AI demand sustains factory expansion

SUPPLY BOTTLENECK: Shortages of substrates and other essential parts delayed AI server deliveries, while manufacturers faced longer lead times and higher costs

• By Crystal Hsu / Staff reporter

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Taiwan’s manufacturing sector continued to expand strongly last month, buoyed by robust artificial intelligence (AI)-related demand, although shortages of key components are delaying some AI server shipments, the Chung-Hua Institution for Economic Research (CIER, 中華經濟研究院) said yesterday.

The manufacturing purchasing managers’ index (PMI) eased to 62.5 from 63.4 a month earlier, while the non-manufacturing index (NMI) fell to 55.4 from 56.9. Both remained well above the 50-point threshold separating expansion from contraction, indicating that business activity continued to grow, the CIER said.

CIER president Lien Hsien-ming (連賢明) said the manufacturing sector remained on a solid growth path, with AI-related demand continuing to support production and orders.

Chung-Hua Institution for Economic Research president Lien Hsien-ming speaks to reporters in Taipei on Oct. 16.

Photo: Liao Chia-ning, Taipei Times

However, supply constraints involving key raw materials and components have become a growing obstacle, preventing some manufacturers from shipping products as scheduled, he said.

The problem is particularly evident in AI servers, which require a large number of components to be assembled into a finished product. A delay in obtaining even one critical component can hold up the entire production process, Lien said.

Memory chips are not the only bottleneck, as substrates have also become increasingly difficult to secure, he said. Substrate production is constrained by limited capacity, while some upstream materials are sourced from Japan, making the supply chain vulnerable to disruptions at multiple stages, he added.

The CIER’s survey showed that the new orders index remained robust at 63.2 last month, indicating continued growth in demand.

However, the backlog of orders index fell to 53.9, its slowest expansion since January, amid continuing production and delivery difficulties, the CIER said.

Meanwhile, the supplier delivery times and raw material prices indices remained near 70, reflecting longer delivery times and persistent cost pressures as companies compete for increasingly scarce supplies, it said.

Asked whether the simultaneous declines in the PMI and NMI signaled that the economy had peaked, Lien said it was too early to draw such a conclusion.

Both PMI and NMI measure changes in business activity from the previous month, rather than the overall level of activity, Lien said. As both remained above 50, the readings indicated continued expansion, not an economic downturn, he said.

Lien also cautioned against assuming that the AI industry could sustain its current growth pace indefinitely. As production capacity expands and the industry’s base becomes larger, maintaining annual capacity growth of 20 percent to 30 percent will become increasingly challenging, he said.

Nevertheless, manufacturers remain optimistic about their business outlook, as the six-month business outlook index rose to 61.7 last month, staying above 60 for the 10th consecutive month.

The services-oriented NMI also registered its 20th consecutive month of expansion, although at a slower pace, Lien said.

Travel fairs, department store anniversary sales and major online shopping festivals this month are expected to boost retail, hotel and restaurant sales, he said.