Advertisement

Blog

Is Japan Still a Stable Location for High-Tech Manufacturing?

In the wake of the terrible earthquake, tsunami, and explosions at the Fukushima Daiichi nuclear plant, I think it is fair to ask: What are the implications for Japan as a stable location for high-tech manufacturing?

There are many factors that influence C-level manufacturing and supply chain executives, who decide where to build manufacturing plants. Operating costs, the cost of capital equipment, the level and quantity of skilled labor, the location’s proximity to markets, the country’s tax rate, the foreign exchange rate, and other factors are pivotal to the decision-making process.

Much less attention has been paid to whether a country is prone to natural disasters such as earthquakes and tsunamis. In fact, many high-tech locations, such as California, Taiwan, and China, for example, are susceptible to earthquakes.

Earthquakes aside, when compared to China, Japan's competitiveness as a preferred location for high-tech manufacturing has been waning. China's low wage rates, low production costs, and large population of 1.3 billion people have drawn high-tech manufacturers to China, and this played a significant role in China replacing Japan last year as the second-largest economy in the world.

Japan has other drawbacks. In recent times it has struggled with a weak consumer economy, a labor force searching for work, and a political system unable to implement reform. Additionally, more than 20 percent of its population is over 65, and estimates show that this figure will double by 2050.

In addition to having a population that is not quite conducive to high-tech manufacturing growth, Japan, unlike other countries such as the United States and Canada, has lacked a program to establish a skills-based immigration system that would attract engineers and other highly-skilled workers that can help prop up its high-tech manufacturing base.

With these considerations in mind, the horrendous situation in Japan should make us question whether, in a global economy, Japan is the right place to produce around 60 percent of the world’s silicon for making semiconductor chips. Japan’s economic troubles are one thing; its geographic location is another. The country is located in the Pacific Rim seismic zone and suffers many significant earth tremors each year. Since the March 11 earthquake, aftershocks have caused continuing interruptions at Japanese semiconductor plants.

According to research firm IHS iSuppli, Japanese suppliers accounted for more than one fifth of global semiconductor production in 2010, but tremors in the days after the earthquake are causing production delays. “Semiconductor facilities in Japan that had suspended manufacturing activities after the earthquake cannot truly commence full production again until the aftershocks cease,” the research company said. “Earthquakes ranging from 4 to 7 on the Richter scale will make it impossible to fully restart these fabs until the earthquakes stop happening with such frequency. Every time a quake tops 5, the equipment automatically shuts down.”

In an extreme case of supply shortfalls, it will be interesting to see if Japanese high-tech companies outsource more of their work to plants located outside of the country; and if they do, how much.

{complink 5648|Toshiba Corp.}, the world’s second-largest producer of NAND flash, said shipments of NAND from its central Japan plant could drop by up to 20 percent in January and February, iSuppli reported. To fill the gap, the research group said leading NAND supplier {complink 4751|Samsung Electronics Co. Ltd.} should be able to partially compensate for the shortfall.

By the same token, many high-tech companies outside the devastated region that had orders to buy components from Japan will now have to find alternatives, and it is unclear what long-term impact this will have on the levels of future sourcing of Japanese-made electronic components.

Daniel Heyler, head of global semiconductor research at {complink 6938|Merrill Lynch & Co. Inc.}, estimates that it will take six months for global technology hardware supplies to resume normal flows following disruptions. He predicts that in the earthquake's aftermath, manufacturers will reexamine supplies in Japan, look for outside suppliers if needed, and finally sort out component mismatches resulting from deals with new vendors.

Amidst the uncertainty, what is clear is that the high-tech supply chain is fast-moving, cost-sensitive, and not particularly loyal to any location when the requirement to fulfill supply and demand obligations is imminent.

Of course, there is always the possibility that a short-term shift in component sourcing may develop into a long-term supply line. This would open the door for other nations to build up their electronic component supply capabilities, and that fact alone has consequences for the way in which supply chain executives view Japan as a high-tech manufacturing location.

Another news item seizes on this notion: Fernando Sierra Ortiz, the president of Mexico’s National Chamber of Electronics Industry, is reported as saying that a number of large Japanese electronics companies damaged by the earthquake and tsunami plan to move part of their production lines to Mexico in the near future. He pointed to Mexico’s close proximity to the US as a favorable factor in relocating high-tech production facilities, and he predicted that the country would produce $15 billion worth of high-tech equipment by 2013.

