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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

OCTOBER 22, 1999 VOL. 25 NO. 42

After the Dust has Settled
Taiwan's components industry is striving to put the earthquake behind it. The world's biggest computer sellers hope the job can be done fast
By ASSIF SHAMEEN and TIM HEALY

Less than a month after the worst earthquake in Taiwan this century killed at least 2,321 people, the picturesque center of the island, which was hardest hit by the quake, is returning to a semblance of normality. Bulldozers are clearing rubble. Tourists are returning - albeit to see a violently transformed landscape. The government has even begun to prepare land for new housing and commercial developments. But closer to Taipei, where the impact was thought to have been slight at first, the actual disruptions have been more onerous. In fact, while the northern part of the island was spared the worst of the shaking, power outages and minor tremors have caused repercussions around the world.

Taiwan's growing success as a center for one-quarter of the world's contract computer-component manufacturing, known as OEM (for original equipment manufacturing), is behind the widely felt effects. In recent days, Hewlett-Packard, Compaq and Dell have all revised earnings estimates for the last quarter of the year downward in part because of supply shortages made worse by the Taiwan earthquake. Dell is set to sign an $8.5 billion deal with Samsung Electronics for computer screens to help ensure a stable supply for at least the next five years. The deal includes Dell's agreement to buy $200 million worth of convertible Samsung bonds to help pay for a new Korean plant making liquid crystal display monitors.

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The Samsung deal may point to a long-term impact of the quake: Some computer executives are grumbling that a series of recent events in Taiwan - from the latest round of China-Taiwan wordplay to an island-wide power outage in July to the earthquake - suggest they should rely less on the island's manufacturers than they once did. Some of Taiwan's own companies are said to be considering plans to move some production facilities to Subic Bay in the Philippines. Others with operations in China have used the earthquake as an opportunity to shift production there.

The greatest physical damage, according to semiconductor analyst Kelvin Chang at Jardine Fleming in Taipei, was to delicate quartz tubes used in the semiconductor chip-making process. The tubes hold silicon wafers within furnaces at high heat. Chang says so many of the tubes were damaged that there may not be enough extra supply worldwide to meet current need.

None of this should overshadow the speedy recovery of Taiwan's computer-component manufacturing industry. Companies proved themselves nimble and reliable suppliers in the face of the crisis. Future earnings results could show that the psychological damage to the industry had a bottom-line impact that was worse than the physical harm, says Ben Lee, an analyst for Dataquest-Gartner Group in Taipei. "In a tight supply market, people wonder how bad things are going to get," says Lee. "Can they get all the components they need in time? They will do anything to get supply and that creates more demand, higher prices, more panic." In the days after the earthquake, prices for the benchmark 64-megabit dynamic random access memory chip (DRAM) rose from $14 to $21. Calm has since returned - prices are back to $14. But future earnings reports may show that this spike in prices hurt companies that couldn't pass on their added costs to buyers.

The earthquake, which measured 7.6 on the Richter scale when it hit early in the morning of Sept. 21, apparently cost two large DRAM producers, United Microelectronics Corp. (UMC) and Taiwan Semiconductor Manufacturing Co. (TSMC), millions. UMC says it suffered the destruction of $32 million worth of wafers. TSMC says it lost 20% of its monthly production of chips. The impact clearly went beyond chips. Taiwan companies make only about one-tenth of the world's DRAM supply, but they produce 40% of the world's notebook computers, 22% of desktop PCs, almost half of the modems, 60% of all motherboards and 69% of desktop scanners. Chang says the speedy return to earth of DRAM prices shows that Taiwan is not critical to global chip production. He notes that prices for components that Taiwan does dominate are unlikely to return to pre-quake levels so quickly.

For this broad assortment of companies, the earthquake could not have come at a worse time. Computer makers around the world are running full tilt to fill Christmas orders. Sellers had also anticipated a surge in orders leading up to the end of the year by individuals and companies seeking to solve potential Y2K problems. At the same time, an ongoing shift by computer manufacturers to just-in-time inventory systems has left little slack in the system. Dataquest-Gartner, one of the industry's leading consultancies, was predicting a shortage of DRAM chips worldwide next year even before Sept. 21.

One problem that makes even short-lived power interruptions especially harmful to computer component makers is the time it takes to ramp up production once there has been an unexpected outage. Precision tools must be recalibrated, finished and source materials scrutinized for flaws, and tools given time to return to optimal operating performance - for instance, ovens take time to regain necessary temperatures. One Taiwan manufacturer said it could take four or five days to restart production after only a two-hour cut in power.

Therefore, it is unsurprising that Taipei went to great lengths in the aftermath of the quake to ensure a stable power supply to key manufacturing centers such as the Hsinchu industrial park near Taipei. The government has repeatedly chosen to provide a stable power supply to electronics manufacturers at the expense of consumers.

The strategy so far seems to have spared the overall economy from serious spasms. Economists expect the earthquake to shave about one-half a percentage point from gross domestic product this year. Most estimates now put growth this year at about 5%. But this year's loss may be more than made up from a boost to construction in 2000. Li Yen-cheng, a Taipei-based economist, predicts Taiwan will achieve 7% GDP growth next year versus his estimate of 6% before the quake. Citigroup economist C.J. Chien says he doesn't see anything that will derail the overall economy in 2000: "Taiwan was one of the fastest growing economies in the world last year and it will be among the fasting growing economies again this year and next." Li even thinks the quake could have a mildly positive impact on prices by halting what was threatening to become a deflationary spiral.

But this view is too pollyannaish for analysts who see the actual harm done by the quake - not just in terms of loss of life and destruction of property, but also to computer component production. Chang says the true cost of the earthquake on the industry may not be known for weeks: "Production cycles are four to eight weeks. We won't fully understand the impact of what happened to high-precision instruments until we actually see a new batch of chips roll out." In other words, the full-scale shaking has stopped. But there may yet be aftershocks.

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