pleasant thing, but the impact on production has been minimal. An earthquake admittedly is a more serious event, but it is too early to assume the worst," he added.

"Our guess is that the Taiwanese earthquake will just make the current tightening supply-demand situation in the semiconductor industry a little bit tighter--and OEM purchasing managers even a bit more eager to build some inventory--but that the impact will be a few days of lost production rather than a serious problem for the Christmas selling season."

But the worst-case scenario could mean a disruption for weeks, according to Danny Lam, a principal at Fisher-Holstein. He said if power is discontinued to semiconductor equipment used to "bake" chips, for instance, disruption could be substantial because this requires the dispatch of special teams from manufacturers to fix the problem, which can sometimes take weeks.

"Very best case is a few days. Worst case is a week to a month," he said.

Other manufacturers appear to have not sustained significant damage. Fujitsu said one of its telecommunications plants was affected by power outages, but that there was no apparent damage to the facility, according to a report in the Nihon Keizai Shimbun, a Japanese business daily.

Sony said there was no damage to a plant near Taipei that manufactures consumer electronics devices, though there were power outages, according to that report.

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