If they can make the global connect with an earthquake, why is it so difficult to envision Y2K disruptions?

Bet the stock market gets it come Monday. Or not.

Diane

Published Saturday, September 25, 1999, in the San Jose Mercury News

Valley vulnerable to foreign disasters

Fallout: Taiwan quake shows global economic linkage.

critical choke point.

BY CECILIA KANG
AND JONATHAN RABINOVITZ
Mercury News Staff Writers

http://www.mercurycenter.com/premium/front/docs/globalecon25.htm

[Fair Use: For Educational/Research Purposes Only]

Ten minutes after Tuesday's earthquake struck Taiwan, a salesman for Cypress Semiconductors Corp. called his boss, Dan McCranie, from a street corner in Taipei to alert him of the disaster. From his San Jose office, McCranie snapped into action.

[Note: Local Impact. International phones working.]

Within hours, McCranie had stopped shipments of Cypress semiconductors that had just been packaged in the Philippines and were about to be sent to Taiwan for testing and assembly. These components were redirected to subcontractors in the Philippines, Indonesia, South Korea and other parts of Asia.

[Note: More international phones working, most likely internet e-mail along with local delivery services and overseas transportation/delivery.]

McCranie's moves reveal the new global economy at work, a world in which overseas manufacturing is tightly integrated into the fabric of high-tech production in the United States. At the same time, it also reveals how this interdependence has left Silicon Valley vulnerable to shocks from abroad.

In this emerging world economy, a disturbance in countries such as Taiwan, which have cornered the market for manufacturing certain key products, can create a critical choke point in production. It can disrupt business across the world -- in a way similar to the oil embargo of the 1970s or the impact of last year's auto workers' strike on car dealers across the country.

[Note: Choke points activated = supply chain disruptions. Period.]

Taiwan plays a pivotal role for high tech because its companies produce roughly three out of every four of the world's motherboards -- the printed circuit boards that are the brains, heart and soul of personal computers. They also account for 65 percent of the computer mouse production as well as more than half the monitors, video cards and keyboards.

[Note: What happens if China also get antsy.]

10% of chip demand

Taiwan also supplies 10 percent of global chip demand and is home to the industry's largest foundry, Taiwan Semiconductor Manufacturing Co., which manufactures chips for many of the world's semiconductor sellers.

[Note: Global impact... increasing prices... at the very least.]

On Friday, the shares of Intel Corp. and some other chip makers tumbled, as Wall Street analysts began warning the Taiwan earthquake could have a worse-than-expected impact on the fourth quarter. Intel's stock closed Friday at $75.67 a share, down $1.83.

[Note: Wall street reacts rapidly to economic/earnings problems.]

The timing of the earthquake could not be much worse, analysts and executives said, as the disaster struck at just the moment that companies swing into full gear for the holiday retail season. On top of this, the supply of computer components was tight. Already the price of DRAM memory chips have reached record highs following concerns of a shortage, and that could well lead to an increase in the price of personal computers, computer notebooks and other high tech gadgetry.

[Note: Rising prices. Supply shortages.]

``This tragedy is clearly going to screw things up for a while,'' said Dan Niles, an analyst at Banc Boston Robertson Stephens who follows the semiconductor and computer industries. ``Look at it this way -- how long did it take for people to get their lives in order after the Loma Prieta earthquake in 1989, and we didn't have nearly the same number of deaths. This is not a one- or two-day fix.''

[Note: Or a 3-day storm. Y2K will play against--occur as an afterthought?--to this event.]

Niles predicted that fourth-quarter earnings in these high-tech industries would drop, though they would recover in the first quarter of 2000.

[Note: Oh really? What are they conveniently forgetting? The Y2K disconnect piled higher and deeper factor.]

It is too soon to get a precise assessment of the damage to Taiwan's high-tech industry.

Taiwan Semiconductor Manufacturing Corp. (TSMC), for instance, which is Cypress's principal Taiwanese supplier, has said that it will have 85 percent of its power back by tonight but that it will not have completed a full assessment of the damage until Monday. In a statement released Thursday, it acknowledged that some equipment repairs may be necessary and some semiconductor wafers may be lost.

[Note: After every event, it is difficult to assess... Whats really wrong. Power outages, on the international scene complicate those assessments.]

Little down time

McCranie, Cypress's executive vice president of marketing and sales, estimated down time of only a few days, but the company was worried that the delay could go longer, posing a serious challenge. Cypress is looking into increasing production at a backup facility -- its production facility in Austin, Texas -- but that plant is already operating at close to 100 percent capacity.

[Note: Any down-time, beyond a 3-day storm, has challenging corporate repercussions. Contingency plan? Move to domestic back-up facility. Assumption: everything in the critical infrastructure is working, even if almost maxed out. BTW, whats Plan C?]

