Wrote this for PC.com magazine in Malaysia for their June 2011 cover story about the earthquake that ravaged Japan and the ensuing effect on the world’s tech supply chain.
On 11 March 2011, the fifth-largest earthquake since 1900 tore through Japan, bringing a massive tsunami that plowed through 10km of land and left a trail of death and destruction in its wake. With Japan’s economy showing small signs of recovery (after a decade of stagnation) at 3.9 percent growth in 2010, the disaster could not have come at a worse time. On 28 April 2011, Michiyo Nakamoto at the Financial Times reported that production fell 15.3 percent in March from February, the biggest since 1953. On top of that, the Bank of Japan also reduced its growth forecast by a percentage point to 0.6 percent.
According to research firm IHS Automotive, the quake could cause global automotive production to fall by as much as 30 percent. The world’s top car manufacturers such as Honda, Toyota, and Nissan, lost several production plants and R&D centres. In Malaysia, UMW Toyota Motor Sdn Bhd reportedly cut production by up to 70 percent and Perodua has been struggling with shortages of Japanese-sourced components.
Much of the global automotive industry relies strongly on an intricate supply chain that where Japan is a key supplier and the disaster has thrown a giant wrench in the system. According to various analysts, the plant shutdowns are costing Japanese auto makers around US$2 billion a day, while the annual operating profits of Toyota, Honda, and Nissan are estimated to fall by between 3 to 8 percent this year.
Koji Endo, managing director at Advanced Research Japan in Tokyo neatly summed up the situation when he said, “This is the biggest impact ever in the history of the automobile industry”.
Much of the problems in the global supply chain stem from a reliance of many firms for Japanese-made component parts. According to Frost & Sullivan, the impact of the quake on Japan’s famed Just-in-time (JIT) production strategy has sent jitters among companies across the world that rely on silicon wafers, microcontrollers (MCU) and other components for manufacturing various products – from washing machines to cars to laptops to mobile phones.
In the MCU manufacturing industry, Renesas Electronics Corp., the world’s largest MCU supplier, is still adjusting to the impact of the quake which left their Naka fabrication plant (which represents 20 percent of their manufacturing capacity) inactive until 1 June 2011.
On the PC front, already said to be struggling to compete (and perhaps, remain relevant) with the sudden Apple-driven tablet revival, shipments in Japan declined 13.1 percent to 4 million units in the first quarter of 2011. This despite the second half of March traditionally being the busiest procurement period of the year.
Production of digital cameras have stalled due to extensive damages to the factories of Panasonic, Fujifilm, Nikon, and Canon for whom “shortages in supply for certain products are set to continue”. Canon doesn’t expect their supply chain to recover to their original levels until June or July.
In May, Nikon UK confirmed the cancellation in some markets of their recently announced Nikon Coolpix S4100, due to “problems with parts procurement”. And prior to that, Olympus cancelled the worldwide launch of its VR-330 digital camera, which touted an impressive x12.5 optical zoom, in order to “balance demand for various models” since “it’s not uncommon for one model to be given precedence”.
World NAND flash production levels also took a big hit from the quake. 40 percent originates from Japan and comes mostly from Toshiba (incidentally, a key memory supplier for Apple), the world’s second-largest NAND flash memory producer. The electronics giant has had to close two factories due to the damage caused by the quake and tsunami, though at time of writing, both factories have resumed partial production levels.
One supply chain for Apple and one for others
Recently, Apple took the decision to sue one of their key suppliers, Samsung, for patent infringements around the Samsung Galaxy line of smartphones. Apple’s decision to bite the hand that feeds them memory, processors, and touchscreens may come back to haunt them. But for now, they’ve gone on record to say there would be “no material supply impact” in the current quarter despite heavy order backlogs for the iPad 2.
On the other hand, companies lacking Apple’s leverage and financial muscle are struggling to obtain sufficient supplies for their products. Finnish mobile phone giant Nokia warned of supply shortages for some of its phones though it maintained the impact would not be severe. Japanese technology makes up about 12 percent of Nokia’s components.
Nokia said it “expects some disruption to the ability … to supply a number of products due to the currently anticipated industry-wide shortage of relevant components and raw materials sourced from Japan”. RIM‘s PlayBook also suffered from a month long delay due to material shortages before finally being launched in April.
In their quest for securing priority for the limited supply of electronic components, Apple seems to be sitting comfortably at the top. Supply chain and Apple analyst Brian White commented, “a number of equipment manufacturers are getting delayed or shut out due to Apple’s supply chain dominance”.
On the flip side to all the official announcements, Digitimes reports that all may not be well with the major manufacturers, “Despite both upstream and downstream PC and smartphone players claiming to have not seen any component shortages and that they will see normal supplies until the end of May 2011, sources from upstream component players have pointed out that Asustek Computer, Acer, Motorola, Apple, High Tech Computer (HTC), Quanta Computer and Compal Electronics have all recently started acting aggressively in securing supplies of MLCCs, PCBs and cover glass for touch panels due to warning signs of shortages”.
Is the grass greener in China or South Korea?
With much of the media focus on possible supply shortages in Japan, how feasible is it for affected companies to outsource their production to countries such as China and South Korea?
Foxconn, the subject of many recent controversies, is said to have secured exclusive rights for the production of Nintendo’s successor to the Wii. Despite the recent controversies (which led Nintendo, Nokia and Sony to launch their own investigations), the world’s largest maker of electronic components in Greater China remains a key manufacturing partner for many companies including the likes of Apple, Acer, and HP.
