August 31, 2017 10:00 am JST

Taiwan's blackout spooks Apple suppliers

Tech execs warn that concerns over stable power supply may impact investment

CHENG TING-FANG and DEBBY WU, Nikkei staff writers

TAIPEI Apple suppliers in export-reliant Taiwan are expressing concerns about the island's power supply after a massive blackout, raising further questions over whether President Tsai Ing-wen's administration is capable of meeting the investment demands of the tech sector, a key driver of the economy.

The power outage, which occurred on Aug. 15, was the largest by number of households affected since a massive earthquake struck in 1999.

The blackout came after government-run petroleum company CPC ran into difficulties while replacing the power supply for a control system responsible for sending natural gas to a power plant.

Three Apple suppliers with facilities in Taiwan have said their production was slightly affected by the power outage, though shipments of Apple components remain on track. The companies are all chip testers and assemblers: Advanced Semiconductor Engineering, Powertech Technology and ChipMOS Technologies.

Powertech Chief Financial Officer Evan Tseng urged the government to address the issue.

"As the semiconductor industry really needs stable and sustainable power for production, we sincerely hope government can ensure a secure and reliable supply of electricity," said Tseng.

An executive at Taiwan Semiconductor Manufacturing Co. said if something went wrong at a chipmaker, it would create problems for the whole supply chain to which it belonged.

"Even with emergency measures, we could still sustain some losses from blackouts. What we really worry about over blackouts is not only potential damage to chip wafers, but whether customers' shipment schedule could be delayed, which could affect the whole supply chain," said the executive, who asked not to be named because he is not authorized to talk to the press.

As the world's largest contract chipmaker, TSMC has a monopoly on orders for the upcoming iPhones' core processors, which the company is churning out in Taiwan even though it also has facilities in China.

According to estimates by some analysts, it takes four to five months for TSMC to turn a single wafer into the cutting-edge core processor chips that will go into the upcoming 10th-anniversary iPhone range.

The executive said that in the event of a sudden blackout, an emergency power supply would kick in immediately, providing a one-minute buffer for TSMC's in-house generators to come online. These generators would then supply enough power for production equipment to stop safely and minimize any damage, the executive said.

Fortunately for TSMC and the entire Apple supply chain, the company was not affected by the recent power shortage, as the government prioritizes electricity supply to certain major companies with facilities in science parks around the island.

TSMC's key production facilities are located in science parks in three cities: Hsinchu in the north, Taichung in central Taiwan, and Tainan in the south.

WAKE-UP CALL According to Woods Chen, head of macroeconomics research at Taipei-based Yuanta Investment Consulting, the local electronics industry accounts for some 53% of Taiwanese exports and around 30% of Taiwan's gross domestic product.

The Apple supply chain alone contributes about 6-12% to annual GDP, said Chen, who also pointed to the economic risks of an inadequate power supply.

"For this year and next year, the electricity supply would be quite tight, as we only have around 5% of reserved capacity before some new thermal power plants come online in 2019, according to our research," Chen said.

The ideal amount of reserve power capacity is around 10%, according to Chen.

"It's lucky that the impact of this power outage is minimum, but it should be a lesson for all of us, and the government should adopt some measures to prevent bigger disasters in the future," Chen said.

Chairman Raymond Sung of Simplo Technology, a key Apple battery module provider, warned that the power issue could deter companies from investing in Taiwan.

"It's really horrible that Taiwan experienced such a serious blackout due to such a small human error," Sung said. "That makes all the companies worry, and they could factor this into their consideration when making further investment decisions."

Sung cited a common complaint among Taiwanese companies when it comes to building production facilities at home: a lack of land, qualified and affordable labor, and a stable supply of water and electricity.

Like many other Taiwanese tech companies, Simplo has only its headquarters and research and development center in Taiwan. All of its manufacturing sites are located in China.

INVESTMENT CONCERNS Another executive at a major Apple supplier echoed Sung's sentiment, saying that while the recent blackout had little immediate impact, it could deter potential investors from setting up facilities in Taiwan.

"After the earthquake in 1999, a major U.S. PC company realized it had to diversify production away from Taiwan and gradually it moved its procurement center to Shanghai," the executive said.

"The blackout this time could bring about similar impact -- in the long term it will affect companies' confidence in Taiwan as a potential investment location," he said.

The president and other senior officials apologized and Minister of Economic Affairs Lee Chih-kung stepped down over the blackout, but the Tsai administration is adamant that it will continue down the path of renewable energy. Tsai has pledged to make Taiwan's energy mix nuclear free by 2025.

"The incident has taught us that we cannot wait to march on the right path of green energy systems and enhanced security for our electric grid," Tsai said on Aug. 16.

Minister of Science and Technology Chen Liang-gee said the following day that Taiwanese officials will soon approach Tesla to discuss the feasibility of setting up lithium-ion battery facilities for storing renewable energy on the island, in line with a project the U.S. technology company recently launched in Australia.

An official familiar with Tsai's energy policy told the Nikkei Asian Review that following the blackout episode, the government hopes to boost the use of thermal power in the short run, while keeping its nuclear-free goal on track.

"We will now boost power supply while reducing supply risks," the official said of the government's contingency plans, adding that another goal is to improve the state-owned Taiwan Power's capabilities in planning power distribution.

The official acknowledged, however, that the government has not yet had time to craft a longer-term strategy that will convince companies that Taiwan has a steady power supply.

"It is now taking up a lot of manpower within the government to deal with issues surrounding the blackout earlier this week," the official said. "We will work on a plan to ensure steady power supply in the next stage. Probably we will have something in a month's time."

Asia300

Advanced Semiconductor Engineering, Inc.

Taiwan

Market(Ticker): TAI(2311)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 10,875M
Shares: 8,724.62M
Asia300

Taiwan Semiconductor Manufacturing Co., Ltd.

Taiwan

Market(Ticker): TAI(2330)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 208,150M
Shares: 25,930.4M
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