San Francisco: March 23, 2011
Disruption of the semiconductor supply chain in the aftermath of Japan's Tōhoku earthquake and tsunami will be temporary and limited based on the availability of inventory buffers and alternate supply, according to a Wall Street analyst.
"We remain constructive on the semiconductor sector as we view the disruption as temporary and it does not alter the two main reasons our viewpoint changed –the end of most of the inventory correction and a change in our belief that an economic downturn is going to happen in the near future," wrote Christopher Danely, a JP Morgan analyst, in a report circulated Wednesday (March 23).
Danely said he does expect several companies to lower revenue estimates due to reduced demand as many electronics producing factories remain idle due to damage and power outages. He noted that Texas Instruments Inc., which said a key fab in northeastern Japan was damaged and won't return to full production until mid-July, and On Semiconductor Corp., which was forced to temporarily suspend manufacturing at two fabs in the affected area, have already done so.
"We also expect the shortfalls will not impact the full-year earnings of companies such as Texas Instruments and ON as demand rebounds after the situation is stabilized," Danely wrote.
Some analysts have warned of the possibility of meaningful disruption on the semiconductor industry in the wake of the disaster. An estimated 25 percent of the world's supply of raw silicon wafers has been taken off line do to infrastructure damage at two facilities in the area, which could result in shortages if the factories remain idle for a prolonged period. Analysts have also warned that all or nearly all of the world's supply of an epoxy resin used in many chip package substrates is produced in two Mitsubishi Gas Chemical Inc. facilities that remain idle due to equipment and infrastructure damage.
Japanese equity research firm Nomura Securities Co. Ltd. has also warned that the production of microcontrollers— used in everything from automobiles to washing machines to consumer gadgets and industrial controls and medical equipment—is likely to be "severely" affected, mostly by temporary loss of production at Renesas Electronics Corp. Renesas, the world's No. 1 supplier of microcontrollers, lost an estimated 40 percent of its wafer production capacity in the quake, but has since restarted limited production at two of its five affected fabs.
Danely said he drew his conclusion that the impact on the chip supply chain will be temporary and limited from analysis of the last major natural disaster to meaningfully disrupt the semiconductor industry: a 7.6-magnitude earthquake that occurred in Taiwan on Sept. 21, 1999.
At the time, Danely argues, Taiwan was important to the semiconductor industry, if not more so, than Japan is today.
"Taiwan was the heart of PC manufacturing, with several components made there as well as the assembly of PCs and notebooks," Danely said. "In addition, the bulk of the foundry industry was based in Taiwan at the time, as were a host of other component manufacturers. The 1999 earthquake resulted in temporary supply disruptions and scrapping of inventory throughout the semiconductor food chain."
In the month following the Taiwan earthquake, the Philadelphia Stock Exchange's SOX semiconductor industry index declined roughly 13 percent as companies from Advanced Micro Devices Inc. to Xilinx Inc. experienced supply disruptions, loss of inventory and shortages of components, Danely said.
But the SOX index bounced back quickly, rising roughly 40 percent over the next two months as the disruptions proved temporary and did not have a material impact on the sector as a whole, Danely wrote. "In fact, some companies commented on more order tightness due to the scrapping of inventory and a sharp rebound in demand after concerns were allayed," Danely said.
Danely acknowledged that the magnitude of the 9.0 earthquake that rocked Japan March 11 was significantly larger than the Taiwan quake in 1999, but said he expects the disruption on the chip industry to be similarly short lived.
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