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In Electronics, Japan Still Matters

In: Business and Management

Submitted By imlemon
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In Electronics, Japan Still Matters
Posted by: Bruce Einhorn on March 17, 2011 In the global technology industry's pecking order, Japanese consumer electronics companies long ago surrendered their top spot to more nimble competitors like Samsung Electronics andApple. Many of the country's chipmakers also struggled as competitors in Korea and Taiwan thrived. Meanwhile, marketing executives at major multinationals turned their attention to China and India, the world's new economic powers. For many, Japan was largely an afterthought, a declining power with an aging population.
The turmoil following the March 11 earthquake has provided a rude reminder that, when it comes to the global electronics industry's supply chain, Japan still matters. The country's factories produce about one-fifth of the world's semiconductors and 40 percent of electronic components. Japan's Mitsubishi Gas Chemical and Hitachi Chemical combined make almost all of the world's BT Resin, a raw material used in chip packaging, and Hitachi Chemical has 70 percent market share for a type of chemical slurry used by semiconductor producers for polishing chips. Tech executives and investors therefore should be worrying about a prolonged shutdown of production in Japan, where many factories are closed and there's no clear sign of how much damage they suffered or when they might reopen. Typically, big chipmakers likeTaiwan Semiconductor Manufacturing Co. keep between four to six weeks of supply, so uncertainty about maintaining supply from Japan is not a problem -- for now. However, "all these Japanese companies are not able to give us an estimation of when they are able to resume their production," says Warren Lau, an analyst in Hong Kong with Samsung Securities. He warns there could be "some destruction" in the supply chain that could cascade down to affect companies like Apple.
One Western company that might feel the pain soon is Nokia, a major purchaser of Japanese components for mobile phones. The region hit by the earthquake, tsunami, and nuclear accident is home to many manufacturers of those parts, and the disaster is likely to hit the handset industry the most, according to a March 14 report by Barclays Capital. For Nokia, finding other sources in the event of an extended disruption to the supply chain won't be easy, Barclays analysts wrote, since the struggling Finnish company's "declining market share has reduced its once legendary ability to procure alternate supply."
As they wait to see if and when the power comes back on at Japanese factories, companies are trying to trying to find back-up suppliers. In some cases, though, there aren't viable alternatives that can produce in the scale that companies need. "The shortfall of supply will be so huge," says Samsung's Lau. "These companies will have to make difficult decisions."

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