Taiwan's March factory output slip from 4-year peak

Soaring costs, crumbling supply chains, and a jobs dip signal the war's toll is only beginning.

Taiwan's manufacturing PMI retreated sharply in March from its highest reading in over four years as the war in the Middle East hammered supply chains and drove input costs to near their steepest level in nearly four years — even as the island's chip and AI-driven expansion held its ground.

The S&P Global Taiwan Manufacturing PMI fell to 53.3 in March from February's more than four-year high of 55.2, pointing to a slower but still solid improvement in the health of Taiwan's manufacturing industry. Operating conditions have now improved in each of the past four months.

The headline number masked a more troubling story beneath. Output and new orders both expanded at softer rates, though ones that remained strong historically, with firms raising production in line with customer demand. New orders recorded their second-sharpest growth since December 2024, underpinned by robust appetite for semiconductors and AI-related technology from customers across Europe, Japan, mainland China, and the United States.

The supply chain picture deteriorated rapidly. A combination of strong input demand and war-related disruption drove vendor performance to its worst since May 2022, with delivery times lengthening at the most pronounced rate in nearly four years. Firms responded by stepping up purchasing for the fourth consecutive month — partly to keep pace with orders, and partly to get ahead of anticipated further price hikes.

Cost pressures intensified sharply. Average input costs rose at the second-steepest rate in nearly four years, driven by higher prices for raw materials and oil amidst supply chain disruption, with manufacturers passing the burden on to customers by raising output charges at the sharpest pace since June 2022.

Despite the strong top-line performance, cracks appeared in the labour market. Employment fell for the first time in three months in March, albeit marginally, with businesses citing the non-replacement of voluntary leavers as the primary cause. The result was a further sharp accumulation of backlogs, with the rate of outstanding work building at the second-quickest pace since the start of 2022.

Business confidence held up, but was tinged with caution. Sentiment on the year-ahead outlook remained close to February's 21-month high, with firms anchoring their forecasts to expectations of stronger global demand for AI-related products. A number of manufacturers, however, flagged concern over the war's impact on supply chains and prices.

S&P Global Market Intelligence economics associate director Annabel Fiddes said Taiwan's factories had delivered a solid first quarter overall, but the risks were sharpening. "The conflict in the Middle East weighed on conditions in March. Firms reported a further sharp rise in costs, while supply chain performance deteriorated at the quickest pace since mid-2022," she said.

Fiddes warned the second quarter could prove more testing. "Uncertainty over the duration of the war and its broader impact on global supply chains and energy markets could continue to dampen momentum in the second quarter, especially if product shortages and price pressures intensify," she said.