VIDEO - Defining disaster in Japan: Impact on Japanese and global electronics industry supply chains

Japan represents 10% to 15% of global electronics demand but 16% to 30% of electronics component supply. OEMs with meaningful cash positions are trying to pull in orders, buying up available component supplies. Taiwan printed circuit board companies like Kinsus and Unimicron could see bigger negative impacts.

The recent earthquake and resulting tsunami impacting Japan have wreaked havoc on the island nation on a grand scale. With the threat of absolute nuclear disaster lurking all eyes are focused on Japan as events continue to unfold.

Japan regional analysis (what’s different this time?)
Shun Maruyama, opining on strategy for investment bank Credit Suisse writes in one analysis the bank compares the great Hanshin-Awaji (Kobe) earthquake in January 1995 with the Sendai earthquake.

The Kobe earthquake was confined to a comparatively small area, so manufacturing was switched relatively quickly to areas not affected by the earthquake and exports / imports were re- routed to other ports.

There was only a limited decline in overall economic activity, as consumers in areas not affected by the earthquake only cut back on consumption for about one month.

In comparison, the Sendai earthquake has affected a relatively large area and manufacturing plants are also located within this area, so manufacturing may not be quickly substituted elsewhere and distribution delays are likely.

Maruyama also indicates in his repot the bank expects Japanese consumers to curb consumption for a long period across a wide swathe of the country, including the Tokyo metropolitan area, which is being affected by strong aftershocks, so manufacturing, spending, and other economic activity is likely to decline for more than one month.

Japan electronics sector / industry
Japan is a strong supplier of upstream components and materials in the electronics supply chain.

Reaching beyond Japan’s coastline and taking a look at business implications in electronics industries worldwide, Japan represents 10% to 15% of global electronics demand but 16% to 30% of electronics component supply according to a recent report by Citigroup Global Markets.

One report from Credit Suisse states the firm expects supply issues impacting the electronics supply chain will last one to three months with the greatest risks being felt in the supply of bismaleimide-triazine (BT) resin which is used for making substrates to attach electronics chips (used in smartphones / handsets) to printed circuit boards; silicon substrate, display glass (TVs, monitors…), semiconductor equipment and aluminum HD substrates.

Untold risks that could further impact the report’s findings include the degree of threat from the nuclear situation in Japan, impact of rolling power issues, impact of water issues, and transportation and logistics issues.

Global electronics demand v. supply
In looking at the global electronics supply chain where overall demand is concerned, Citigroup estimates Japan accounts for, approximately:

• 9% of worldwide GDP
• 14% of worldwide electronics production
• 11% of worldwide semiconductor demand
• 3% of worldwide handset demand
• 5% of worldwide PC demand

Meanwhile, Japanese supplies to the worldwide electronics industry amount to:

• 50% of the supply of semiconductor silicon substrate
• 21% of front-end CMOS semiconductor supply
• 16% of back-end semiconductor supply
• 35% of total LCD glass production
• 56% of total MLCSS production
• 85% of BT resin production

Looking closer at wafers, a separate more detailed report from Credit Suisse discusses Japanese wafer firms Sumco and Shin-Etsu Chemical.

Sumco owns approximately 35% global market share in 300mm wafers, which account for about 80% of operating profits (FY3/11E basis). The 300mm wafer market is becoming increasingly oligopolistic, with Sumco and Shin-Etsu (the top two companies) holding a combined 65% global share.

Sumco has completed construction of new facilities (production capacity of 300,000 to 400,000 wafers / month) in anticipation of expanding demand, but these have yet to become operational.

Shin-Etsu Chemical is also a major global manufacturer of 300mm wafers used in semiconductor production (estimated 30% share).

Figure 1: Worldwide Silicon Wafer Supply

With a large number of new semiconductor factories expected to come on line in 2011, semiconductor manufacturers will naturally need to secure wafers appropriate for their production lines, and should thus more readily accept price hikes from late 2010 to conclude long-term volume contracts.

Impacted area, company reference
Figure 2 illustrates affected areas in Japan while pinpointing locations of particular Japanese electronics company locations. Figure 3 illustrates the expanded dotted line area (see Figure 2), in more detail.

Figure 2: Japan affected area, with Japanese electronics companies

Figure 3: Japan affected area emphasis, with Japanese electronics companies

Taiwan component sector / issues amid Japan disruption
An alternate report by investment bank Credit Suisse indicates the firm believes the printed circuit board IC substrates market (mainly BT) could likely see bigger negative impacts.

Printed circuit boards
Among Taiwan PCB companies the bank covers, Credit Suisse believes that BT-based substrate companies such as Kinsus and Unimicron may see bigger negative impacts, as the key material is mainly supplied from Japan with potential production outage currently at Mitsubishi Gas Chemical.

Meanwhile, the impact on flexible printed circuit boards (FPCB) is mainly due to production outage from JX Nippon (Japan), which accounts for 75% of the global output for RA foil.

However, the bank believes this can be partially offset by second sourcing such as Furukawa Copper Foil Taiwan, Taiwan Copper Foil and Olimbrass (US).

