As we approach the tenth day after the devastating earthquake and tsunami that impacted northern Japan, some initial global supply chain implications are surfacing. As we noted in our previous advisories one and two, it is still rather early to ascertain the specific industry impacts but some initial signs are evident. The two most impacted industries initially appear to be automotive and high tech/consumer electronics, with some added concern for aerospace component suppliers.  While supply chains currently have some buffer inventories to get through these next couple weeks, we believe it is still uncertain to ascertain any specific issues. Initial signs however are pointing to the potential for key component part shortages and/or price inflation for lower-tiered value-chain items.
Situation on the Ground
As we pen this commentary, the priority focus on the ground in Japan remains with taking care of survivors, recovery of the victims, and strong concerns controlling fires and the effects of radiation leakage from the five reactors located at the nuclear power station at Fukushima.  While the government has ordered the evacuation of residents directly in the impacted area of Fukushima, other survivors have decided that it may be prudent to leave the various areas of northern Japan. Japanese and multinational companies continue to focus on insuring the safety and well-being of their employees and some companies have actually moved operations to other temporary locations. Transportation assets remain focused on the priorities of disaster relief and humanitarian aid for the victims. The availability of consistent and reliable power throughout the country remains problematic, which has hampered the ability of production facilities to resume operations.
Automotive
Many automotive brands continue to deal with the after-effects with some supply shortages already beginning to appear. General Motors will be stopping work at specific plants in Spain, Germany, and possibly South Korea because of spot part shortages. GM CEO Dan Akerson acknowledged uncertainty over the short or longer-term extent of the impact.
Honda will extend shutdowns of its production facilities until March 23, and has indicated that 30 percent of the company’s 110 suppliers for both four wheel and two wheel vehicles are having difficulty in resuming operations. One news report notes that Honda has communicated to its U.S. based dealers that the company may not be able to resume full production until May.
Toyota notes that production in all in-country plants is suspended until March 22. Some concerns are being raised by industry observers regarding the specific impact to the Toyota Prius hybrid, whose component level value-chain is sourced in some of the impacted areas of northern Japan.
Nissan’s engine plant located in Iwaki remains offline and Nissan’s in-country plants also remain offline.
Semiconductor, High Tech and Consumer Electronics
While Qualcomm and Intel have issued statements indicating that global operations will be not be impacted by events in Japan, others remain in either a wait or see, or scramble mode to develop scenarios and plans to mitigate potential component shortages or severe price spikes.
Texas Instruments as already stated that its two impacted plants in the region would not return to full operations until July.
Much of the current concern is reflected on specific components related to NAND flash memory, DRAM memory, microcontrollers, LCD displays and electronic components. Many of the value-chains of these components incorporate some or significant sourcing from Japan.
An analyst with Yuanta Investment Consulting in Taipei noted that 80 to 90 percent of the products that bond integrated circuits to glass panels for electronics displays come from Hitachi Chemical and Sony Chemical.
Within the semiconductor value-chain, bismaleimide thiazine or BT resins utilized to bond chipset packages, and an analyst for FBR Capital Markets noted that major supplier Mitsubishi Gas Chemicals has its plant located close to the site of the nuclear reactor incident.
The value-chain for high-end lithium-ion batteries that power many sophisticated consumer and high tech electronics also comes from Japan, which is fueling additional concerns about a potential disruption in supplies. CNET by way of All Things Digital comments that the production facilities for Sony and Hitachi which produces anodes are located within the evacuation radius of the troubled nuclear power plant.
Already, the threat of shortages is sparking price spikes among available supplies.
Another commentary on All Things Digital noted that at least five parts in Apple’s latest iPad2 device are sourced with Japanese supplies, three of which may be impacted. They include a glass display manufactured by Asahi Glass, the battery which is sourced to Apple Japan, and the electronic compass which is sourced from AKM Semiconductor. The commentary opines that because of Apple’s innovative design specifications, it may prove difficult to locate and qualify alternative suppliers.
Aerospace
The Wall Street Journal noted in its reporting that the three primary Japanese suppliers that build critical parts for Boeing’s 787 Dreamliner escaped major damage, according to Boeing. We would add an interesting aside concerning Bombardier who similarly embarked on a major sub-component sourcing strategy for its C Series single-aisle aircraft in development, but elected instead to source 75% of the value-chain within North America, with additional sourcing in China and Europe.
Again, while the situation continues to unfold, and information is still a work-in-progress supply chain business planning, strategic sourcing and sales and operations planning teams need to be initiating scenario planning and mitigation alternatives. This is the time for reaching-out and being patient with all impacted suppliers. It is also a time when cross-functional communication, synergy and teamwork will prove valuable over the coming weeks, as the situation unfolds.
