My first business reaction to the Friday earthquake in Japan was that it happened in a country better prepared than any other to withstand an earthquake, and that tsunami damage would be limited to a few miles of the coast. By Saturday, I was concerned that electricity was still out and that the country’s transportation system was tattered at best. By Tuesday, I was toting up the real and potential damage to the global electronics supply chain.
The world’s electronics supply chain is a beautiful, enormously complex process that typically runs better than a Swiss watch. But inventories are often measured in days and sometimes hours, as clusters of factories manufacture parts for final assembly with only minimal transportation delays.
When things go wrong in the industry, there are often backup geographical or alternate suppliers that can close a supply-chain gap, since no sane CEO wants to shut factories due to lack of component supply.
Japan’s prefectures of Fukushima, Miyagi, Aomori, Yamagata, Iwate and Akita bore the brunt of the earthquake and tsunami. They are also key — double digit — producers for the global electronics industry of silicon wafers, DRAM memory chips, NAND memory chips, disk drives, passive devices, lithium batteries for mobile devices, and glass for PC and gadget screens — to name just few of the requisite components in virtually every modern electronic device.
So far, none of the major downstream electronics manufacturers (i.e., Sony, Apple, H-P, Acer, Dell) have let out public concerns for anything short of a brief disruption as alternate supply sources are turned on. But note that publicly traded companies are loathe to warn stockholders of potential risks, waiting until there is no way out of announcing bad news. So, the lack of concern on the airwaves is not a positive sign.
The worst case assessment includes widespread nuclear contamination and decades of cleanup, knocking Japan out of its Number 3 spot in GDP. But that worst case has only a fraction of a percent of happening.
The bad case to watch for is a scenario that includes
- prolonged electrical outages and brownouts — a bane of electronics production
- a disrupted transportation system (both internal to Japan and via ships for export)
- an inability to repair and restore damaged factories and production infrastructure
- a months-long period of social unrest caused by an inability to put the earthquake and tsunami behind sufferers due to lack of food, water, housing, transportation, and knowledge of the fate of loved ones
- a faltering government response including leadership, monetary policy, police, and moral suasion.
As of this morning, I’m very concerned that the bad case is quite possible — no one still has the whole scope of the damage, the time it will take to get back to a semblance of a modern economy, and the resulting impact on the global electronics supply chain.
Like the threat of the SARS virus in 2003 closing China’s factories to the world, the earthquake may have wiped out or seriously impacted a double-digit cohort of the electronics components industry. If Japan’s output is inhibited more than a few more days, the impact on Q2-2011 and subsequent quarterly revenues of major electronics products companies will head south quickly.
DRAM prices on the spot market jumped 5% yesterday as companies moved to shore up inventories.
I think the needed process is called “watchful waiting”, an apt expression.