With U.S. Chip Industry Facing Aftershocks from Taiwan Earthquake, Deloitte & Touche Advises Hi-Tech Companies to Check Insurance Policies for Contingent Business Interruption Coverage - Industry Trend or Event

Edge: Work-Group Computing Report, Oct 11, 1999

The September 21 earthquake in Taiwan caused inestimable damage to life and property on the island nation. However, the quake's aftershocks are just beginning to hit the U.S. computer industry, which relies heavily on Taiwan as a source of integrated chips for its lifeblood.

As highlighted in a Sept. 23 Wall Street Journal article, Taiwan's huge chip industry was idled by the quake and could be crippled for weeks. As a result, prices for silicon chips were up sharply in the days after the disaster.

"This will have a chain effect on the entire industry," F.C. Tseng, president of Taiwan Semiconductor Manufacturing Co. told the Journal. The company ranks as the world's biggest chip factory.

Particularly hard hit by a subsequent loss of power and chip production shutdown was the Hsinchu Science Park, where, according to the Journal, 25 chip plants account for 90 percent of Taiwan's semiconductor output.

Chips comprise about a third of Taiwan's exports, estimated at $111 billion in 1998. Even if the industry had gotten back on its feet quickly, Merrill Lynch estimated the loss to the Taiwan chip sector would reach $150 million in a matter of days.

But because the ripple effect in the worldwide industry could take months to be accounted for, Deloitte & Touche's Business Insurance Consulting Group (BIC), which specializes in insurance claims preparation and settlement, predicted the losses would be much higher.

Gregory S. Thaler, the Western Region director of the BIC group, said losses could hit $1 billion to $2 billion in Taiwan, and another $1 billion in the United States. Mr. Thaler said that supply problems are extremely likely by the end of the year and into 2000, as companies roll out new generations of chips and other computer-related products. PCs, peripherals and other chip-dependant applications will also be affected.

"Because of the lag time between manufacturer, supplier and retailer, U.S. high tech firms may not feel the effects of the Taiwan quake for some months. In fact, for many companies the quake may prove to be more of a genuine Y2K problem than any software glitches," said Mr. Thaler, based in Deloitte & Touche's San Francisco office. Considering that U.S. computer and chip makers may face substantial losses stemming from the quake, Mr. Thaler advises risk managers with any exposure to Taiwan to put their insurance companies on notice now.

"Right now, the U.S. computer industry is looking at the same problems orange juice makers face when there's a huge frost in Brazil - a commodity industry hit by shortages and rising costs," Mr. Thaler said. "The quake sends a reverberating message to high tech firms that they should start looking into contingency plans now to mitigate losses, and begin identifying and quantifying any lost business or profits caused by recent events in Taiwan.

A Helping Hand for High Tech

Deloitte & Touche has extensive experience for companies in the semiconductor and computer industry. Among the firm's clients have been Hewlett Packard, Microsoft, Cisco, Intel, 3Com, Harris Semiconductor, Hyundai Semiconductor, Kinden Semiconductor, Nanometrics, and Tegal Corp. The Business Insurance Practice has recently been involved in a $100 million-plus business interruption claim for a semiconductor fabrication plant.

The Deloitte BIC practice is the largest and most experienced Big 5 consulting firm in the area of claims preparation, negotiation and settlement, according to Brad Murlick, co-national director of the BIC Group.

Contingent Coverage Critical With a disaster such as the Taiwan earthquake, which occurs thousands of miles from Silicon Valley and other U.S. high tech corridors, Deloitte & Touche emphasizes the importance of having insurance policies that include contingent business interruption, as well as first-party property damage coverage.

"Any high tech company that even marginally relies on overseas suppliers and vendors for its products should have some form of contingent business interruption coverage - it's the only real line of insurance protection if those suppliers are out of commission, which is obviously the case in Taiwan," Mr. Thaler said.

He added that companies could be nurturing a false sense of security because they feel their near-term inventories are adequate to cover any disruption in the chip pipeline. "I spoke to one semiconductor company with a Taiwan connection and they felt they had no problem, until they considered the effects on research and development for new products in 2000," Mr. Thaler said.

Calculating Losses In establishing losses tied to an event striking suppliers on another continent, Mr. Thaler said that U.S. high tech firms should begin the calculus of how their prices, market share and potential profits are adversely affected by any delays caused by the earthquake.

Insurance claims consultants, especially those with accounting and high tech industry experience, can help in identifying what portion of lost profits was expressly due to delays in a new generation of computer product that were caused by events in Taiwan. "These are very complex claims," added Mr. Thaler. He noted that companies might be able to get reimbursement under their policies for consulting and professional fees tied to claims preparation for large losses.