Japanese Earthquake’s Implications for Electronics Supply Chain

What are the considerations given to the safety of all in the supply chain regarding the export of radioactive dust into the supply chain especially from the factories that are within 100miles of the nuclear reactor melt down? What is the clean up effort going to look like and how adversely will this decrease the supplies from Japan?

Thanks Malcom

It was a very interesting discussion...thanks for organizing it, Bolaji and thanks to Malcolm for his views :)

Thanks for your perspective on this.

Like I said ... this is going to have far-reaching impacts

Malcom, Toshiba Corp said that the assembly unit in Japan near Tokyo making small liquid crystal displays for Smartphone’s and other devices will be closed to repair sensitive equipment knocked out of alignment for a month. Toshiba plant supplies navigation displays of mobile phone industry and auto makers. Their contributions from two factories, including the one still operating account for about 5 percent of the global small LCD display market.

So the recent happenings in Japan is going to affect more in telecom sector especially in smart phone and tablets. So according to you, how they can over rid such problem in near future

Thanks Malcolm for telling it like it is!

Thank you Malcolm Penn, very clear and helpful information .

Malcolm, Thank you so much for participating and to all our readers. We would love to have you back sometime to address the subject of foundries. Thank you all for taking part. This concludes today's live chat with Malcolm Penn, founder and CEO of research company Future Horizons.

Thanks Malcolm, for sharing your views.

Money also tells lies ... ask the financial commuinity there good at that !!!!!!!

It doesn't have longevity or loyalty.  Money talks...nothing else.  That's why the Apples of the world will be least affected

I'd like to think tha one of the good things from this is a hard look at the way we run this industry.  Whewre though will the leadesrship come from ??  Bolaji ... over too you :-)

The current industry business model is broken.  We;ve been saying this for ages but everyone has ignored us or though me quait but mad (stupid!)  It's built oin zero committment / something for nothing ... sorry, that doesn't have longevity

Malcolm, the industry is still reeling from this as noted in the statement you put out about postponing your conference that was supposed to take place in May to later this year. What do you expect for the rest of the year and when do you see some form of normalcy in the market? Any last words before we wrap up for today?

If I may...I can tell you what the smarter OEMs are doing right now. They are calling their suppliers and distributors and checking on open orders. They are making sure those can be filled--meaning do you have the stuff on the shelves? If there is any doubt of that, they are going down their supply chian tier by tier and seeing who has inventroy and who doesn't.

OK Anna ... ple contact me afterwards

Yes movement of goods by land (and air) is still disrupted, but in the soirt term inventories (albeit low) will smooth this

Can you list out the immidiate and long run consiquencess

Malcolm, If you can, I would like your key takeaway from this discussion and your best practices suggestions for supply chain professionals in the current situation. I realize there are immediate and longer-term concerns and would appreciate your breaking these out.

Do companies really have a diverse supply chain?? I think not.  They think they do and on paper it looks that way but when you peel bacl the onion you start to see lots on mega-dependencies on one or two ket suppliers.  Real supply chain management would sort this out.  When was the lkast time anyone did a What if scenario?

Capacity has no value if it's not being used--that's the insane thing about this model

What about the issues with the movement of goods via land? I would expect the companies to be facing this issue as well..

Two week after the earthquake and tsunami in Japan, the full extent of the disaster is still unfolding. For the global tech industry, at this point of time there is no significant near-term impact on supply chains but can cause damage in long term effects for business.  Many companies have a diverse global supply chain that enables them to mitigate risk in many areas. Malcom how companies can overcome such a situation

Fams wer running flat out before the crisis and this was going to get worse anyway due to the builkd up for Q"-Q£.  There IS no spare capacity to take up the slack, even asssuming you can get all if the substrates that you want, which you cant

Malcolm--amen to that. But Apple is only the darling as long as they can deliver

And the electricity in Japan depends a lot on the output from nuclear plants that have been shuttered. Even the nuclear fabs that were not impacted by the earthquake are being examined for safety. Meanwhile, Japan cannot import electricity so it must somehow find a way to generate this to satisfy demand at companies. This is the bottleneck we see in the horizon.

Nemos: Most are, yes, becuase of the ability to raise capital

Companies like Apple can stand up to the street's worst excesses ...  firms are there to provide good product6s that peoiple want to by and by so doing make lots of money and profit.  The street wants the latter without the former :-)

Do you see any other fabs picking up the slack and filling in the shortfall, thus minimizing impact on IC supply?

