IPhone chipmaker TSMC races to recover from computer virus, warning of shipment delays

Bloomberg

Taiwan Semiconductor Manufacturing Co., which makes chips for the iPhone and other devices, has revealed details of its recovery from a debilitating computer virus, and warned of delayed shipments and reduced revenue because of the impact on its factories.

TSMC said that 80 percent of the fabrication tools affected by a virus outbreak Friday evening had been restored, and that it expected a full recovery on Monday, an emailed statement shows. The Taiwanese company said the incident, which came as it ramps up chipmaking for Apple Inc.’s next iPhones, would delay shipments but did not specify which customers would be affected.

The chipmaker estimated that third-quarter revenue would decline by about 3 percent and operating margins by about 1 percentage point, according to the Sunday statement. It maintained its 2018 forecast of boosting revenue by high single digits in U.S. dollar terms.

The incident underscores the global nature of the technology industry’s supply chain, in which companies like Apple and Qualcomm Inc. depend on hundreds of suppliers around the world. This is the first time a virus has ever brought down a TSMC facility, and is reminiscent of the WannaCry cyberattacks of 2017 that forced corporations around the world to suspend operations as they rooted out the ransomware. TSMC says no confidential information was compromised in the virus attack and that most customers have been notified.

“TSMC has taken actions to close this security gap and further strengthen security measures,” TSMC Chief Financial Officer Lora Ho said by phone Sunday.

The firm is the latest to fall prey to a growing global scourge. Cybercrime could cost businesses as much as $8 trillion in damage over the next five years, according to the World Economic Forum.

The implications are unclear for Apple. The iPhone maker last week surpassed a market value threshold of $1 trillion, largely on the strength of sales for its pioneering smartphone.

Still, TSMC’s statement that the virus will affect shipments comes at a sensitive time for Apple, which is TSMC’s largest customer and accounts for more than 21 percent of its revenues according to data compiled by Bloomberg. Apple designs the processors that go into its devices, but it uses TSMC as its exclusive partner for producing the chips. In the past, the U.S. company has employed foundries owned by Samsung Electronics Co., its rival in global mobile devices.

Apple is currently ramping up production of three new iPhone models for this fall, banking on them to continue its recent sales momentum. It’s also planning new iPad and Apple Watch models — devices that have also historically used chips produced by TSMC. While TSMC has not indicated which customers could be affected, such a virus could potentially slow Apple’s output of new devices and cut into the number of units sold.

Apple does prepare for last minute supply-chain hiccups like the one facing TSMC and could work through any potential problems. An Apple spokesperson didn’t immediately respond to a request for comment on Sunday.

While Qualcomm, which provides processors for many devices running Android software, gives TSMC about 6 percent of its revenues, it diversifies production so that some chips are built by competitors like Samsung. Huawei Technologies Co., MediaTek Inc., Nvidia Corp., and Texas Instruments Inc. also rely on TSMC to produce chip designs.

The incident comes weeks after TSMC cheered investors with a rosy outlook for smartphone demand in the latter half of the year. That helped the market look past a reduced revenue outlook. A bellwether for the chip industry as well as an early indicator of iPhone demand, it heads into its busiest quarters grappling with waning enthusiasm for the high-powered chips used to mine digital currencies. The high single-digit percentage increase forecast for TSMC’s sales this year, noted by Chief Executive Officer C. C. Wei, was down from an already reduced projection of about 10 percent.

Friday’s virus outbreak was due to “misoperation” during the software installation process for a new tool, the company said in the statement. The virus then spread once the tool was connected to TSMC’s computer network.

“TSMC has been attacked by viruses before, but this is the first time a virus attack has affected our production lines,” said CFO Ho.