As the global supply chain community enters the third week since the devastating earthquake and tsunami that hit northern Japan, some distinct patterns are beginning to emerge, particularly in the automotive and high tech industries.
Situation on the Ground
The priority focus on the ground remains with taking care of survivors, recovery of the victims, and strong concerns related to controlling the effects of radiation leakage from the five reactors located at the nuclear power station at Fukushima. Food and water supplies are now flowing to the impacted region, which continued evacuation plans remain muddled. Japanese and other multinational companies continue their efforts on assessment of the condition of people, facilities, and supplier networks. Aftershocks are still prevalent with some exceeding 6.0 on the Richter scale. The availability of consistent electrical power throughout the country as well as growing concerns of the effects of radiation leakage remain growing concerns among citizens and businesses. One little known fact from those not residing in Japan is that while the Tokyo region uses 50-hertz electricity, the western region around Osaka utilizes 60-hertz electricity, thus making it very difficult to share electrical power burdens across all of Japan.
As more communities, drinking water supplies and food products are discovered with elevated or abnormal levels of radiation, various countries have imposed outright bans on the import of food products to stem any radioactive contamination spreading across global food chains. As of Friday, authorities noted six types of vegetables with traces of contamination. The most immediate concern is focused on the spread of radioactive iodine, which is more hazardous to humans.
The immediate crisis will have impact on both the export and import of food supplies within the country. Australia, China, Taiwan, South Korea, Singapore and the United States have banned imports of dairy products, fruit, vegetables seafood and other products from the areas located near the impacted nuclear plant. More bans will surely follow.
Meanwhile as Japan continues to deal with the aftereffects of the disaster, it will most likely be forced to increase imports of certain food and water supplies to compensate for elevated contamination levels, thus adding to global concerns for increased commodity prices brought about by global supply and demand shortages.
For the automotive industry as a whole, it would appear that most of the impact will be felt in the Tier Two or Tier Three components that feed production of other components and final assembly of actual autos, trucks and other vehicles. A Financial Times article quotes Dave Andrea, vice-president of the Original Equipment Suppliers Association as noting: “What vehicle manufacturers are finding are parts within parts within parts that are sourced from a single-source Japanese manufacturer.” The article also notes that Goldman Sachs has tagged two other supply chain areas, rubber products and plastics, along with electronic components as heavily reliant on Japanese manufacturers. Other reports have noted shortages beginning to appear for mass inflow air sensors manufactured by Hitachi Sawa Automotive Systems, which accounts for 60 percent of the global supply for airflow sensors. Another identified shortage involves a shiny paint pigment, termed Xirallic, manufactured by German specialty chemical maker Merck KGaA, which is utilized in the formulation of shiny metallic paints used by multiple automotive brands. Industry observers expect the bulk of the impacts to become much more visible by mid-April, when current inventory and safety stock levels begin to diminish.
Meanwhile, Japanese OEM’s Honda, Nissan, Subaru and Toyota continue to scramble to assess the condition of both final assembly plants as well as supplier networks within country. The Wall Street Journal reported today (paid subscription may be required) that supplies of some fast-selling vehicles such as the Nissan Rogue and Subaru Forrester already are beginning to dwindle. Deutsche Bank cut its estimate of Toyota’s profit in the fiscal year beginning in April by 84 percent, Honda’s 2012 profit by 50 percent, and Nissan’s by 79 percent. These are significant impacts
Semiconductor, High Tech and Consumer Electronics
In the semiconductor, high tech and consumer electronics sector, a similar challenge in shortages effecting lower tier components and supplies is also emerging. Supply Chain Matters noted in our previous third advisory the developing concerns for shortages in NAND flash memory, DRAM memory, microcontrollers, LCD displays and electronic components Japan accounts for 60 percent of the world’s raw silicon wafers and the shutdown of two impacted factories impacted a quarter of global supply. Noted was a Taipei analyst report that 80 to 90 percent of the products that bond integrated circuits to glass panels for electronic displays coming from two Japanese providers. Similarly, BT resin utilized to bond chipset packages may be impacted.
Today’s Wall Street Journal also notes that Kurea Corporation, a supplier of 70 percent of the global market for a polymer used in the production of certain specialized lithium ion batteries, the kind currently utilized in Apple iPods. The company’s polymer, which is made from a resin known as PVDF, is used as a binder in lithium-ion batteries and its factory located in Iwaki has been closed since the quake, with an uncertain time as to when the plant can resume operations. The company has factories in China, Vietnam and the United States but none can produce PVDF. Kurea’s chief executive noted that the Japan disaster would accelerate plans to source more production external to Japan. The supply of lithium-ion batteries is also affected by the production facilities for Sony and Hitachi which produce the anodes, which are located close to the nuclear reactor incident.
Now is the time for supply chain planning and sourcing teams to be validating the sourcing and status of all supplies that originate from Japan. While northern Japan is the obvious impacted area, other parts of Japan will continue to deal with some of the aftereffects of the disaster such as a lack of consistent electrical power, and the effects of the radiation crisis stemming from the Fukushima Daiichi nuclear complex. One report notes that businesses covered in the area served by Tokyo Electric Power and Tohoku Electric Power account for 45 percent of Japan’s manufacturing output, with measures for reduced work shifts as a possible outcome in the coming weeks. Supply Chain Matters believes that manufacturers should have plans developed for a worst case or best-case scenario for plans incorporating the next two quarters. While current in-transit or buffer inventory levels may allow some breathing room, the evolving situation in Japan points to some period of capacity and supply reductions.
Procurement teams should also be planning for price increases and secondary qualification and sourcing of impacted components as global supply chains scramble to compensate for supply and demand shortfalls. Larger, high volume OEM’s will fare better in insuring supply, while other manufacturers will probably have the challenge for securing other sources of supply.
It is far better at this point to have scenarios identified for sales and operation teams and executive management, scenarios that while unpleasant, may be more prudent as the situation evolves.
We would like to invite our readers to respond to our interactive poll located on the right-hand panel, regarding your organization’s current perceived impact from the events in Japan.