Barbara , but most of the Companies they are in the street or not ?

I read your report on foundries and know moderately well you do not agree with the current model. Again, while I don't disagree, I believe the industry did and is doing what they think is best for their businesses. I would like to know in more details what other model you believe should replace the ongoing concentration of wafer manufacturing at a few companies and in Taiwan. I also think it is possible that new foundries will be established in future and they may even be able to take on the like of TSMC. Until AMD spun off GlobalFoundries the capacity it now offers was not available so perhaps the outlook for the foundry business may not be as gloomy as you think.

Not yet ... we don't do 'tabloid' headline grabbing market research and there is no data out there at the moment to make any judgement on to sat this will be down 4%, 40%, 10%, no impact etc.  Our feeling is that unit demand will be down but ASPs and product mix may counter balance this.  Q2 will be OK IC sales wise, Q3 will be hit, Q4 back on track??  It all depends on when factories and the supply chain can resume normal wotrking.  That needs a reliable electricity supply

Hallow from Dr.Toms

anandvy--i personally think privately held business that dont have to answer to the Street can make investments as they see fit. But companies like Apple are dependent on the street to raise capital. Companies have to have the guts to invest int he long term and not worry what the street says or does.

I think Bolaji has pointed out that TI did some stuff that was unpopular with analysts at the time but has serevd them well a few years later--that's one example

One thqat rewards companies that grow not massage their balance sheets for short-term cosmetics.

Are you and other research firms changing your forecast for the industry for the year as a result of this development?

I don't think these 'fires' will be put out that quickly but it will take real industry courage to break the bad habits and go back to a better (and more efficient in the long-term) way of doing things

The street is another time expired business model -- What do you think is the appropriate business model ?

:)

Anna - I agree.  This is a hot topic right now because we are living through the crisis.  Once everything is up and running again, people will forget and go back to doing status quo business

The street will do what the street does best !!!  Dump the shares and then buy themn back at a profit.  The street is another time expired business model

To Bolajis point--it is the commodity stuff--memory etc.--that is taking the hardest hit. You dont need state of the art fabs to churn this out, and even though it's not where the money and margins are, you can't build an electronics product without it

What I've noticed in the industry is a tendency to quickly put out fires and then resume the bad habits of the past. I don't see the movement towards a realistic assessment of current conditions to push the industry towards a more sustainable supply environment. People hold up Apple as an example. It paid money to secure billions of dollars worth of parts but the strategy addresses immediate needs and not long term requirements.

God when he sreated the world din NOT decree TSMC should be the world's sole firm who could run a fab effectively ... they did that by doung a great job.  The failed IDMs should look in the mirror and ask themselves just what did we do wrong .. it's a bad workman that blames his tools, like wise a bad IC firm that blames his 'expensive' wafer fab :-)

Malcolm--agreed. OEMs have been rewared for operating lean, but now they are not going to be able to deliver product because of running so lean. The iPad 2 will be delayed...how do you think the Street is going to react to Apple whne it misses its targets?

Very few companies can afford a brand new fab but not all semiconductor products require new fabs. Many older-generation fabs continue to run worldwide and will continue for a while.

The old IDM model iwon't come back but there has to be something between today's balck and white alternatives whereby TSMC and possibly GF supplies the whole world with logic.

@anandvy: I think it requires a lot of experienced and skilled labor to operate these and huge initial investments..this is why you don't have them in India

Malcome i totally agree with your thesis we must re exam our business model

Fabs from scratch are in the billions of dollars, but there are a lot of fabs taken offline during the recessions that can be rebooted for less. TI acquired one in China this year. They are not state of teh art but they can get the job done

@Malcome, we dont see any fabs built in India. Do  you find any particular reason for this absence of Fabs in India ?

Procuremnt managers need to relearn how to understand and manage their supply chain and to identify where the supply risks are.  This is what used to be done in the 1980s but sadly is not (was now) taken for granted.  Everyone assumesd they could get all of the poarts they wanted at the drop of a hat fpr ever devreasing priced ... nice business model eh ??

It seems to me the IDM model will not come back. It wasn't discredited  but it continues to be a hard sell to investors spending $3 billion to $4 billion on a new fab. It seems you would wish for electronics industry to support again the IDM model. I don't see it happening. I don't disagree with your thesis; I just don't believe it is realistic.

What is the start up cost for opening up a wafer fab?

Malcolm - I totally agree but everytime I say companies need to move some manufacturing in house, I am told that its price prohibitive.  What's your opinion on this?

