Climate risks loom large over semi-conductor supply chains, warns Moody’s

The resilience of global supply chains is under threat from the concentration of semi-conductor manufacturing in regions highly exposed to climate risks, warns Moody’s. In particular, Moody’s says the costs related to climate risks in Taiwan, which houses 92% of the world’s most advanced semi-conductor manufacturing capacity, is set to rise substantially over the next 20 to 30 years as extreme events increase in frequency and severity. In a recent blog, Claire Souch, vice-president of global models and climate risk at Moody’s, says: “With such a geographically concentrated semiconductor manufacturing industry, concerns are growing about the region’s exposure to climate change and the knock-on effects on supply chains around the world.” Based on Moody’s projections and analytics, the cost of flooding in Taiwan is expected to increase by 30% by 2050 and costs from water stress will be running 35% higher. Over the same time frame, the cost of sea level rise is projected to spike by 60%, while losses from heat stress will surge 150%, under a moderate climate change scenario. Moody’s says climate risks facing semi-conductor supply chains is a problem across the Asia Pacific, with South Korea, Japan and China also operating significant semi-conductor industries. Some 75% of the world’s semi-conductor manufacturing is concentrated in east Asia and China, mostly in Taiwan and South Korea. “Shocks to a geographically concentrated supply chain can be amplified by the impacts of climate perils, particularly if multiple plants are impacted by the same severe climate event,” says Souch. Severe drought in Taiwan in 2021 was followed an absence of typhoons, which usually make Taiwan one of the wettest countries globally. Water supplies were diverted from agriculture to water-intensive semi-conductor manufacturers, but Souch says the change in weather pattern exposed Taiwan’s vulnerability to drought. “Any future changes in climate and weather patterns could potentially increase the frequency, intensity and severity of events, and in turn, increase these risks and their impact on communities and costs to businesses,” Souch says. “In terms of supply chain disruption, the recent water scarcity events in Taiwan are a very relevant example. As more and more devices rely on a range of semiconductors to function, the supply of semiconductors for the modern global economy has become critical,” she adds. Souch says any break in the supply of semi-conductors impacts production lines will impact automotive and computer manufacturing. “The importance of the semiconductor supply chain, from the manufacturing plant to distribution through to the end user, cannot be underestimated,” she says. After several high-impact, high-profile disruptions to the supply of semi-conductors played out during the Covid-19 pandemic, many countries in the West have reviewed the security of supply chains, with some looking at how to source materials closer to home. However, Moody’s says the future impact of climate change should also be considered in plans for domestic plants. In particular, investment for new manufacturing plants in the US carries its own risks, Souch says, using data from Moody’s Climate On Demand risk analytics. New semi-conductor plants have been announced in Arizona, New York, Ohio, Texas and Utah. But Moody’s warns that New York ranks as one of the top ten US states expected to see an increase in water stress over the next 50 years, while Arizona, Utah and Texas are already prone to water stress and are projected to see an increase in other climate risks. A fabrication plant in development near Phoenix, Arizona, carries potentially large impacts from climate change, Souch says, led by both water and heat stress. Damage and business interruption losses under a moderate climate change scenario by 2050, based on $1bn of exposure, would run into several hundred thousands of dollars annually, she adds. “Given that a manufacturing plant will be operational for decades into the future, it makes business sense to take potential future impacts of climate change into account, such as how water supply and the effects of heat stress on operations may change, along with potential damage and disruption from flooding and storms,” Souch says.

Climate risks loom large over semi-conductor supply chains, warns Moody’s

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