21 comments on “Is Japan Still a Stable Location for High-Tech Manufacturing?

  1. jbond
    March 21, 2011

    Even though this was Japan's worst disaster in over a century, not including World War 2, Japan has dealt with earthquakes for a long time. It would seem premature to think that this one set back, as large as it may be, would cause everybody to flee and take their companies with them.

    One thing that can come out of this is other regions taking advantage of the seismic activity that goes on in areas like Japan, China and California, and try to set up new manufacturing areas that aren't as susceptible.

     

  2. DataCrunch
    March 21, 2011

    It would make sense that high-tech manufacturers located solely in Japan should look to implement a business continuity strategy that could include additional plants located outside Japan.   Japan is a country with a lot of seismic activity, roughly 1,000 earthquakes a year that can be felt.

  3. Anand
    March 21, 2011

    Nicole,

     I feel the answer is “NO”. Its not a stable location for high-tech manufacturing anymore. I am surprised most of the hightech manufacturing plants are present in Japan and Taiwan both of which are highly prone to earthquakes and tsunamis. Its high time companies should start thinking about moving these facilites to safer locations so that in future supply distruption doesn't occur.

  4. mfbertozzi
    March 22, 2011

    Anandvy and all, I agree; if we focus on natural dangers, we could say it couldn't be a stable location; anyway knowledge and culture of microlectronics were born exactly there, then they could be key drivers to hold manufacturing leadership from Japan also in the future, what do you think about?

  5. Adeniji Kayode
    March 22, 2011

    Well, i just feel it will not be too safe now to make Japan  the only or main location for high- tech manufacturing because of the earthquake tendencies is just too high.

    There should be another place or location to bounce on if such repeat itself.

    But with the impact of this natural disaster,I don,t see japan as a stable location afterall.

  6. Barbara Jorgensen
    March 22, 2011

    This is a valid question, but looking back on recent events, some qualify as “100 year” events, such as snowstorms in the Northeast, Hurricane Katrina, volcanic eruptions…certainly areas are earthquake-prone, but unfortunately there is no way to predict when a disaster on the level of Japan's will strike. Then we have factors such as the political upheaval in the Middle East. Mexico has been known to have its political problems…it's a very difficult risk-management equation. Sometimes I think that end-markets should simply adjust their expectations and realize such things happen and put less emphasis on time to market.

  7. eemom
    March 22, 2011

    I agree.  It is hard to “plan” for natural disasters or political unrest.  Sometimes, things happen that will affect lead times and consumers need to adjust their expectations.  It is most advisable however, to have diverse manufacturing capabilities in several areas so that if a disaster occurs, manufacturing can be shifted elsewhere.  I hope companies do take advantages of other areas besides China since our over dependence on China is unhealthy.

  8. The Source
    March 22, 2011

    To all of you who have commented on this article, let me thank you for reading it and say that I find these comments very interesting.

    Jbond said: “One thing that can come out of this is other regions taking advantage of the seismic activity that goes on in areas like Japan, China and California, and try to set up new manufacturing areas that aren't as susceptible.”

    Dave Sasson said: “It would make sense that high-tech manufacturers located solely in Japan should look to implement a business continuity strategy that could include additional plants located outside Japan.”

    Anandvy said Japan is “not a stable location for high-tech manufacturing anymore.”

    Mfbertozzi agrees with Anandvy.  

    Adeniji Kayode said it won’t be safe to “make Japan the only or main location for high- tech manufacturing.”

    Barbara Jorgensen said there are problems everywhere and “end-markets should simply adjust their expectations and realize such things happen.”

    Eemom agrees with Barbara and says “It is most advisable however, to have diverse manufacturing capabilities in several areas so that if a disaster occurs, manufacturing can be shifted elsewhere.”

    What the Japanese earthquake and its impact on high tech manufacturing has taught us is that these events could and should provide an opportunity for supply chain and C-level executives to change the way they assess the choice of a manufacturing location.  For consumers, these events could allow them to be more flexible in their thinking on issues like price, the timing of a product release, and other expectations they may have. I would say that such a shift in thinking could alter our entire approach to high tech manufacturing.  Congratulations to you all!  

