The one aspect of the Japanese crisis that has so far received little attention is the component parts crunch that is starting to create its own earthquake through the supply chain. From Kyodo: "Concern over a shortage of components for manufacturers is spreading globally as many Japanese companies have been forced to suspend production in the aftermath of last week's devastating earthquake. Some of the effects have already surfaced, with U.S. automaker General Motors Co. suspending operations at a plant in Louisiana, while Chinese companies that rely on Japan-made parts are rushing to buy semiconductors." And while none of this matters to markets still basking in the radioactive warmth of the Bernanke Put, some are already sensing the impact on everyone's darling stock - Apple. iSuppli reports that the Japan quake could create iPad and iPhone shortages, a meme that is already pushing AAPL stock down. "The aftermath of the Japanese earthquake may cause logistical disruptions and supply shortages in Apple Inc.’s iPad 2, which employs several components manufactured in the disaster-stricken country—including a hard-to-replace electronic compass, the battery and possibly the advanced technology glass in the display, IHS iSuppli research indicates. The IHS iSuppli teardown analysis of the iPad 2 so far has been able to identify five parts sourced from Japanese suppliers: NAND flash from Toshiba Corp., dynamic random access memory (DRAM) made by Elpida Memory Inc., an electronic compass from AKM Semiconductor, the touch screen overlay glass likely from Asahi Glass Co. and the system battery from Apple Japan Inc." And the last nail is that as more production scrambles to be pushed to other locations, margins will plunge for all tech companies, forcing a wave of preannouncements within 2-4 weeks and crushing bottom lines. Welcome to the re-depression.
From Kyodo on the big picture:
In the auto industry, Toyota Motor Corp. has stopped overtime and holiday work at all of its 14 plants in North America as procurement of parts will be suspended for the time being, while their stocks of components will only last around two weeks.
As the automaker imports about 20 percent of the parts used to manufacture vehicles in the United States from Japan, the scale of its output suspension could expand if production at companies including parts manufacturers continues to be disrupted in Japan.
Due to the effects of the magnitude 9.0 quake that struck northeastern and eastern Japan on March 11, Toyota has postponed the opening ceremony for its new plant in India to make the Etios compact car, while requesting its employees in Thailand to stop working overtime.
As the Japanese carmaker's Thai plant imports components from Japan to manufacture such vehicles as the Prius gas-electric hybrid car, Toyota plans to adjust production capacity by shortening work hours.
Among non-Japanese automakers that have been affected, GM has decided to stop production at its assembly plant in Louisiana due to the suspension of parts imports.
An official of major Swedish automaker Volvo said Japan's situation is deteriorating by the minute, expressing concern that the world's auto industry is likely to face production problems if parts procurement difficulties are prolonged.
In Asia, South Korea, a leading shipbuilder, is facing a suspension of steel imports from Japan as a number of steelmakers including Sumitomo Metal Industries Ltd. have been forced to halt operations in quake-hit areas.
And from iSuppli on Apple's problems in particular:
The aftermath of the Japanese earthquake may cause logistical disruptions and supply shortages in Apple Inc.’s iPad 2, which employs several components manufactured in the disaster-stricken country—including a hard-to-replace electronic compass, the battery and possibly the advanced technology glass in the display, IHS iSuppli research indicates.
The IHS iSuppli teardown analysis of the iPad 2 so far has been able to identify five parts sourced from Japanese suppliers: NAND flash from Toshiba Corp., dynamic random access memory (DRAM) made by Elpida Memory Inc., an electronic compass from AKM Semiconductor, the touch screen overlay glass likely from Asahi Glass Co. and the system battery from Apple Japan Inc.
There potentially are other components from Japan in the iPad 2, however, the teardown analysis process cannot always identify all components’ countries of origin.
While some of these suppliers reported that their facilities were undamaged, delivery of components from all of these companies is likely to be impacted at least to some degree by logistical issues now plaguing most Japanese industries in the quake zone. Suppliers are expected to encounter difficulties in getting raw materials supplied and distributed as well as in shipping out products. They also are facing difficulties with employee absences because of problems with the transportation system. The various challenges are being compounded by interruptions in the electricity supply, which can have a major impact on delicate processes, such as semiconductor lithography.
Furthermore, semiconductor facilities in Japan that had suspended manufacturing activities following the quake cannot truly commence full production again until the aftershocks cease. “Earthquakes ranging from 4 to 7 on the Richter scale will make it impossible to really restart these fabs until the earthquakes stop happening with such frequency,” said Dale Ford of IHS. “Every time a quake tops 5, the equipment automatically shuts down.”
These issues may come at a time when Apple is rushing to ramp up iPad 2 production to meet stronger-than expected demand for the device. The company this week announced that iPad shipments from the Apple Store have been delayed by one week from previous lead times because of the surge in demand.
Apple’s supply of NAND flash has come under scrutiny in light of a temporary suspension of production and the resulting scrapping of some wafers at Toshiba’s main NAND production facility. However, the NAND devices used in the iPad are available from alternative sources, including South Korean semiconductor giant Samsung Electronics Co. Ltd. and U.S. memory maker Micron Technology Inc.
Similarly, the Elpida DRAM component can be alternatively sourced from Samsung.
The compass and glass supply could prove to be more problematic issues for Apple. Although AKM said its fab that produces the electronic compass used in the iPad was undamaged by the quake, the company's shipments are likely to be impacted by the same logistical issues that will plague all Japanese industries during the short term.
Compasses are available from other sources including Yamaha, Aichi Steel, Alps and STMicroelectronics. However, these components are not easily replaceable.
“The calibration of electronic compasses is tricky for a number of reasons,” said Jérémie Bouchaud, director and principal analyst for MEMS and sensors at IHS. “Compasses are sensitive to electromagnetic interference. Furthermore, the iPad 2’s compass works in close coordination with the tablet’s accelerometer and gyroscope. This makes it impossible to simply replace one manufacturer’s compass with another.”
The glass used in the iPad 2’s touch screen overlay could present another supply problem for Apple. While the supplier of this glass cannot be confirmed with certainty, the concurrent release of the iPad 2 and the new Dragontrail Glass technology from Asahi Glass of Japan has led to speculation that Asahi may be the supplier of this durable new glass, according to Kevin Keller, principal electronics analyst for IHS.
Physical tests conducted by IHS reveal that the iPad 2 glass is more flexible and durable than the glass used in the iPad 1, possibly indicating that the glass is Asahi’s Dragontrail.
Asahi Glass reported damage to two of its facilities and damage at a third.