Apart from existing contracts with Taiwan-based Foxconn, it seems unlikely that any Japanese company will tap onto Chinese manufacturers to solve their production problems. In a shortlist of potential countries for outsourcing that included locations like Malaysia, Thailand, and Indonesia, China is a notable exclusion thanks to concerns over the quality of “Made in China” products.
China-based researcher of Japanese businesses Chen Yan noted that “subconsciously for the people of Japan as far as China is concerned, the first words that come to their minds are pollution and corruption”. Not particularly business friendly words.
South Korea seems well poised to take advantage of Japan’s production issues. Some reports seem to indicate that Apple has asked Samsung and Hynix, the second-largest memory-chip maker in the world after Samsung, to provide more flash memory chips and mobile DRAMs for use in its iPad 2 and the rumoured iPhone 5. It’s also possible that Hynix is boosting its production of mobile DRAM chips at the request of other foreign companies.
It’s doubtful that any long-term manufacturing arrangement to offload production from Japan to South Korea will happen though. Since the disaster, Japanese companies have been working round the clock to reinstate factories to original production levels with varying degrees of success.
On other fronts, Nikon reportedly plans to transfer its production of camera batteries and lenses to Malaysia, while Renesas is said to be in talks to increase their share of outsourced chip production from 8 percent to 25 percent by 2013 by transferring some of their MCU production to Singapore.
Video game industry left shaken
In the aftermath of the disaster, most video game developers delayed their releases of apocalypse-themed (or similarly named) games such as Motorstorm: Apocalypse, Yakuza: Of The End, Dead or Alive: Dimensions, Marvel vs Capcom 3, and Steel Diver. Disaster Report 4 for the PS3 was cancelled outright, ostensibly due to its content where players are faced with a major earthquake ripping apart a city right at the very beginning of the game.
The financial costs of these cancellations and delays has hit Japan hard. According to Enterbrain, which tracks the evolution of the Japan’s video game development industry, estimates show the disaster might have cost the business segment no less than 7.3 billion yen (88 million $USD) from lost sales in the hardware and software spaces. Square Enix, a company synonymous with the Final Fantasy series, recently announced a 0.6 billion yen extraordinary loss attributed to the quake in their Consolidated Results Forecast for fiscal year 2010.
On the bright side, Enterbrain’s CEO Hirozaku Hamamura expects the industry to recover quickly, noting that the movie industry tends to experience a 120 to 140 percent expansion following a disaster.
Black dawn for Sony
Through it all, Sony seems to have been the hardest hit of all the Japanese MNCs. Japan’s biggest exporter of consumer electronics saw its plants in Miyagi (Blu-Ray, optical devices, IC cards, semiconductor lasers), Fukushima (lithium ion secondary batteries), Ibaraki (DVDs), Shizuoka (broadcast and professional equipment), Aichi (camcorders, digital cameras, LCD TVs), Gifu (lenses for digital single lens cameras, cell phones), Oita (microphones, headphones), and Chiba (Blu-Ray recorders, home audio) experience various disruptions to production. On top that, they also lost two research centres to quake-related damage.
Reportedly, 1,000 Sony employees took shelter on the second floor of a nearby chemical products factory when the quake occurred. Mercifully, despite extensive damages to their plants and research centres, none of their employees were reported missing or dead.
With such a steep level of losses to their business operations, more is riding on the Sony Next Generation Portable (NGP) than just another volley in the console wars. Unfortunately, the quake has delayed the global launch of the NGP, which may now only launch in one single region this year, possibly Japan.
Apart from boosting a PlayStation brand damaged by past blunders and the recent PlayStation Network outage controversy, Sony Computer Entertainment needs to ensure a great launch for the NGP to help offset the quake-related losses suffered by Sony’s wider business operations.
An incredible display of honour
Remarkably in spite of the tragic scale of the disaster, the Japanese have reacted with a great level of dignity, honour, and tenacity. Numerous news stories abound about the way the Japanese have conducted themselves since the quake, patiently waiting in line for hours to buy food while still remaining calm and polite.
Neighbours shared food and made sure they used only whatever energy was necessary, all this without any form of government control. Many Westerners have commented that the same situation would see a very different kind of social order in Western society.
We want to wish all the very best to the Japanese people here in Malaysia and we want to salute you and your people for the wonderful example you’ve given to the rest of us (and the world) on how to react to a national disaster.
- Sony – At time of writing, Sony Group had not yet released their FY 2010 Q4 financials. However, according to Thomson Reuters, six analysts have lowered Sony’s operating profit estimates for the year to March 2012 by 19 percent on average since the quake
- Nikon – Extraordinary loss of 2.3 billion yen
- NEC – Special loss of about 6 billion yen
- Panasonic – 19 billion yen loss. They also aim to cut 17,000 jobs over the next two years
- Toshiba – Estimated loss of 70 billion yen
- Fujitsu – 11.6 billion yen loss
- Hitachi – 75 billion yen loss.
- Two Years After Fukushima, Japan Worries About the Next Big Quake (world.time.com)
- What happened to Japan’s electronic giants? (bbc.co.uk)
- Japan Manufacturers’ Confidence Improves by the Most Since 2011 (bloomberg.com)