The “plum rains” of Taiwan’s monsoon season, or Meiyu, have started to fall, bringing a modicum of relief to the island’s worst drought conditions in over 50 years and enabling manufacturers and technology investors to exhale — at least temporarily. While the weather forecast in Taiwan would not normally make financial headlines, the island’s exposure to climate risk, current severe water shortage, and reliance of its large semiconductor industry on water have the global business and investment community on alert.
Global semiconductor hub
Taiwan produces 50% of the world’s semiconductors and 92% of the high-end transistors used in advanced technology applications like autonomous driving and high-performance computing. Any disruption in local manufacturing could short circuit the global technology supply chain. The overarching risk to semiconductor fabrication in Taiwan is lack of water. Semi fabrication requires enormous amounts of water: the typical chip factory consumes between two and four million gallons of water per day; larger companies use even more. Without sufficient water to power and cool chip fabrication, production grinds to a halt.
Taiwan has among the world’s lowest per capita water resources despite receiving more than twice the average rainfall. High population density, uneven rainfall distribution, and lack of adequate water storage capacity (an estimated 70% of the island’s precipitation is lost to ocean runoff) account for the shortfall. While agricultural demand (70% of Taiwan’s total water use) has held steady in recent decades, household consumption has tripled (20% of water use), and industrial consumption (10%) has more than doubled.
Despite rising demand and shortage of supply, however, water prices in Taiwan remain very low. According to the International Water Association, water costs less in Taiwan than anywhere in the world, other than Macau.1 Amid continued water shortages and eventual repricing, the semiconductor industry must invest heavily in infrastructure to improve water efficiency. The industry is already taking steps to reduce the use of ultrapure water systems (which can be up to 1.5% of a company’s total capex) through process optimization and recycling.
Worst drought in half a century
Just prior to the 2021 Meiyu, Taiwan’s reservoirs stood at approximately 20% capacity. The dearth of water is largely due to the total absence of typhoons during the 2020 season. Taiwan typically encounters three to four landfall typhoons annually, which come on the heels of the spring rains and account for half of the country’s annual rainfall. Last year, for the first time in 50 years, no cyclones reached Taiwan, resulting in a significant precipitation deficit and sending the government and private companies scrambling to shore up reserves and avert disaster. Rationing water, digging wells, building desalination and water-reclamation plants, and upgrading water transportation and infrastructure are among recent emergency efforts. To make matters worse, this year’s monsoon season arrived late, exacerbating conditions and triggering broader conversations about Taiwan’s long-term climate-adaptation needs.
Long-range projections: Boom or bust precipitation
Wellington’s Climate Research Team, working with Woodwell Climate Research Center, believe that climate change will continue to distort rainy seasons in Taiwan, leading to future challenges. Based on our research, we believe climate change will cause Taiwan’s precipitation events to be more intense and shorter in duration, creating a “boom or bust” situation that is difficult to manage. The climate conditions that create continuous, relatively predictable rainfall are projected to weaken, giving way to atmospheric patterns that result in the uneven distribution of precipitation, with more strong events and fewer weak events becoming the norm. Counterintuitively, extreme precipitation events can lead to water deficits if high-volume ocean runoff cannot be captured.
Adapting to this problem will require significant investment in reservoir capacity and water transportation/efficiency infrastructure. This spending will not happen quickly, as the political economy of reservoir construction is extremely complex at the local level in Taiwan. We should not expect significant projects to help the situation in the short term, and megaprojects that could alleviate water scarcity take years to complete, even under the most expeditious circumstances.
Closing remarks on Taiwan drought and chip shortages
While semiconductors account for a small fraction of overall industrial water use in Taiwan, we believe the country’s water scarcity is a major tail risk for the industry that highlights the need for supply-chain diversification. Our Climate Research, Global Macro, and Global Industry Analyst teams continue to research Taiwan’s climate-risk exposure and strategic climate-adaptation approach. Like other water-stressed regions, chronic water shortages could become a national security concern for Taiwan and remain a potentially systemic risk for the global technology supply chain.
To learn more about Wellington’s water scarcity research, please visit our Future Themes hub.
1IWA Annual Report, Inspiring Change, 2018 – 2019.