At the same time, McCranie is watching whether Taiwanese motherboard manufacturers begin canceling orders for Cypress components because of the outages.

[Note: Critical need for timely information. What if thats not possible in a partially broken world? Plan D?]

ASUSTek Computer Inc., a Taiwanese firm that makes the circuit boards, is hoping to have its four factories fully back online in two weeks, though it could take as long as six weeks, said Ivan Ho, president of the company's Newark, Calif.-based subsidiary. While the company's facilities appear to have suffered little damage, they were closed Tuesday and Wednesday before returning to 50 percent operations Thursday, Ho said.

[Note: Little damage causes 2 to 6 weeks delay. Recall, there are other simultaneous factors occuring on the local level to cause disruptions. Rather like anticipated Y2K impacts.]

``A lot of people are still afraid to go into the building right now, because the aftershocks keep on coming,'' Ho remarked Thursday. Asked if there was another place for his customers to turn, he responded, ``There's no other alternative.''

[Note: Spell... Vulnerable... with a capital V.]

The Taiwanese high-tech facilities are mostly clustered in the Hsinchu Science-based Industrial Park 45 miles southwest of the capital Taipei, about 100 miles from the earthquake's epicenter. Many industry sources and analysts have projected at least a two-week production hiatus due solely to a country-wide power outage and time needed to restore operations.

[Note: Sounds like... a Y2K lesson! Duh.]

Some Silicon Valley companies will try to make up for the chip shortages by buying from rivals to the Taiwanese foundries -- Singapore's Chartered Semiconductor, Japan's Seiko Epson and IBM. But industry experts say that Taiwan has by far the largest share of the foundry market and these other nations' facilities are already operating at high capacity.

[Note: So... what if the back-up competitions LOCAL area is experiencing local infrastructure disruptions too? How does that impact your bottom line... and/or your idled labor pool?]

Communications chip provider Broadcom Corp. has 50 percent of its wafer production contracted to TSMC and the other half to Singapore's Chartered Semiconductor. Bill Ruehle, Broadcom's chief financial officer, acknowledged that the disaster would cause a temporary shortfall but that it wouldn't be felt until late December.

[Note: Delayed reaction to disruptions. Got inventory stockpiled? Got no problems at your local level... or at your customers local level?]

Worsening the problem

What exacerbates the problem is that few companies keep a warehouse of supplies anymore, as chips depreciate in value rapidly and just-in-time production has become the order of the day.

[Note: That ole JIT rears its ugly head... one more time. Shortages... disruptions... delays... rising prices... what do you think the local economic impact is, not to mention mundane issues like cash flow?]

``The industry keeps little inventory,'' said Keith Potashner, president and chief executive of Santa Clara-based graphic microchip provider S3 Inc., which outsources all of its chip production to Taiwanese foundries.

``Production has been interrupted in an environment that has already been tight,'' said Potashner, adding that demand will increase ahead of the Christmas holiday season. ``This will put stress on the system and put pressure on pricing,'' he said.

[Note: Yep. Assuming the demand remains. Might not. Might decrease, especially with everyone, globally, dealing with their micro world. Then what?

Y2K... Lessons... to learn. Theyre everywhere!]

-- Diane J. Squire (sacredspaces@yahoo.com), September 25, 1999

Answers

If Y2K hits hard, maybe, just MAYBE this whole "Globalism" will have to be rethought. Perhaps corporations will be ALLOWED to produce say, 10 % of production outside the country.

-- K. Stevens (kstevens@ It's ALL going away in January.com), September 25, 1999.

Silicon is 33% of the atoms in sand, the other 66% is oxygen.....

Maybe we should quit using oxygen????;)

-- Helium (heliumavid@yahoo.com), September 25, 1999.

Diane;

You are too fast with the del key for me, ;) now my post of earlier is not in context...

oh well, if that is all i have to worrry about....

-- Helium (Heliumavid@yahoo.com), September 25, 1999.

Helium,

Wonder if the rest of the Valley will make the Y2K & Taiwan connect?

Doubt it. At least... in public.

Diane

(Zapped "another" al-d religion dribble. You didn't miss anything).

-- Diane J. Squire (sacredspaces@yahoo.com), September 25, 1999.

And all those people thought I was posting OT.

What will China do?

My brother is serving in the Navy in the South China Sea and they have been antsy since the Quake. Lots of stuff classified. Hush hush all e-s kinda standoffish cryptic.

China speaks out of one side of its mouth

what will it do with the other?

Watch China

-- JOHNNY (JLJTM@BELLSOUTH.NET), September 25, 1999.

As expected, things did not go well in Taiwan Monday due to quake damage:

Taiwan stocks down

Many of them declined the full 3.5% that the exchange would allow.

-- @ (@@@.@), September 27, 1999.