Hydropower Crisis in China’s Sichuan Could Affect Semiconductor Production: Expert

An aerial view shows the Yangtze River that is approaching record-low water levels during a regional drought in Chongqing, China, on Aug. 20, 2022. Thomas Peter/Reuters

News Analysis

The high temperatures and drought across southern China in August prompted many places in Sichuan Province to impose power cuts on industries. The disruption could affect semiconductor production in Chengdu city and directly impact Taiwanese companies and the supply chain.

As a semiconductor manufacturing powerhouse, Sichuan’s provincial capital Chengdu has attracted many international and Chinese semiconductor companies, including testing companies such as SK Hynix; chip design companies such as NXP Semiconductors, Unisoc, and Vimicro; and other companies like China Resources Microelectronics, CSEC, AOS, Tsinghua Unigroup’s DRAM, and Xinxin Quantum.

Liu Pei-chen, a semiconductor industry expert and director of the Taiwan Industry Economics Services, told The Epoch Times on Aug. 28 that although the impact of the power restriction on the semiconductor industry in Sichuan is limited at this stage, it’s noteworthy and people should pay attention to the situation.

Liu pointed out that under the overall geopolitical changes, coupled with China’s relatively unfavorable operating environment for domestic and foreign companies, Chengdu’s position as a semiconductor production center could change soon.

She added that foreign investors are more cautious about investing amid heightened tensions between the United States and China, sanctions imposed by Washington on several Chinese officials and companies, and China’s draconian COVID-19 lockdowns and unstable power supplies in China in the future.

Power shortages in Sichuan eased on Aug. 28 as rain fell in some areas, according to Chinese media. The province restored electricity for general industry and commerce. The power consumption of large industries, except the high-load energy industry, is gradually being restored. The power consumption of large industries will fully return to normal after the hydropower inflow improves.

The six-month power cuts in Sichuan and Chongqing—major manufacturer hubs of cars, chemicals, solar energy, electronics, and semiconductors—are bound to impact the local electronics supply chain, according to market players. Due to weather and environmental factors, enterprises are forced to cooperate with the mandatory power restrictions, which disrupts their production schedule.

Taiwan’s Investment in China

Taiwan Minister of Economic Affairs Wang Mei-hua said on Aug. 25 that Sichuan and Chongqing are important assembly bases of laptops and consumer electronics for Taiwanese firms with investments in China, and the global market is watching the impact of the power cuts on supply chains.

The short-term impacts for the operators are being dealt with through off-peak production, using existing inventory, and production management, according to Taiwan’s Ministry of Economic Affairs. While it takes longer to understand the long-term impacts, Wang said that they would closely communicate with the operators.

According to data from the Investment Commission of the Ministry of Economic Affairs (MOEAIC), approved investment in mainland China reached $5.863 billion in 2021, accounting for about 35 percent of the total. Mainland China is still the focus of outbound investment by Taiwanese enterprises.

From 2016 to July 2022, Taiwan’s approved investment in China was $9.67 billion, $9.248 billion, $8.497 billion, $4.173 billion, $5.906 billion, $5.863 billion, and $2.115 billion, respectively, according to statistics from the MOEAIC. The amount of investment has decreased significantly since 2019, indicating that most Taiwan investments have moved out of China.

The current Cross-Strait political tension, China’s slowing economic growth, tense U.S.-China relations, and COVID-19 lockdowns have made it more difficult for Taiwan and other foreign companies to operate in China.