     

     

     

     

     

  9. Kunmi
    March 22, 2011

    This is a strong point that the investors have to add to the strategic plan when deciding on where to establish the plant. Though the situation in Japan triggered this question but the same question appplies to all. I will not deny the fact Japan can still be a stable location for high tech Manufacturing because of some factors:

    1. What made Japan a chosen location in the past? As long as the factors still remain, that is the key for the business.

    2. There is no business without the associated risk. The question of instability could be part of the risks.

    Claifonia, USA has recorded earth quake and tremor events, yet the state is the citadel of technology. But we can not limit the business practices in the entire USA because of Califonia, All areas in Japan may not be proned to great disaster like the current one. Manufacturers have to strategically plan to minize the risk.

  10. hwong
    March 22, 2011

    My opinion is that Japan is still a stable location for high tech manufacturing. The reason is that the purest and most highest form of technology is being produced in Japan. The Japanese culture has already been known for its strength in miniscule details and research. China or other Southeast Asia countries just cannot produce the type of precision that would be required. It's not that they can't but it's just the culture hasn't been that way. I am Chinese and I would clearly prefer a product made in japan than in China.

  11. Tony Massimini
    March 22, 2011

    Without going into a dissertation worthy of a 2 hour episode on the History Channel, the reason we have so much high tech manufacuring in places prone to earth quakes is that is where the population centers are.  For millenia humanity has been drawn to shorelines.  Throughout history oceans. seas and lakes have been a a source of food, energy for running mills, and for trade routes.  Many great cities are on shores, lakes or rivers.  As it happens many of the tectonic plates meet up and form shorelines.  Volcanic soil is rich in nutrients.  So people are drawn to these regions.  At this point, it would be darn near impossible to move most of the world's population to more stable locations.

    Where do you want to put high tech manufacturing?  The American mid-west is inviting until you figure there is also the New Madras Fault near St. Louis. Also, the Mississippi has been known to have severe floods and they also call the region Tornado Alley.  The American Southwest (west TX, NM, AZ, NV, UT) is stable. But most of it can be inhospitable. While the population is relatively sparse the southwest is already dealing with water supply issues.

    The Gulf coast has to deal with hurricanes.

    Mexico has its volcanoes and earthquakes, especially in central Mexico and a little bit of a problem with Narco terrrorism.

    If you go to Brazil you will accelerate the destruction of the rain forest to accomodate more people and manufacturing.

    Central China has lots of room and its share of earthquakes.

    We can list a lot of pros and cons for every region on Earth.  But the key element is where is the talent and the knowledge?

    The answer is to spread manufacturing around the world to minimize the impact of a major natural disaster.  As we see developing in Japan, the supply chain has been disrupted, but it is NOT broken.  Companies are figuring out how to work around problems while also getting these impacted sites back on line.

     

  12. Anna Young
    March 22, 2011

    We cannot assume from a single incident that an entire eco-system for manufacturing that has worked for decades is suddenly inadequate. Japan has had problems in the past but until the recent earthquake nobody questioned its viability as a center for high-tech manufacturing and innovation. If they did, it would be only because it may not be competitive versus China and other low-cost locations. Still, as you noted, that's where the talent is and all other regions have their own problems.

    We shouldn't locate too much in a single region and that may be the best antidote to natural and man-made disasters. In my opinion, Japan is less of a threat to the high-tech supply chain than China. Everything is made in China nowadays but imagine if a major destruction had hit the country. Diversification is key not total abandonment of a region or country because of a once in a life time event.

  13. Ashu001
    March 24, 2011

    Tony,

    Great post!!!

    Spreading things out all across the Globe as you so rightly point out changes and strengthens the Global supply chain dramatically.I am sure it can and will be seriously considered in the aftermath of the Japanese disaster.

    Having atleast one backup for every single function/link in the Supply Chain also becomes totally indispensable in the light these tragic events.But the question is,who is going to pour the resources to build that backup?

    If my reading of Global Geopolitical currents is accurate (and I could very well be wrong);then the Winners in the Global manufacturing race today are going to be those firms who have built and implemented backups quite successfully .

