Japan quake tests supply chain from chips to ships

SEOUL/TAIPEI (Reuters) - Companies from semiconductor makers to shipbuilders moved to minimize major supply disruption caused by Japan’s devastating earthquake.

Smoke and scattered containers are seen at a devastated factory area after an earthquake and tsunami in Sendai, northern Japan, March 13, 2011. REUTERS/Kim Kyung-Hoon

The 8.9 magnitude quake and ensuing tsunami destroyed infrastructure and knocked out factories supplying everything from high-tech components to steel, forcing firms including Toyota Corp 7203.T and Sony Corp 6758.T to suspend production.

Plant closures and production outages among Japan’s high-tech companies, combined with port closures, were among the biggest threats to the supply chain as an estimated fifth of all global technology products are made in Japan, analysts said.

Rolling power blackouts are set to hit Tokyo and surrounding areas over coming weeks, adding to the challenge of inspecting and repairing north Japan plants amid continuing aftershocks and the threat of radiation leaks from damaged nuclear power plants.

Korean shipbuilders and U.S. solar power companies are among those facing disruptions to supply. But with damage assessments still being made, companies and analysts said it was too early to accurately gauge how long these might last.

The impact was felt further afield, with PSA Peugeot Citroen PEUP.PA halting production of its iOn and C-Zero electric cars which are based on Mitsubishi's iMiEV and manufactured in Japan.

Renault RENA.PA said it saw no impact on production, although the French carmaker's stock was hit by a fall in the shares of partner Nissan Motor 7201.T.

Honda 7267.T said it was monitoring the supply of parts to its Swindon plant in southern England closely while Toyota 7203.T noted a 3-day halt to production in Japan would not have an immediate impact on deliveries to Europe given shipping from Japan takes six weeks by boat.

Both companies have suspended production in Japan with Honda saying that it had set up emergency coordination centers both in Japan and Swindon.


Ports handling as much as 7 percent of Japan’s industrial output sustained major damage from the quake, with most seen out of operation for months.

South Korean companies, which depend heavily on Japan for LCD glass, chip equipment, silicon wafers and other materials to make semiconductors, are likely to be some of the worst hit.

Hynix Semiconductor 000660.KS, the world's No.2 memory chipmaker and a rival of Japan's quake-affected Toshiba Corp 6502.T and Elpida Memory 6665.T, said it was concerned the quake may weaken consumer demand and disrupt supplies.

“It could give a boost to battered chip prices but that’s a short-term impact from disrupted supplies by Japanese companies,” said Kim Min-chul, chief financial officer at Hynix.

“We are more concerned about the quake reducing overall consumer demand and disrupting supplies of chip components and equipment, which could interrupt our production as well.”

Dutch electronic chip-making equipment group ASML ASML.AS said it sources some components from Japanese firms including lasers which are used in some of its scanners.

But it can call on other manufacturers if supplies are disrupted, ASML spokesman Lucas van Grinsven told Reuters. ASML was in constant contact with suppliers and customers in Japan who have said their main concern is their ability to maintain production due to the power shortages, he added.

The whole semiconductor industry is built on fault lines, including Japan, Taiwan, California and Korea so ASML’s semiconductor-making equipment is designed to shut down automatically if it senses an earthquakes, said van Grinsven.

Toshiba, which supplies more than a third of the NAND memory chips used worldwide in devices such as Apple's AAPL.O iPad, said it was restarting a chip factory in Iwate, northern Japan.

The disaster also led to a rise in spot prices in China for DRAM chips, mostly used in personal computers (PC), chip price tracker DRAMExChange said.

The world's largest mobile phone maker, Nokia NOK1V.HE, said it was investigating the impact on supplies. About 12 percent of its components are sourced in yen, but Japanese components are likely to represent a larger percentage due to a recent renegotiation of supply contracts.


Japanese steelmakers halted production at some plants and firms reliant on them such as South Korean shipbuilders could face supply constraints or higher prices.

South Korea houses the world's top three shipbuilders -- Hyundai Heavy Industries 009540.KS, Daewoo Shipbuilding and Marine 042660.KS and Samsung Heavy Industries 010140.KS.

“It (the quake) will disrupt production in Japan, one of the major steel producers exporting 40 percent of its output. In contrast, steel demand will rise for damage restoration,” said Kim Hyun-tae, an analyst at Hyundai Securities in Seoul.

“If there is a 10 percent rise in steel plates, it can result in a 1.5 percent fall in the operating profit margin for shipbuilders,” said SK Securities analyst Lee Ji-hoon, adding that Japan supplies roughly 15 percent of their supplies.

The earthquake also raised risks of lower production from Japanese manufacturers of polysilicon and wafers -- materials found in solar panels that convert sunlight into electricity.

Credit Suisse expects supply problems at solar wafer maker M. Setek Co, a unit of AU Optronics 2409.TW, whose plant is situated near Sendai town, close to the epicenter of the quake.

U.S. solar panel maker SunPower Corp SPWRA.O could be vulnerable to wafer supply disruption as it relies on M. Setek for up to 20 percent of its supplies, Credit Suisse said.

AU said initial assessment at M. Setek plant showed no major damage but it was unclear when production would resume.

Meanwhile Taiwan's TSMC 2330.T, the world's largest contract maker of semiconductors, said there was no immediate threat to supplies and it had enough raw wafers, gases and chemicals and spare parts to keep running for at least 30 days.

Other high tech producers including Taiwanese smartphone make HTC 2498.TW said operations and components supply had not been affected but they would talk to alternative suppliers.

Additional reporting by Hyunjoo Jin and Ju-min Park in SEOUL, Tarmo Virki in HELSINKI, Gilles Guillaume and Helen Massy-Beresford in PARIS, Rhys Jones in LONDON, Roberta B. Cowan in AMSTERDAM and Leonora Walet in HONG KONG; Writing by Lincoln Feast and Alexander Smith; Editing by Anshuman Daga and Andrew Callus