You don't need to move all the fabs out of Taiwan necessarily but yoiu do need to reverse this fablite illusion and have firms start to make their own wafers in house agaim, no reason whuy not as a partnership with each other

Malcolm, On a practical level, what should procurement managers be doing right now? If I work at an OEM, I would be bothered by all the negative news from Japan and the supply chain. Yet, I need to ensure the plants keep running, profitably and at highest capacity. What do I need to do or is it just the firefighter approach for now until things calm down?

We need real partnerships not the lip service stuff that meansd e.g. IC firms buying capacity not wafers as with the more professional fabless firms, not so the fablite ones!!! (and paying for the investment as well) ... not so different from being IDM!!

@anandvy:What exactly does eco-innovation comprise of?

Nemos, As Malcolm said we have a concentration of foundries in Taiwan and this industry would have been in worse shape as a result. But can we suddenly move fabs out of Taiwan now in preparation for the next disaster? No. Also, it costs so much to build a single fab few chip vendors are willing or able to invest the funds.

What do you think companies should do to safeguard against this problem?

Foundries were puttoing up prices anyway ... this is now a supply issue; there will not be enough parts to go round at any price

@Malcolm Penn, EU is stressing hard on eco-innovation. Do you this model will work ?

These are all examples of the tail wagging the dog.

Like shipping ahead whern you've got no orders (bit like spendingh money you've not got)

Like selling your buildings and then leasing thenm back (at a cost penalty)

Like outsourcing manufacturing .,.. and losing conbtrom of your producrtt !!!

Anna young " we are scared of what might happen in future." if we dont learn from this i dont thing will be next time......

You had said in a previous post on EBN that prices were bound to go up because of constraints at foundries and also because growth this year will be in the upper single digit (I believe that's what you said). This earthquake will probably push prices up in my opinion. Would this be a correct assumption and if yes, for how long and how much?

These aren't real efficiencies they're spread sheet fantasies!!

Do the job right and you get the right resulkts.

Great, thanks.

Great point, Malcolm. Publicly held companies are under pressure to mimimize inventory so the balance sheet looks better--it's the financial guys who look at inventory on WIP as bad. For those companies that have been able to minimize that--are they going to get slammed now becuase they are running so lean?

Clairvoyant - Just - In- time

Just in time ?

Malcolm, Sorry to be contrarian but companies (and financial firms) were searching for efficiencies and margin improvements. It was impossible to prepare for something you couldn't anticipate or imagine the severity such as an earthquake. The reason why the means of production migrated to where they are today is for efficiencies and also because that's where the skilled people are. I don't believe it is possible to just spread out plants everywhere simply because we are scared of what might happen in future.

That's another problem ... no-one wants to pay for anything or take risks but by doing so are taking the greatest risk of all !!!

For those here that may not know what JIT is, what does it stand for?

I agree, having no control over your supply with a JIT model can put smaller and midsize companies out of business

Nemos ... my guess is end of Q2

@Bolaji: to me, it seems a big risk now to deposit such a huge amount with your supplier when uncertain events like the tsunami can occur any time.

Here's the question I have that Malcolm alluded to earlier: how far off the AVL can companies go to procure components?

Well eemon ... they should.  It's the financial commuity that said inventory and assets and in-house manufacturing was bad, not the operations people!ty

"No security of supply" unless you are the 800lb gorilla and can afford to spend $3 billion like Apple to secure components. Even this does not guarantee supply, though, because earthquakes and tsunamis do not care about the money deposited with a supplier.

How much time do you thing will take to the factories in Japan to be again on truck ?

Plus we noww have too mucg supply concentrated in the hands of two fee (eggs in basket issue) ... what if the quake/tsunami had hit Taiwan?  ALL of the world's SoC logic would be killed.  What if the Netherlands flooded ... No more steppers for anyone etc etc

Thanks Malcolm--nobody really wants to say that, but it is true

Is it possible that there are second and theird tier component suppliers out there that have the materials to manufacture that can step in and fill some of the gaps?

Do you think companies are re-thinking their JIT strategies due to this crisis?

Responding to Barbara's comment, this is an excellent example where having good relationships with suppliers may give you an advantage!

Barbara, Correct. It would be interesting also to see how semiconductor companies respond, especially the fabless ones that may not have the same level of importance at suppliers.

