Potential Impact of Japan's Earthquake on Electronics & IC Markets

The strongest earthquake ever recorded in Japan occurred last Friday at 2:46 p.m. local time. The earthquake and resulting tsunami were so powerful the island shoreline was moved 8 feet (and the speed of the Earth's rotation was increased by 1.6 microseconds!). Following the massive 8.9 magnitude earthquake was a tsunami that unleashed further devastation.

In the ensuing hours, additional damage reports coming from Japan reveals how devastating this quake really was. Two nuclear facilities with a total of five reactors suffered severe damages. One facility that contains three reactors is an older General Electric design commonly found in the US as well. As of today, there have been two explosions. An explosion shattered the building housing the nuclear reactor on Saturday. Although government officials are claiming that the metal containment vessel surrounding the reactor is still intact, clearly the situation is getting worse, not better. Rods have been exposed twice, resulting in a partial meltdown.

At this point, the best-case scenario will be to stop the nuclear reaction, cool the facility down, encase it in concrete, and abandon the facility. This would leave Sendai in an electricity deficit from the closure of three to five reactors. This certainly will cause some problems for the semiconductor and related manufacturing facilities in this area as they are electric power hogs.

Heavy damage is reported within a 200km radius of Sendai. One of Japan's largest oil refineries is on fire, and there were reports of multiple fires in Tokyo, which is almost 200 miles from Sendai. Gas lines in the area have also been severed.

Japan is a significant producer and consumer of semiconductors. In addition to memory products such as NAND flash, Japan is the largest supplier of discrete devices, including such products as power MOSFETs. These products are used in all electronic devices; NAND flash is a key component for many consumer and communication products. A small disruption in the supply chain can cause significant price increases for at least a limited time.

The Semico Research Corp. Fab Database lists more than 100 fabs in Japan. Freescale Semiconductor Inc. has a fab in Sendai, although our records indicate the company was intending to close the Sendai fab by the end of this year. The fab produces microcontrollers and sensors. Renesas Electronics Corp. (Tokyo: 6723) seems to be enduring the most impact as it maintains several fabs in the Tokyo area. The company has closed several fabs indefinitely. Renesas is a major microcontroller supplier.

Toshiba Corp. (Tokyo: 6502), a key NAND supplier, maintains its Flash Alliance and Flash Partners fabs in Yokkaichi in the Mie Prefecture over 200 miles south of Tokyo. While Toshiba shut down a number of fabs for inspections, they are now back in production. Toshiba is the main manufacturing partner for SanDisk Corp. (Nasdaq: SNDK) in its sector. Most of the other semiconductor fabs are located in the southern regions of Japan.

Many fabs halted production as a result of the disaster. The financial impact would include any equipment damage and loss of work in process. Companies will assess any damages and will most likely resume production based on availability of reliable electricity. Rolling blackouts could be the biggest challenge to running wafers through the fab plants.

In addition to electricity supply, there was some concern over the future supply of silicon wafers. Shin-Etsu Chemical Co. Ltd. and Sumitomo Mitsubishi Silicon Corp. (SUMCO) both maintain facilities in Japan and supply a significant portion of the silicon wafers used in the worldwide production of semiconductors. Many of the large manufacturers have released statements indicating no issues relating to silicon wafer supplies. Wafer production at some facilities has resumed as the companies work around the rolling blackouts.

Semico believes the quake may have significant impact on Japan’s semiconductor production this quarter, but the impact should be minimal, relative to total world production for the year. It is early in the year, and there is still time to recover for the peak production months of electronic products that typically occur in the second and third quarters of each year. Towards the end of last year, inventories were starting to grow, and there was a concerted effort by companies to reduce inventory levels. It would now appear that a little bit of excess inventory in products that come from Japan will be a windfall for those companies.

There could be a short-term positive impact for GlobalFoundries Inc. Its multiple fab locations are a definite plus. Companies may review the vulnerability of their foundry supply partners' susceptibility to earthquakes. But our memories are short. Even after the 1999 earthquake in Taiwan, companies continued to utilize the foundries in Taiwan.

Japan is a significant consumer of semiconductors. According to Semiconductor Industry Association (SIA) /World Semiconductor Trade Statistics data, Japan accounted for 19 percent of total worldwide discrete sales and 14 percent of total IC sales. This represents Japan's semiconductor consumption and has significant impact on production of electronic systems. Production of automobiles, consumer electronics, and certain industrial parts for aircraft and heavy equipment could be delayed.