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Disaster in Japan exposes supply chain flaw

Earthquake damage to a Japanese silicon wafer production plant illustrates the manufacturing troubles that can ensue when companies reduce their network of suppliers.

April 06, 2011|By Don Lee and David Pierson, Los Angeles Times

Reporting from Shirakawa, Japan; and Beijing — About 40 miles west of the crippled Fukushima nuclear plant, another kind of crisis may be unfolding — this one striking at the heart of the world's multibillion-dollar market for smartphones, portable music players and other cutting-edge electronics.

The powerful earthquake that rocked Japan last month knocked out a hillside factory owned by Shin-Etsu Chemical Co. Little known outside industry circles, Shin-Etsu is the world's biggest producer of advanced silicon wafers, a key material needed for the manufacturing of semiconductors. Its Shirakawa plant represented 20% of the globe's capacity to produce the building blocks on which some key high-technology products depend.

The disaster could prove to be a major concern for chip makers, including Intel Corp. and Toshiba Corp., that buy wafers from Shin-Etsu, analysts said.

But it also has turned the spotlight on a much broader problem in the global economy: Companies around the world often rely on small networks of suppliers that may be thousands of miles away. A good number of those suppliers are in Japan.

Already, quake-related shortages of automotive electronic sensors made by Hitachi's Automotive Systems business have been blamed for halting or cutting production of vehicles in Germany, Spain, France and Shreveport, La.

The crisis also is expected to slash the supply of some vehicles such as Toyota's Prius and contribute to higher passenger car prices in the U.S., where temporary worker layoffs already have hit Ford Motor Co., General Motors Corp. and some Japanese auto firms.

Chinese computer maker Lenovo Group was among the latest to warn that a shortage of components from Japan could crimp supplies of finished products, in its case the LePad tablet computer. Another Chinese firm, ZTE Corp., a major producer of cellphones, said it could face shortages of batteries and LCD screens for months.

The likelihood of more disruptions to come has touched off a scramble for alternative suppliers. It has sparked a run-up in the price of memory chips and some parts. And it is almost certain to lead to a rethinking of a global production and logistics system in which a natural disaster in a small part of Japan's industrial base could have such broad effects around the world.

"There should have been fail-safe measures taken, if one [plant] goes offline it doesn't throw your whole production schedule off," said Kenneth Grossberg, a business professor at Waseda University in Tokyo. "How could you make yourself so vulnerable?"

The unusually large concentration of production at a single site such as Shin-Etsu's Shirakawa campus, he said, may reflect a wider tendency, especially in Japanese society, to centralize operations, whether it's government or private organizations.

What's more, the disaster and its aftermath revealed just how far some companies had pushed the just-in-time supply system. The practice, pioneered by Toyota Motor Co., allows companies to reduce inventories, thus freeing up cash for more profitable use elsewhere. But in managing supplies ever so tightly, companies also narrowed their vendors, sometimes to just one or two, leaving little margin for adjusting if something went wrong.

France's PSA Peugeot-Citroen, for example, usually keeps just a 10-day supply of Hitachi air-flow sensors on hand. With Hitachi controlling more than half of the world's production of this obscure, $90-retail-priced component, Peugeot and General Motors, among others, had little choice but to cut production when those parts began to flow more slowly.

Just-in-time "is a good plan for normal times, not for emergencies," said Tetsuji Morino, a managing director at Dai Nippon Printing Co., a $19-billion enterprise based in Tokyo.

He said that only about three of his company's 50 factories sustained damage. But the actual effect is likely to be bigger as rolling blackouts, transport problems and fuel shortages in Japan hamper production and delivery of supplies for many companies, possibly for months to come.

Koriyama Central Industrial Park in Fukushima prefecture is a case in point. Plants operated in the park by Panasonic Corp., Hitachi, Shin-Etsu and other leading Japanese companies are mostly up and running now, but only at about 50% capacity combined, said Endou Katsuei, executive director of Shinwa Planning Co., which is managing the zone.

He said these factories depend on the delivery of other components, which has been anything but stable. The town's train station has yet to reopen, roadways have been cracked by the earthquake and many gas stations remain closed, more than three weeks after the disaster.

It's much the same along the 125-mile stretch of Tohoku Expressway, from Utsunomiya, about 60 miles north of Tokyo, to Sendai, a city in Miyagi prefecture that was ravaged by the tsunami and where many homes remain without gas and hot water.

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