Yes barbars ... peoples have lost touch with the real supply chain dynamics ... even big firms (like Nissan last year).  Deluded by Just in time, they forget (a) it's 6 months from wafer schedule to module in the car plus everyone outsources everything to everyone with no-one taking care of the whole chain ... this is the fallacy of outsourcing; there is NO security of supply

To expand on Malcolm's comment about being first in line...most of the activity at distributors has been with existing customers. It is just now that new customers are entering the fray. Those that do not have relationships with suppliers and/or distributors now are likely to have the most difficult time going forward.

That means you don't think this issue will be contained to the first half of the year?

How long do you estimate before the supply network is back on track?

What sort of impacts will we start to see here in North American because of this situation?

Is there anything that electronic manufacturers in China, Taiwan and Hong Kong can do? These countries have some of the major players in the global electronics market..

If your TSMC, Samsung, Intel ... you're safe ... the 800lb gorilla will get all they want ... Broadcom and Qualcomm therefore are safe but this will really sort out just who are the tier 1, 2, 3 accounts ... substrat allocations in Q2 are definite; things may be better under control in Q3 but these are Q3 and Q4's IC sales ... in other words 2011 is a reasl problem supply wise

I've had some interesting discussions this week with distributors that are reaching out to both suppliers and customers. They say the bigger OEMs have been in touch from the start, and it is the smaller and midsize OEMs that are finally re-assessing their supply chian. Concern is across the braod from semis to IP&E.

Malcolm, are you hearing the same?

Peoples talk about just going to mother suppliwers ... dream on.

There's qualifications to so and iven oif already qualified, current cusatomers will be first in the queue

I think the chip industry as a whole, not just Japan, will have problems.

There has been a hit at SEH, a msjor 300mm wafer substrate supplier.  This shortfall can't be made up very easily.

Then there's the problem of pulling ingots and processing wafers.  you can;t do either with 3hr rolling blackouts

What sort of impacts will we start to see here in North American because of this situation?

So, you mean Japanese companies were not adequately prepared to handle the impact of such a huge natural disaster?

I understand that some industries like the auto industry are already experiencing shortages.  Which industries do you think will be more susceptible by this.

Are there specific industry segments you are more concerned about than others? Can you give us a breakdown of your assessment by industry section?

Well it's the companies responsibiliuty to take care of their supply chain ... nowadays, no-one takes care of this anymore!

Hello from ISM!

To all participants, I would like us to focus all questions on the supply chain. There are issues nobody here would be able to address, including the next developments as far as the containment actions being undertaken for the nuclear reactors. Thank you.

From my understanding the risk here is now over and everytrhiong is safe, but the plant is not operational and electricity supplies are down.  There is no grid as we know it in Japan , even 2 different systems 50[60 Hz so making up from one rewgion to another is tough

Wasn't it part of disaster recovery plan of the Japanese government to also take measures to protect industrial activity and goods movement in disasters like these?

Hi Malcolm,

Who have you been able to speak with in Japan?

Malcolm, is the nuclear situation now stabilized? or we will see more bad pictures in the next days ?

There are several issues.

First the direct disruptions to factories that have been damaged.  These will take some time to restart

Second the infrestructure damage making supply movements difficult

Thirs the electricity problems stopping good factoreies working

finallty theres the problem of workers getting to work (no fuel etc )

These#r enmopugh inventory to keep the nearterm supply working ... things will start to go wrong in 4-6 weeks time

hello from snowy new jersey

If I may start with the first question, Malcolm. Could you please help us understand the scope of the problem facing the industry from the earthquake. What exactly are we looking at or is this still not very clear?

Hello

greetings from Gr, Hello to all

Thank you for participating in EBN's second live chat on issues and major events in the electronics industry. Today, we are hosting a discussion with Malcolm Penn, a veteran of the semiconductor and electronics industry. Malcolm is a well-known voice in the industry and he is founder and CEO of Future Horizons, a semiconductor research firm based in England. He is also a frequent contributor to EBN.

Malcolm is well positioned to address the unfolding development of shortages and other supply chain snafu arising from the Japanese disaster and he has also been active in calling for a wider distribution of and increase in foundry manufacturing capacity over the last year. It's a pleasure having him join us for this chat. Just to underscore the significance of the Japan earthquake, Future Horizons today announced it would postpone its annual International Electronics Forum scheduled to take place in May in Morocco. The conference will now be held in the fall.

OK

Welcome Malcolm. Thank you for joining us for the chat. I will be introducing you formally in a couple of minutes.

Hi everyone ... I'm here

Hi, The Live Chat will start shortly.

hii..anyone here?