Global Supply Chain Rises to Japan Disaster Challenge

In a testament to the resilience of the global technology supply chain, the electronics manufacturing services (EMS) industry appears to have weathered the impact of the Japan earthquake and tsunami with admirable aplomb.

Conditions on both the supply and demand sides of the equation appear to be better than expected. Meanwhile, the electronics supply chain has pulled together to mitigate the impact of supply disruptions caused by the disaster.

As IHS iSuppli noted last month, the global EMS business had little direct exposure to the situation in Japan. (See: Japan Disaster Rewrites Book for Manufacturing Risk Management.) True, EMS providers were expected to be hit by constrictions in the availability of electronic components and raw materials, but that impact is still being assessed. And despite supply issues, reports so far reveal reasonably solid results and a healthy outlook for the second quarter across the global electronics supply chain.

Excluding companies with direct manufacturing or revenues in Japan, aggregate demand appears to be holding up slightly better than many experts had feared when the disaster struck. EMS providers with direct manufacturing assets in Japan are noting that production has restarted, but activity is likely to remain lower than previous levels because the basic infrastructure is still recovering. The only glaring shortages at the moment are to be found in the global automotive market, where Japanese sub-suppliers command very high global share.

The impact on parts procurement also has been slightly less than expected, as EMS providers are not citing component shortages as a reason for revenue shortfalls in the first quarter. As opposed to a couple of years back when every market was declining, EMS providers are generally noting strong bookings on new business opportunities. This is because OEMs once again are placing increased outsourcing back on the table.

One takeaway of the tragic events in Japan is the supply chain's capability to adjust to the lost production there during the month of March. It appears that the sharp focus of EMS providers in 2011 on improving inventory velocity has taken a backseat to their efforts to secure component availability on behalf of their OEM customers.

Several of the larger EMS providers already are receiving advanced deposits from customers in order to offset pre-purchased buffer inventory. The fact that OEMs are helping to shoulder the burden in this area is a positive development, IHS believes.

Just the same, a very large "what if" still looms in the third quarter, and the potential exists that supply shortfalls arising from the Japan earthquake could collide with the start of the rise of strong demand for EMS during the period before the peak holiday selling season. So far, however, the global electronics supply chain is rising to the challenge of the Japan earthquake.

— Thomas Dinges is the EMS and ODM analyst at market research firm IHS iSuppli in El Segundo, Calif. For more information on the contract manufacturing market, see Dinges’s new report, "EMS and ODM See Near-Term Pause on Road to Recovery." For media inquiries on this article, contact Jonathan Cassell, editorial director and manager of public relations, at jonathan.casell@ihs.com. For non-media inquiries, please contact analystinquiry@isuppli.com.