Quake Disrupts Key Supply Chains

By DON CLARK And YOSHIO TAKAHASHI

The earthquake that struck northeast Japan Friday forced shutdowns across a broad spectrum of the country's industries, but the bigger impact for companies could come in the weeks ahead as the disruptions make their way through the global supply chain.

The 8.9-magnitude earth quake, one of the largest on record, has crippled activity for now in a country that is a critical source of parts for consumer electronics, as well as a key producer of automobiles, auto parts, steel and other goods.

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Plants don't appear to have suffered widespread, catastrophic damage, but production delays could be enough to affect some tightly calibrated industries.

The earthquake affected operations at dozens of semiconductor factories, raising fears of shortages or price increases for a number of widely used components—particularly the chips known as flash memory that store data in hit products like smartphones and tablet PCs.

Many key chip plants, including most of the factories run by companies like Toshiba Corp. and SanDisk Corp. that account for the bulk of Japan's flash-memory production, were far removed from the quake's epicenter, and most are designed to withstand such events.

But some manufacturers are likely to be affected by other issues, particularly disruptions in transportation of finished goods to airports or ports, as well as the movement of employees and supplies to production plants. Even relatively short disruptions could further stress a supply chain already stretched tight in spots over the past year by strong demand for hot gadgets.

"This could have a pretty substantial impact for the next quarter on the whole supply chain," said Len Jelinek, an analyst at IHS iSuppli, a market-research firm that focuses on the electronics industry.

Jim Handy, another market-watcher at the firm Objective Analysis, said he expects "phenomenal" price swings and large near-term shortages as a result of the quake.

Chip companies based in Japan generated about $63.8 billion in revenue in 2010, accounting for about one-fifth of the semiconductor market, IHS iSuppli said. Their presence is felt most in the key market for what the industry calls NAND flash memory, chips at the heart of products like Apple Inc.'s iPhone and iPad. Japanese companies, led by Toshiba, account for about 35% of global flash revenue.

Toshiba is inspecting all of its factories for damage, U.S. spokeswoman Deborah Chalmers said. "In addition to delivery interruptions that may arise from factory damage, shipments of product may be affected by disruptions in road, rail, sea and air transportation within and from Japan," Ms. Chalmers said.

SanDisk, which manufactures flash memory in a joint venture with Toshiba, said its operations south of Tokyo felt "modest" impact. Spokesman Mike Wong said manufacturing operations were stopped temporarily and there was "some loss" of silicon wafers that were being processed. Operations have since resumed, but the overall impact is still being assessed, Mr. Wong said.

Companies with factories close to the quake's epicenter include Freescale Semiconductor Inc., which makes chips called microcontrollers in a factory in Sendai. Robert Hatley, a spokesman for the Austin, Tex., company, said the Sendai facility was evacuated and currently has no electrical power. The company is making plans to evaluate the plant's condition once power is restored, Mr. Hatley said.

The earthquake struck off the coast of the Tohoku region, which occupies the northern section of Japan's main island. While often overshadowed by the Pacific industrial region that lies between Tokyo and Osaka, Tohoku does host big factories for major manufacturing companies.

Auto makers reported some of the most serious damage. Honda Motor Co. said a 43-year old male employee died at its research and development center in Tochigi Prefecture, north of Tokyo, when the wall of a cafeteria crumbled. Honda added that more than 30 employees at several facilities in the same prefecture were injured. The car maker said it halted operation of three plants in Tochigi, Saitama and Shizuoka.

Toyota Motor Corp. said its two Central Motor Co. and Kanto Auto Works Ltd. subsidiaries shut two plants in Miyagi and Iwate in northern Japan. Nissan Motor Co., meanwhile, suspended operations at five factories in Fukushima, Tochigi and Kanagawa prefectures. Small fires broke out at its Tochigi and Iwaki plants but have been extinguished, it said.

The shutdowns come at a time of strong recovery in global auto sales. U.S. auto sales clocked their strongest pace in 18 months in February, and demand in China's market remains strong as well.

Ian Fletcher, senior analyst at IHS Global Insight's automotive unit in the U.K., said the auto industry recovered quickly from a smaller earthquake in the northern part of Honshu, Japan's main island, in June 2008. Friday's earthquake, he said, "is a significantly larger event."

"They will have enough components for a day or so, but the big question is how badly the supply chain has been affected," Mr. Fletcher said. He noted that in 2008 car production was disrupted when a supplier was unable to deliver piston rings.

The auto industry, which has grappled with shortages of chips and conductors over the past year, could also feel the impact of disruptions in Japan's electronics sector.

Paul Romano, chief operating officer of Fusion Trade Inc., an Andover, Mass.-based company that buys and sells electronic components, said a significant amount of components like capacitors and resistors are made in Japan. If factories are affected, "there will be a significant impact because we're coming through a shortage of electronic components," he said.

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Kyodo/Associated Press
A toppled chimney damaged a factory building in Sendai, Japan, as a result of Friday's earthquake.

The three primary Japanese suppliers that build critical parts for Boeing Co.'s 787 Dreamliner escaped major damage in Friday's earthquake, according to a senior Boeing executive.

Scott Fancher, general manager of the Dreamliner program, told reporters that the company and its suppliers—Mitsubishi Heavy Industries Ltd., Kawasaki Heavy Industries Ltd. and Fuji Heavy Industries Ltd.—are still inspecting their factories and manufacturing equipment, but so far have discovered no major damage.

The Japanese firms are responsible for the 787's wing structures, main landing gear and part of the forward fuselage, underscoring the country's role in the global supply chain.

While the devastation will affect production on some scale, some economists say damage to the country's industrial base could have been much worse. "They dodged an enormous bullet with this one," said Marcus Noland, deputy director of the Peterson Institute for International Economics. "Sendai isn't the industrial heartland of Japan."

The disruptions affected a wide range of industries. Consumer electronics giant Sony Corp. said it stopped operations at six electronic-components manufacturing plants in Fukushima and Miyazaki. A plant making Blu-ray discs and other products in Miyagi also experienced flooding on its first floor, Sony said.

Disneyland operator Oriental Land Co. decided to close the Tokyo Disneyland and Disney Sea theme parks on the outskirts of Tokyo Saturday, a spokeswoman said. There were about 70,000 visitors at the two theme parks when the quake hit. No injuries were reported, but with train service suspended, several thousands of people were still stuck in the parks Friday night.

Oil refiner Cosmo Oil Co. suffered a major fire at a facility in Chiba near Tokyo.

Gap Inc., which has 131 stores in Japan, said all of its roughly 6,000 employees were accounted for except for those at its outlet in a tsunami-effected area. Based on early reports, the company said its Sendai Kurax and Ikebukuro Tobu stores suffered significant damage

—Dana Mattioli, Elizabeth Holmes and Peter Sanders contributed to this article.