iPhone chipmaker blames WannaCry variant for plant closures

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(Bloomberg) -- Taiwan chipmaker TSMC, reeling from a computer virus that shut down several plants over the weekend, is expected to be able to fill orders on time for Apple Inc. as it gears up to release new iPhones later this year.

Taiwan Semiconductor Manufacturing Co. said earlier Monday that full operations have resumed after a variant of the 2017 WannaCry ransomware affected production over the weekend. The infection, which happened when a supplier installed tainted software without a virus scan, spread swiftly and hit facilities in Tainan, Hsinchu and Taichung -- home to some of the cutting-edge plants that produce Apple’s semiconductors.

Nehal Chokshi, an analyst with Maxim Group LLC., said delays to Apple should be limited because it appears that no wafers, a semiconductor material involved in the production of chips, were affected. “My suspicion is that there will be minimal impact on Apple,” he said. “Nothing has been scrapped, just simply production days have been impacted."

The wait time between raw wafer to finished chips is about six to eight weeks, Chokshi said, which would cause a much more serious delay if that part of the production line was affected. However, in this case, the time Apple will have to wait to receive the chips will be extended only by the number of days production was delayed, which is about three days, he said.

"This is really minor," Chokshi said. "I don’t think there’s a need to panic from Apple’s perspective or from an investor’s perspective."

TSMC declined to discuss the implications for Apple, which also declined to comment. Apple shares were little changed at $207.78 at 10:46 a.m. in New York Monday. TSMC’s U.S.-traded shares were down 1.3 percent.

Apple is said to be 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 historically used TSMC chips. Apple designs the processors that go into its devices, but uses TSMC to make the chips. In the past, the U.S. company has employed foundries owned by Samsung Electronics Co., its rival in global mobile devices.

TSMC intends to make up for the lost time as it heads into the critical holiday season, Apple’s most important quarter. The chipmaker will probably prioritize Apple, its largest customer, over smaller clients as it resumes normal operations, Chokshi said.

TSMC Chief Executive Officer C. C. Wei wouldn’t discuss where the malware variant originated, nor how it made it past the company’s security protocols -- a black eye for a corporation that prides itself on its technological and operational superiority. No hacker targeted TSMC, Wei said, explaining that the infected production tool was provided by an unidentified vendor. The company is overhauling its procedures after encountering a virus more complex than initially thought, he said.

“We are surprised and shocked,” Wei told reporters. “We have installed tens of thousands of tools before, and this is the first time this happened.”

Chief Financial Officer Lora Ho said the incident would have some impact on TSMC’s 2018 profit, declining to elaborate beyond an earlier warning that third-quarter gross margins would slip by about a percentage point.

This is the first time a virus had brought down a TSMC facility. The incident underscores the global nature of the technology supply chain, in which companies like Apple and Qualcomm Inc. depend on hundreds of suppliers around the world.

WannaCry spread across the globe in May 2017, rolling through corporations from FedEx Corp. to French carmaker Renault SA and infiltrating Russia’s interior ministry as well as British hospitals. Thought to have emanated from North Korea, it gave victims 72 hours to pay $300 in bitcoin or cough up twice as much, threatening a permanent loss of data. Wei said the variant that infected TSMC didn’t demand a ransom.

The rogue code was ultimately estimated to have infected hundreds of thousands of computers that run Microsoft’s Windows, in thousands of companies in about 150 countries. The ransomware however was considered unsophisticated and was quickly contained.

Gene Munster, co-founder of Loup Ventures and a long-time Apple watcher, agrees with other analysts that iPhone production is unlikely to be delayed but says the virus incident could affect Apple’s relationship with TSMC. “My sense is that this is an issue for Apple because they’re going to take TSMC’s security problem more seriously than any other company," he said. "Apple believes so strongly in privacy and security that this is something that could impact their relationship with TSMC.”

--With assistance from Emily McCormick and Mark Gurman

Bloomberg News