Power shortages threaten global supply chain

Mar 20, 2011 @ 12:01 am

By Bloomberg News

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Ford Motor Co., Samsung and The Boeing Co. are waiting for suppliers in quake-stricken Japan to increase one key export: information.

A top supplier of high-end components for the global technology and auto industries, Japan may need weeks to recover output lost as a result of the country's strongest earthquake on record, according to a forecast by Barclays Capital.

That is why manufacturing executives from San Mateo to Stuttgart are scrutinizing production schedules, searching for backup suppliers and figuring out how to cope with rising component prices.

And parts shortages are forcing at least one automaker to halt production. General Motors Co. this week will suspend production at its Shreveport, La., plant, where Chevrolet Colorado and GMC Canyon pickups are assembled.

The crippling of the nuclear reactor complex in northeast Japan has resulted in rolling blackouts throughout the country, forcing Japanese suppliers such as Sanyo Electric Co. Ltd. and Toshiba Corp. to reduce their production in order to conserve power, water and materials. If the reduced output continues into next month, the ripple effect will be felt in Seattle.

“We're OK for a few weeks, and I can't tell you beyond that,” said Boeing Commercial Airplanes president James F. Albaugh. Japanese companies design and supply 35% of Boeing's new 787 Dreamliner.

Japanese factories produce about one-fifth of the world's semiconductors and 40% of electronic components, according to CLSA Asia-Pacific Markets. Sony Corp. makes 10% of the world's laptop computer batteries, and other Japanese companies are the dominant suppliers of chemicals that manufacturers need to make microchips.

“Japan has higher and higher market share of specialty materials as you go up the supply chain,” said Tony Tseng, an analyst in Taipei with Bank of America Merrill Lynch.

Last Monday, the price of the benchmark DDR3 1-gigabit dynamic RAM chip, used in personal computers, climbed 7% to $1.11, the largest gain since Jan. 27, according to Taipei's DRAMeXchange, a research firm that tracks chip prices. Spot prices of the 4-gigabit NAND flash memories that are in smart phones, tablet computers and digital cameras rose 17% the same day.

Toshiba Corp. produces 25% of the NAND flash chips globally. Last Monday, it temporarily halted operations at plants and offices in areas affected by rolling power outages.

If the crisis leads to extended shutdowns, “then we just have an almost apocalyptic shortage,” said Jim Handy, an analyst with research firm Objective Analysis.

Taiwan Semiconductor Manufacturing Co. Ltd. and United Microelectronics Corp., the world's largest contract manufacturers of chips, may miss second- and third-quarter revenue estimates because of disruptions to the supply of the Japanese-produced silicon wafers used to make chips, analysts for The Goldman Sachs Group Inc. wrote in a report last week. South Korea's Samsung and Taiwanese smart phone maker HTC Corp. are seeking other parts sources to help avert a shutdown, company spokesmen said.

Typically, big players such as TSM keep a four- to six-week stock of chemical products used to make chips, so maintaining supply from Japan isn't a problem for now. Nobody knows, however, when these companies will be back up to speed.

Warren Lau, an analyst in Hong Kong with Samsung Securities Co., warned that extended delays will be felt by Apple Inc. and others.

“If [the Japanese] cannot supply, then no one is going to get their iPad 2,” he said.

The supply outlook for Japanese high-end auto components is less worrisome at the moment.

Ford hasn't yet experienced problems getting nickel-metal-hydride battery packs from Japanese supplier Sanyo for its Fusion hybrid sedan, which is assembled in Mexico, a company spokesman said.

Swedish automaker Volvo, now owned by China's Zhejiang Geely Holding Group, buys about 10% of its components from Japan.

“Our production won't be affected this week, but then we'll see,” Volvo spokesman Per-Ake Froberg said.

Supply of batteries, Blu-ray compact discs and magnetic heads used in hard drives also may be affected by the quake and power shortages, according to a report by Taipei research company TrendForce Corp.

“The reality is, the companies don't know the full extent of what's happened,” said economist Kim Hill at the Center for Automotive Research. “You can't build a car with 97% of the parts.”


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