April 24, 2011

Japan Earthquake: A supply chain catastrophe

Japan suffered from one of the most devastating earthquakes in the nation’s history. The lives lost and damage done to the property is irreparable. We shall take a look at the adverse effect this tragedy has on the global supply chain.

Worries about supply-chain disruptions from Japan's earthquake continue, with some Asian businesses slowing production to preserve stockpiles of crucial components.

But some Japanese factories reported progress in restarting operations, raising hopes that long-term disruptions might be avoided. Japanese-made equipment and materials play a key production role in many of the region's main industries, from automobiles in Thailand to semiconductors in the Philippines. While many businesses said they have adequate inventories of materials for the time being, some were cutting output as they attempted to gauge the impact of the earthquake and disruptions caused by continuing problems at the Fukushima Daiichi nuclear power plant.

In Thailand, Toyota Motor Corp., Thailand's single biggest auto maker is slowing production to preserve stockpiles of Japan-made components, such as the transmission for Camry and Prius hybrid models. "Slowing production now is better than maintaining full output and having a problem later," a Toyota executive said. He declined to say how much production would be reduced.  Other Toyota models face less of a problem because they use a higher percentage of Thailand-made parts. Some 90% of the components used to make Toyota's Thailand-made pick-up trucks are made in the country, compared with 60% for its passenger cars. In Japan, Toyota said it would resume production of replacement auto parts for the domestic and overseas markets soon.

Nissan said it will resume output at two plants in Japan but keep operations at three other vehicle assembly plants in Japan closed until later. Some other factories in Japan have reopened, except for Suzuki and Honda.

Production problems continued in other industries. In a possible blow to global production of consumer gadgets such as smartphones, Mitsubishi said the building and equipment at a plant in Fukushima prefecture had been damaged by the earthquake and that operations were suspended. The plant produces materials for printed wiring boards for use in smartphones and other consumer electronics and makes up to 60% of the global market for wiring-board materials.

The Philippines semiconductor industry association said it was concerned that the disaster in Japan could disrupt the supply of raw materials from the country and affect the export of Philippine-made components back. "A prolonged abnormalcy in Japan will certainly affect the material supplies in the Philippine electronics industry," said Ernie Santiago, president of the Semiconductor and Electronics Industries in the Philippines.

Some of those raw materials include substances such as bismaleimide-triazine, or BT, resin, which is used in making printed circuit boards. Japan provides around 90% of the world's supply of BT resin, Credit Suisse Group AG said.

In some cases, manufacturers will be able to shift to chip suppliers outside Japan. But that can be difficult if product specifications call for a particular brand, said Paul Romano, chief operating officer of Fusion Trade, an Andover, Mass., company that helps manufacturers find sources of scarce components. He said the company has been retained to find components by more than 15 clients. He said they don't allow his firm to disclose their names.

This just shows the side effects of a global supply chain. In a country like Japan, which is home to many high technology industries like automotives and electronics, a natural disaster of this magnitude can cripple supply chains of even major corporations. The indispensable nature of Japanese parts and finished goods will create a ripple effect across many industries for a long time. At a time when the world is just coming back on its feet from the global financial crisis, a production slowdown will further dent the economic recovery shown in the developed nations.

Vishwajit Vyas has done his B.Tech. in Electronics Engineering from Wayne State University, Detroit,  Michigan and can be reached at vishwajitvyas @ gmail . com.

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