- In the face of increasingly frequent and severe climate hazards around the globe, water constraints appear to be emerging as an important factor impacting the Taiwanese semiconductor industry.
- Already reeling from pandemic-related shortages, the water-thirsty semiconductor industry in Taiwan faced a severe drought in 2020-2021, heightening concerns that water constraints might worsen existing supply woes.
- Taiwanese authorities appear to have prioritized chipmakers’ water use over municipal and agricultural use during the 2021 drought season, helping the semiconductor industry to avoid production cutbacks.
Semiconductor chips serve as one of the primary building blocks for our rapidly evolving digital economy. Shocks to the supply can disrupt the delivery of products ranging from smartphones to autos, potentially impacting many industries and markets.1 Taiwan, a vital link in the semiconductor supply chain, owned the largest share (21.4%) of the global market for semiconductor-wafer fabrication by the end of 2020 — followed by South Korea (20.4%), Japan (15.8%) and China (15.3%).2 The largest of these companies, Taiwan Semiconductor Manufacturing Co. Ltd., was also the largest constituent in the MSCI Emerging Markets Index, as of Sept. 30, 2021.3
The world has already experienced a chip shortage due to the COVID-19 pandemic, forcing automakers to reduce their sales projections.4 This supply-chain crunch exacerbates a more persistent and easy-to-overlook problem facing the semiconductor industry: drought and water stress. Chip fabrication is water-intensive, relying on a large, steady and ultrapure water supply, used to rinse particles and chemicals from chip surfaces. The Global Industry Classification Standard (GICS®)5 semiconductors sub-industry peers that have in-house fabrication capacities have an average freshwater-withdrawal intensity that is higher than that of nearly three-quarters of all GICS sub-industries.6
Taiwanese chipmakers are at risk of becoming weak points in the global semiconductor supply chain, as their most-water-intensive fabrication processes are concentrated on a water-stressed and drought-prone island.
Abnormal climate patterns resulted in Taiwan’s worst drought in 56 years in 2020-2021. Total precipitation (807 millimeters) from June 2020 to May 19, 2021, was only around one-third of the annual average, intensifying the region’s water-withdrawal conflicts.7 Among the 12 reservoirs that serve as primary water sources for chipmakers in Taiwan, all have seen dwindling water levels since June 2020, falling to 5.38% of total capacity as of May 25, 2021, a record low.8
Semiconductor Plants Affected by Water-Supply Restrictions in Taiwan in 2021
Red Bubbles represent the 31 chip-fabrication sites owned by 10 companies in the semiconductors and semiconductor-equipment industry that have Taiwan facilities and were constituents of the MSCI ACWI Index as of May 24, 2021: Taiwan Semiconductor Manufacturing Co., Ltd., Micron Technology, ASE Technology Holding Co., Ltd., United Microelectronics Corp., Vanguard International Semiconductor Corp., Winbond Electronics Corp., Nanya Technology Corp., Win Semiconductors Corp., NXP Semiconductors N.V., and Texas Instruments Inc. The size of the bubbles denotes total freshwater-withdrawal volumes in 2019 (in thousand cubic meters). The 12 reservoirs that were identified as primary freshwater sources for Taiwanese chip fabricators included Baoshan, Second Baoshan, Yongheshan, Shih-men, Liyutan, Techi, Nanhua, Tsengwen, Agongdian reservoirs; Jiji and Longen weirs; and Shigang Dam. Light-blue hexagons represent the reservoirs’ total capacity, while solid dark-blue hexagons represent water levels on May 25, 2021 (in thousand cubic meters). Data as of July 27, 2021. Source: MSCI ESG Research, company disclosures, Taiwan Water Resources Agency
Water restrictions were imposed in regions that suffered the most from water shortages beginning in October 2020, and were raised to their most stringent levels at the end of May 2021. We conducted an asset-level analysis based on the 31 chip-fabrication sites owned by the 10 semiconductor companies that have such facilities in Taiwan. Our analysis showed that 97% of these companies’ chip-fabrication operations were exposed to varying levels of mandatory freshwater-withdrawal restrictions, ranging from 5% to 17%, between October 2020 and June 2021. In the first week of June 2021, water restrictions peaked, ranging from 15% to 17%. Water restrictions over this eight-month period resulted in average water reductions of 8% across the 31 fabrication sites. Their aggregate water-reduction rate topped out at 10.5%.
Despite heightened concerns that the drought might threaten production continuity, Taiwanese chipmakers did not report operational suspension or production losses due to water shortages during the 2021 drought season. Taiwanese authorities appear to have prioritized chipmakers’ water use over municipal and agricultural use during the 2021 drought season, to assure chip supplies amid the global chip shortage.9
Recent chip shortages and geopolitical tensions have highlighted the importance of creating a more resilient, decentralized global semiconductor-chip supply chain. Our research suggests that water constraints may add yet another important consideration for investors as they evaluate the future of this far-reaching industry.
1Varas, Antonio, Varadarajan, Raj , Goodrich, Jimmy, and Yinug, Falan. “Strengthening the Global Semiconductor Supply Chain in An Uncertain Era.” Boston Consulting Group, April 1, 2021.
2“Global Wafer Capacity 2021-2025 Report.” IC Insights, July 13, 2021.
3“MSCI Emerging Markets Index (USD).” MSCI, Sept. 30, 2021
4Fulthorpe, Mark. “Major revision for global light vehicle forecast, production impacted well into 2022.” IHS Markit, Sept. 16, 2021
5GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.
6The peer set used in this analysis includes the 34 companies in the GICS semiconductors sub-Industry that had in-house semiconductor fabrication capacity and were constituents of the MSCI ACWI Index as of July 27, 2021. “Freshwater” refers to potable, fresh surface, inland water sources, such as river, municipal water and groundwater. “Freshwater withdrawal” refers to the total water intake into a facility/process from all sources. Freshwater-withdrawal intensity equals total freshwater-withdrawal volume/total sales.
7“Taiwan Drought Disaster Response Agency’s Reports.” Taiwan Water Resources Agency. https://www.wra.gov.tw/cp.aspx?n=22695 (Chinese only)
8“Water Resources Information.” Taiwan Water Resources Agency. Retrieved on May 25, 2021.
9Wu, Debby, Ellis, Samson, and Wang, Cindy. “Taiwan says it has enough water to keep chip makers humming amid worst drought in decades.” Bloomberg, March 9, 2021.
“Taiwan is facing a drought, and it has prioritized its computer chip business over farmers.” New York Times, April 8, 2021.