Semiconductor industry was "ticking along nicely" before Japan disaster

The beginning of March was ticking along nicely and figures for the World Semiconductor Trade Statistics (WSTS) were doing the same until the tragedy in Japan.

That’s according to chip analysts at Future Horizons, who say that despite the weakening in the industry as a result of the Lehman Brothers crisis, the sector had “weathered” the oil and Africa upheavals and the Libyan problems.

However, the Japanese earthquake played a part in accelerating and showing that there was always going to be a problem this year in supply.

The aftermath of the earthquake and tsunami had brought to a head the far deeper industry problems that the analyst company had “long warned of”. It said that the disaster had “parallels with the Lehman Brothers collapse”. Future Horizons hopes the current  disruption to manufacturing worldwide will force a rethink of how the world manages production.

Repercussions of the tragedy will manifest in four waves, according to Future Horizons: the immediate, which will see minor disruptions due to logistics, but otherwise will pretty much be “business as usual”.

That’s because there is presently enough inventory in the supply chain to keep processes rolling. The exception is the NAND Flash memory spot market (30 percent of the whole) where some price hikes are inevitable and unavoidable anyway.

The second wave – the near term, which falls in the next one or two months – will see
supply shortages caused by the destruction of work-in-progress. This means anything being made at the time of the disaster, which is now lost and unsalvageable.

Then there’s the medium term, which the company predicts will fall within the next three to six months where we will see further supply shortages. These will be caused by reduced production capacity, either due to factories destroyed or factories unable to restart because of electricity supply problems, and lack of piece parts including anything from resins to wafers and ICs to displays.

The fourth wave, the longer term, falls in the next 6-24 months. It will highlight supply chain constraints while damaged factories get repaired or replaced and new capacity comes on line.

As a result of these waves, the industry will “face an extended period of supply chain uncertainty and a frantic order book re-jiggling by firms directly hit by factory disruptions, seeking to reschedule their orders with alternative suppliers.”

Future Horizons claims that for starters, the pre disaster supply chain was already maxed out so even if a firm wanted to place an order elsewhere, there was little spare capacity.

Secondly, it won’t be easy for manufacturers to simply switch parts in consumer products. This is because anything new that’s put into the supply chain needs testing  for around three months.

It’s also predicted that there are potential yield and reliability problems in changing wafer substrate suppliers and packaging materials. Some manufacturers might risk it for a biscuit and cut corners.

For example, changing an airbag controller would mean a manufacturer has to re-run the airbag qualification, adding to more delays – something some could skip.

“It is here where the real supply chain risks, so readily cast aside over the past decade or so, are the most profound. We have squeezed inventory and just-intime beyond all degrees off reasonableness,” the report added.

Future Horizons’ predictions for the year ahead and into 2012 won’t change too much.

“As such, our instinct is that there will be little overall change to our nine percent semiconductor market growth forecast for 2011,” it said.

It added that any reduction in unit shipments would be offset by price hardening.

“We are also mindful to keep with our longer-term outlook of 18 percent growth for 2012, slowing to minus two percent in 2013,” it said.