Japan Earthquake Could Shake Up Semiconductor Industry

The massive earthquake and tsunami that tore through Japan on 11 March and rippled throughout the Pacific region could have significant short-term effects on the semiconductor industry, according to analysts.

Japan and Taiwan make up a huge amount of the global semiconductor manufacturing, and even the smallest amount of downtime could have a large impact on chip supply and prices, the analysts said in various reports.

The 8.9-magnitude earthquake, which the Japan Meteorological Agency called the largest in Japan’s history, struck the region on 11 March. The massive earthquake set off a series of aftershocks, some as high as 6.6, and a tsunami that slammed into the island nation and rolled out as far as the West Coast of the United States.

Damage assessments are still coming in and tech companies are reportedly scrambling to determine the damage to their operations in the region.

Earthquake: a blow to the semiconductor industry

According to Jim Handy, an analyst with semiconductor market research firm Objective Analysis, more than 40 percent of the NAND flash memory chips and about 15 percent of the global DRAM supplies are made in Japan, which is also a key source of chips that support such booming consumer electronics devices as smartphones, tablets and PCs.

“A two-week shutdown would remove from production a sizable share of each of these,” Handy wrote in a report. “It doesn’t take a large production decrease to cause prices to increase dramatically. Objective Analysis anticipates phenomenal price swings and large near-term shortages as a result of this earthquake.”

The supply side of the business will not be the only one to take a hit, he said, adding “demand will be impacted as well since many electronics manufacturers are in Japan, and their consumption of semiconductors will be halted until earthquake damage is repaired.”

Any disruption could be significant

However, analysts with IHS iSuppli said the major impact of the disaster will be not in semiconductor production, but to the supply chain.

“Suppliers are likely to encounter difficulties in getting raw materials supplied and distributed and shipping products out,” the company said in a research note. “This is likely to cause some disruption in semiconductor supplies from Japan during the next two weeks, based on the IHS iSuppli preliminary assessment of the situation.”

Any disruption could be significant, according to the firm. While Japan has a strong share of the world’s DRAM manufacturing market, the two top DRAM fabrication plants in the country, run by US-based Micron and Japan’s Elpida, have not been directly impacted.

In addition, Japanese companies – primarily Toshiba – account for 35 percent of global NAND flash production in terms of revenue, according to IHS iSuppli.

Globally, companies headquartered in Japan ranked third in 2010 in semiconductor production. The Asia-Pacific region outside of Japan ranked first, followed by the Americas. Of the 300 global semiconductor suppliers that IHS iSuppli tracks, 39 are based in Japan.

The impact could be large

Malcolm Penn (left), CEO of Future Horizons, a semiconductor market research firm in Europe, said in an interview with the Electronics Weekly that the impact on the industry could be large.

He also sharply criticised executives of tech firms that consolidated so much of their operations in the region to save money while ignoring the benefits of diversification, in everything from location to suppliers.

“It’s [yet another] red flag warning though: ‘Don’t put all your eggs in one basket,'” said Penn.

“How many more warnings do the balance sheet-driven CEOs and CFOs need? You can fiddle with your spreadsheets all you want, but the bottom line is: If you can’t get the wafers, you will have zero sales; 100% correlation. And if everyone buys from the same (now very limited) source, the risks of a problem are getting higher and higher.”

Smaller earthquakes have halted production before

He said Japan produces about a quarter of the world’s silicon chips and as much as half of the NAND chips. He noted other countries in the region that also produce high levels of chips. Korea produces almost 20 percent of the world’s silicon chips and most of the DRAM supplies, while Taiwan makes most of the advanced logic and SoCs (systems on a chip).

If a similar natural disaster hit Taiwan, “that would kill all the fables firms: Qualcomm, Broadcom, Marvell, MediaTek, Nvidia, Xilinx, etc.,” he said.

Objective Analysis’ Handy said earthquakes smaller than the one that hit northern Japan have stopped production in the past.

“As a matter of comparison, the Taiwan earthquake in 1999 that caused significant damage in Taipei and stopped fabs in Hsin Chu was a magnitude 7.6, less than one tenth the power of Japan’s earthquake,” he wrote. “The 1989 Loma Prieta earthquake that stopped production in Silicon Valley measured 6.9, or one hundredth the strength of today’s earthquake.”

There also have been earthquakes in Japan between 5.9 magnitude and 6.8 over the past few years, all of which raised the concerns of the semiconductor manufacturers. Future Horizons’ Penn agreed that it doesn’t take much to throw the industry off its rails.

“A microsecond power supply glitch wiped out production at one of the Toshiba factories just before Christmas,” he said. “A more serious interruption would bring the NAND market to its knees, especially as no one holds inventory anymore — ‘It’s too expensive,’ scream the bean counters and Wall Street, until you can’t get it.”