    Regards

    Ashish.

  14. The Source
    March 24, 2011

    Tony,

    Building back-up production plants in locations within a country or in another country altogether could be a viable possibility, and would help lower unemployment levels and strengthen the middle class wherever these facilities are built.     Indeed, there are many places in the world that are not susceptible to earthquakes.     Canada is one as well as parts of the U.S., but there are also places in Europe and Africa and South America that could be considered. 

    Thanks again for your comments.

    Nicole

  15. Tony Massimini
    March 24, 2011

    Ashish

     

    As always the companies with deep pockets will have the resources to build exact copies of fabs and factories in more than one location.  Over the course of the last two decades we have seen that many companies in the semiconductor industry cannot go it alone when it comes to manufacturing at the bleeding edge technologies.  This has been a driving force for the growth of foundries. 

    Going forward we may well see semiconductor vendors and OEMs rely more on joint developments and the use of third parties – foundries and contract manufacturers.  Thus, the supply chain will cover different regions to minimize the adverse impact of natiural disasters or other unforeseen circumstances.  There will still be disruptions, but the goal will be for fast recovery.

  16. Adeniji Kayode
    March 25, 2011

    You made a good point on that,there is a reason(s) why we have so manufacturers in Japan today and that reason may still be strong enough to have japan as the main location for these manufacturers but then, this same place is highly prone to natural disasters- If that is the case, there is need to spread sub-manufacturing stations somewhere else to serve as backup when the main location needs support. It is not a wise idea to put all eggs in one basket though.

    manufacturers should look into spreading manufacturing across the rest of the world, by this they will be able to stand and maintain supply during a disaster such as that of japan.

     

  17. t.alex
    March 25, 2011

    Certain products can only produced by Japanese companies, partly because the manufacturing process has been finetuned for many years to reach certain level of perfection. It is really challenging to establish similar process in other Asian countries.

  18. elctrnx_lyf
    March 26, 2011

    Japan has strong economy and highest level of technologies used but this may not be the same case in the future. Considering the fact that Japan is very susceptible to lot of natural calamaties might bring down the interests of the new ventures. Thers is going to be lot of changes in the coming few years.

  19. The Source
    March 26, 2011

    elctrnx_lyf's,

    This week iSupply said:    

    “The Japanese earthquake has resulted in the suspension of one-quarter of the global production of silicon wafers used to make semiconductors. Manufacturing operations have stopped at Shin-Etsu Chemical Co. Ltd.’s Shirakawa facility. MEMC Electronic Materials Inc. also stopped manufacturing at its Utsunomiya plant. Together, these two facilities account for 25 percent of the global supply of silicon wafer used to make semiconductors. Wafers are thin slices of silicon that serve as the substrate of semiconductor devices. All semiconductors are built on wafers.

    The facility in question Shirakawa facility produces large 300mm wafers, which are used in more advanced semiconductors that have high transistor counts. The wafers made by this facility mainly are used in the manufacturing of memory devices, such as flash memory and DRAM. Because of this, the global supply of memory semiconductors will be impacted the most severely of any segment of the chip industry by the production stoppage. Logic devices represent the next largest use of these wafers.”

    This is just one of many instances that demonstrates the difficulties of having too much manufacturing concentrated in one location, Japan, which as we know is susceptible to earthquakes. 

  20. saranyatil
    March 27, 2011

    t.Alex,

    Definitrly i agree with you, Few chips / products can only be manufactured at certain places similarly lot of efforts have gone to set up such a high- tech manufaturing companies and hence it will need enormous efforts to establish the same set up therefore i feel for few more years Japan will still be the location.

  21. Nemos
    March 29, 2011

    We cant control nature power such as earthquakes and tsunamis but we can learn to live with them and  I think Japan learned with the hard way in all these years , to live with the earthquakes. The disaster came and demolish Japan from the sea. I dont think there is a place in the world we can easy say “here is a stable place , lets built our factories here .”

    If we follow all the necessary safety “guides” and have in mind when we do business that its not all about money , we can have then a “stable” environment.

    From my point of view I think is wrong also not to apply a spread risk policy and to built all your units in a specific place only because there they have low cost in working hours and with this way you will have a competitive final product.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.