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Energy Crisis Threatens Taiwan's Chipmakers
(11/13/00, 5:42 p.m. ET) By Faith Hung, Electronic Buyers' News Political turmoil surrounding the government's planned cancellation of a nuclear power plant in Taipei, Taiwan, is leading to impeachment proceedings against Taiwan's new president, casting a shadow across the island's electronics industry.
With their long-term energy resources in question and the sleeping giant of China poised for a wake-up call nearby, component suppliers feel they are caught between a looming energy crisis at home and an inflexible government that prohibits many from setting up shop across the Taiwan Straits to tap the mainland's stirring economy.
In spite of predictions that Taiwan will face an energy shortage by 2007, President Chen Shui-bian is holding to a promise to scrap a planned $5.6 billion nuclear power plant in the northern town of Kungliao, a move that is roiling financial markets and threatening the recently begun rule of Chen's Democratic Progressive Party (DPP).
Irate at the decision, the opposition-dominated legislature recently adopted rules for a recall motion. If two-thirds of the legislators support a recall, a public referendum on Chen's fate would be held in 60 days. Half of the voters would have to approve Chen's dismissal.
In an appeal to the business community, Premier Chang Chun-hsiung hosted a state dinner early this month for about 30 industry captains -- including the chairmen of chip foundry Taiwan Semiconductor Manufacturing Co. Ltd. (stock: TSM) and PC makers Acer Inc. and Quanta Computer Inc. -- at which guests were reassured that Taiwan's power supply and the DPP's power base are stable.
But the political maneuver offered little long-term comfort for electronics companies facing rising energy costs and an inability to expand to meet market demands.
"For the short term, the impact is still endurable for Taiwan's suppliers," said Frank Cheng, a spokesman for Via Technologies Inc., which makes computer chipsets for most of the world's top ten OEMs. "However, we're deeply concerned the leading edge Taiwan has will diminish in the long run."
Observers said what's at stake is the continued growth of a major manufacturing center and a key link in the global electronics supply chain. Taiwan builds more than half of the world's notebook PCs and 80 percent of computer motherboards while supplying two-thirds of the available semiconductor foundry production capacity. According to recent data from Taiwan's Ministry of Economic Affairs, the island will ship $33 billion worth of electronic products to OEMs this year, up 27 percent from 1999. Compaq Computer Corp. (stock: CPQ) alone will buy $9.5 billion worth of Taiwan-made components this year, while IBM Corp. (stock: IBM) is expected to spend about $5 billion.
There are good reasons for vendors to worry about their future energy supplies. Just two weeks ago, semiconductor chip manufacturing plants at the Hsinchu Science-based Industrial Park -- the heart of the island's IC manufacturing zone -- were temporarily throttled back by a fire that damaged one of the park's electrical transformers. The fire caused as much as $6 million in lost production, according to local estimates. Power outages like this one are not uncommon for the industrial park, whose only major energy source comes from the state-run Taiwan Power Co. (Taipower).
"More than 20 similar incidents have occurred in this park during each of the past five years," said Hsu Chia-li, an executive at Macronix International Co. Ltd. (stock: MXICY), a manufacturer of flash memory chips and EPROM. "That's really terrible. Taipower has had trouble providing stable electricity. A lot of us just don't think Taipower is reliable."
The authority's ability to respond to major crises evokes even greater criticism. A large-scale electrical failure in July 1999, followed in September by a devastating earthquake, caused widespread outages, crimped production in the industrial park, and fueled a semiconductor shortage that left OEMs like Hewlett-Packard Co. (stock: HWP) unable to meet fourth-quarter revenue targets.
With those memories still fresh, the government's decision to cancel what would be the island's fourth nuclear power plant has compounded fears that Taiwan won't have sufficient energy to keep up with global demand.
For years, the lack of adequate, reliable power has been one of the reasons that Taiwan's top five notebook computer makers and suppliers like Asustek Computer Inc. -- Intel's biggest vendor of PC motherboards in Taiwan -- have expanded into China.
Chipmakers, among many others, have not been so lucky. Most are still not allowed to build fabs on the mainland, which boasts a huge PC market and a large pool of U.S.-trained engineers. Companies blame the restriction on the Taiwan government's hoarding of technology riches following years of massive capital investments in the industry. Such a policy is counterproductive to the island's competitive interests, according to TSMC chairman Morris Chang, who in a recent speech to members of the Nationalist party said the government "is killing opportunities for Taiwan's industries."
For Chang, who is widely considered to be the grandfather of Taiwan's IC industry, this was the first time in years he has taken such a severe tone toward the government.
"The Chinese government is building up an infrastructure in favor of the semiconductor industry," said Andrew Lu, an analyst at Salomon Smith Barney Inc. in Taipei. "It wouldn't be surprising if OEMs shift their orders to China from Taiwan."
In an effort to tilt the table in its favor, Beijing has indicated that by about 2003, local and foreign OEMs must procure a much larger percentage of their components from manufacturers based on the mainland.
"Five years down the road, if a company doesn't have a presence in China, that would mean it lacks vision," Jason Chang, chairman of Advanced Semiconductor Engineering Inc. (stock: ASX), told a group of reporters recently.
Chang said ASE will spend millions of dollars in China in the future.
Alternatives proposed by the Taiwan government -- including the creation of privatized utilities -- have been roundly rejected by electronics companies, many of which say they have no interest in entering the energy industry.
"Those alternatives are neither concrete nor convincing," said one executive at Winbond Electronics Corp., a DRAM vendor and heavy supplier to Toshiba Corp.
Chen's victory in March ended the 50-year grip on power by the Nationalist Party, making it the first democratic transfer of power between parties in the island's history. In the short time he has been in office, however, Chen's two bedrock campaign goals -- scrapping the nuclear power plant and seeking independence from China -- have sent the market here reeling.
Taiwan's benchmark stock index has slumped 31 percent since Chen took office, though this week it turned slightly upward.
If the public passes a recall referendum, the island would hold new presidential elections in a process that could take about five months, further adding to the political and financial instability plaguing the island. Whichever course of action wins the day, observers warn of troubled times ahead.
"Taiwan is just a tiny island," said Salomon Smith Barney's Lu. "The rising political instability or the government's decision to halt the power project would deal a big blow [to industry]."
-- Martin Thompson (email@example.com), November 13, 2000