The impact on rigid printed circuit board production should be relatively limited if there is no disruption for end-product demand. This is because the majority of the raw materials for PCBs have been supplied by non-Japanese companies.

Optical lens
The impact on optical lens sensor components is limited, as Omnivision is now the biggest optical sensor supplier globally. High-end producer Kantatsu (Japan), has one factory located in Fukushima that has been impacted by the earthquake.

Passive components
Murata has two factories (Sendai and Tome) impacted by the earthquake. Based on Credit Suisse Japan analyst, Akinori Kanemoto, Murata’s Sendai factory makes SAW duplexer and SAW filters, and Tome is produces RF inductors. The investment bank believes no alternative Taiwan company is capable of producing these three products for handsets with large volume at the current stage.

Crystals
The global number one crystal oscillator maker, Japan-based Epson Toyocom, announced its operations had shutdown following the earthquake.

Keypads
According to Bloomberg, Shin-Etsu Chemical may be one of the companies hurt the most by the earthquake in Japan. However, the factory Shin-Etsu Chemical has stopped operation mainly to make silicon wafer, instead of silicone rubber (the key raw material for keypads).

Factory damage may be smallest of problems
An informal survey among contacts in the global electronics manufacturing services (EMS) and electronics components manufacturing community by Credit Suisse revealed the following key points:

Focusing on factory damage
EMS and component industry contacts suggest that most analysis of customers and suppliers is only digging one layer deep and focusing on assessing factory damage. Similarly, the investment bank believes some investors are only digging one layer deep, asking about company footprint and revenue exposures in Japan.

While the bank has estimated these exposures among companies it covers, it believes such estimates do not accurately evaluate relevant risks.

Credit Suisse goes on to say in its report its contacts believe the biggest near-term disruptions in supply and demand will be driven by (1) infrastructure, including power, water, gas, and transportation, and (2) second-order suppliers, including subcontractors and raw material suppliers.

Regarding infrastructure and the supply chain, a press release by IHS iSuppli released last week indicates the research firm anticipates the global electronics supply chain has about two weeks of excess component inventory in the pipeline for semiconductor parts affected by the earthquake.

Based on this forecast, IHS iSuppli feels any shortages won’t begin to appear until the end of March / beginning of April time frame.

Expect impact to be inconsistent among manufacturers
Credit Suisse contacts are telling the bank that some OEMs (especially private companies with meaningful cash positions) are trying to pull in orders (buying up available component supply). The industry can likely expect this to cause inconsistent results among manufacturers in Q1 – Q3, with some companies exceeding and others missing expectations.

Figure 4: Exposure to Japanese companies

Japanese companies producing indispensable materials and products
Another report by Credit Suisse speaking to Japanese products including autos, semiconductors, and LCD TVs highlights  “White Paper on Manufacturing Industries (Monodzukuri) 2010″, where the Ministry of Economy, Trade and Industry (METI) provides data on global market shares of Japanese companies for various end products and components.

According to this white paper, total sales and global market share for end products of Japanese companies are as follows:

• automobiles ¥54tn, 32%
• electronic equipment ¥25tn, 22%
• LCD TVs ¥3tn 44%
• digital cameras ¥1.8tn, 75%
• multifunction printers / copiers (MFP/MFC) ¥730bn, 69%

Additionally, total sales and global market share for Japanese companies in components and materials are:

• wire harnesses ¥2.2tn, 58%
• continuously variable transmissions (CVT) for autos ¥400.7bn, 92%
• electronic components ¥9.4tn, 43%
• display devices ¥2.9tn, 25%
• polarizers ¥473bn, 64%
• protective polarizer film for LCDs ¥283.7bn 100%
• overall semiconductors ¥6.4tn, 22%
• silicon wafers ¥845.8bn, 72%
• lithium-ion batteries for mobile phones ¥159.9bn, 46%
• electrode materials for lithium-ion batteries ¥137.8bn, 78%

Chart 1: Japanese companies global market share (FY08 base)

Chart 2: Japanese companies global market share (FY08 base)

Japanese corporations looking at next-generation industries
Looking into the future relative to next-generation industries, Credit Suisse goes on to say while Japanese companies have high market shares in some product categories such as digital still cameras (DSC) and MFPs / MFCs, they have high shares in a broader range of component and materials categories.

According to the white paper, Japanese manufacturing companies are also aggressively entering many next-generation industries.

In fact, a survey of 2,102 companies revealed 12% of Japanese manufacturing companies had entered or were preparing to enter the market for solar power generation or solar cells.

For hybrid vehicles and electric vehicles, the corresponding percentages were 12% and 8.6%, respectively.

Traditionally, Japanese manufacturers have adopted a structure wherein set makers at the top of a hierarchy developed close relationships with component and material makers.

In next-generation industries, however, makers of major components and materials have become increasingly influential, although set makers remain powerful.

Changes in prominence among set makers, component makers, and material makers within various industries driven by the shift to the next generation can be seen below.

Chart 3: Change prominence – industries transition next-generation

Credit Suisse believes this shift will allow Japanese companies manufacturing indispensable materials to strengthen their positions within their industries.

Sources: Citigroup, Credit Suisse, IHS iSuppli, VentureOutsource.com