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September 15, 2021

US semiconductor hubs need to address physical climate risks to sustain investment

Liz Najman
Moody's ESG Solutions

Bolstered by a favorable policy backdrop, domestic semiconductor production in the US is expected to rise over the coming years. As the industry expands, companies and local authorities in semiconductor manufacturing hubs will need to prepare for increasing climate risks, such as water stress and wildfires to ensure the long-term viability of investments.

There is wide support for revitalizing American manufacturing, with growing investment in key manufacturing sectors such as automobile and electronics. These industries often provide significant employment and create demand for intermediate goods and services downstream. Such reliance on supply chains, often from overseas markets, can create risks for manufacturing companies. For example, ongoing semiconductor shortages are projected to cost the global automotive industry $110 billion in lost revenue this year with 3.9 million fewer cars produced. Companies have projected revenue losses and reduced production due to insufficient semiconductor supply.

Given that the American electronics industry imports 88% of its semiconductors from countries like Japan, South Korea, and Taiwan, there has been a bipartisan push to onshore production. In May, the Senate Commerce Committee approved the Endless Frontier Act (S.1260) to earmark funds for science and technology improvement, including semiconductor research, and in June, it approved a $52 billion package to build the domestic semiconductor industry.

In this analysis, we explore the climate risk exposure of semiconductor manufacturers in US states that will likely see growth as the industry expands. Physical climate risks can threaten the viability of new manufacturing investments and place pressure on the labor pool and economic vitality of communities. We leverage our county climate risk scores, which quantify population-weighted exposure to floods, heat stress, hurricanes and typhoons, sea level rise, water stress and wildfires, over the 2030-2040 horizon.

Texas & California: Electronics and Semiconductors

Since California and Texas are already major players in the electronic manufacturing market, accounting for nearly 75% of domestic production, we expect both states to benefit from efforts to grow the domestic industry. California leads the nation in electronic manufacturing with $12.6 billion made from semiconductor manufacture alone. Of five sites Samsung is considering for a $17 billion semiconductor lab, two are in TX. Williamson County, TX has made itself particularly promising by offering rebates to Samsung. Other similar companies such as Texas Instruments and NXP manufacture semiconductors in facilities across Texas.

Water Stress

Semiconductor manufacturing is particularly water-intensive and requires access to two to four million gallons of clean water a day, as well as highly filtered clean air. Out of Texas’ 254 counties, 69% are highly exposed to water stress and in California, 64% of 58 counties are highly exposed to water stress (Figure 1). Water stress is a particularly relevant concern because as of August 2021, the western US, especially California and nearby states, are in a historically severe drought that is exacerbating wildfires and heat waves leading to water restrictions. Texas had been in an acute drought in early 2021 until heavy, flooding rains hit much of the state recently.

Decreasing water supply can threaten manufacturing output. Water restrictions may lead to reduced production, higher costs if water must be supplied by trucks or tanks, as experienced in Taiwan this past year, or additional capital investment if companies have to subsidize infrastructure such as desalination plants. Water stress also taxes the electric grid, as 70%of power generation in the US requires water for cooling. Unaddressed electric grid instability in both California and Texas are outstanding threats to manufacturing and worsened by other, compounding climate threats.

Figure 1 County level water stress risk in California and Texas. Source: Moody’s ESG Solutions

Addressing Water Stress

Factoring climate risk exposure into planning and development decisions will be essential for companies to ensure investment returns on new manufacturing plants and for communities to maintain the benefits of tax revenue and employment. Companies with facilities in areas of increasing water stress can plan for using recycled or reclaimed water in the event of water restrictions. Likewise, there is an opportunity to retrofit facilities for water efficiency. For example, Texas Instruments has plans to shut down older fabrication plants and shift to more water efficient production, saving around 20% of water use in semiconductor production. The company also works with the Texas Water Development Board to report its use and monitor future risk. In 2015, during the last California drought, Intel acknowledged their 2 billion gallons of annual water use and committed to a water recycling program that returned and restored 90% of all water used in industrial processes in 2020.

Wildfire Risk

Water stress and heat also exacerbate wildfire risk. In California, 66% of counties are highly exposed to wildfires, including high exposure in both Santa Clara and Orange, where Intel and Broadcom have facilities. In Texas, only 37% of counties are highly exposed to wildfire, including some counties with semiconductor manufacturing (Figure 2). However, poor air quality and negative effects of wildfires extend far beyond county lines – degradation of regional air quality can directly affect semiconductor manufacture and indirectly impact production by threatening the health of workers and their families.

Semiconductor production also requires uninterrupted energy supply to monitor toxic gases used in fabrication, and in the event of a blackout, anything on the production line must be discarded. As utilities like Pacific Gas & Electric introduce planned power shutoffs to reduce the risk of wildfire, this could present significant risks for manufacturing hubs without backup power, in addition to the liability risks for utility companies stemming both from the power shut offs and from their roles in igniting wildfires.

Figure 2 County level wildfire risk in California and Texas. Source: Moody’s ESG Solutions

Mitigating Wildfire Risk

Exposed communities will need to invest in wildfire resilience to continue attracting both businesses and potential employees to their economies. Likewise, companies looking to expand into new locations or maintain operations in exposed areas will rely both on regional resilience measures and facility-level risk mitigation. After the devastation of last year’s wildfires, California braced for the 2021 wildfire season by investing in additional firefighters and mitigation strategies with Community Wildfire Protection Plans detailed on county and city levels. Several Texas counties also have wildfire plans. There is an opportunity for cross sector collaboration in wildfire risk mitigation. Some county plans include partnerships with Texas A&M University in addition to: utilities, transportation departments and other organizations.

Companies with exposed facilities can implement measures such as adjusting their budget to plan for high filtration costs and more frequent filter replacement due to wildfire smoke and plan for potential impacts on employee health and labor productivity. Likewise, companies can contribute to regional resilience measures. For example, Broadcom has contributed to countrywide wildfire relief funds, and there is a great potential for public private partnerships to spread community awareness on preparing for wildfires and minimizing risk. When faced with the challenges of increasing climate risk exposure, counties can use climate resilience planning as an incentive to attract companies, and companies have an opportunity to work with municipalities to devise solutions that have benefits for multiple stakeholders.

Moody’s ESG Solutions provides insights and analyses on ESG themes and multi-stakeholder performance, climate-related risks and opportunities and global sustainable finance trends.

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