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Of course, people will not be paying so high a price as the thousands of people who lost their lives one week ago or the ongoing and mounting price that hundreds of thousands of displaced people are paying in Japan right now. Our thoughts are with them.
But the issues identified around the supply of raw silicon wafers, of chemically engineered resin for packaging, of microcontroller ICs and other issues, highlight that the pursuit of the leanest and meanest just-in-time supply chain over the last decade has now put the global economy at some risk.
It is still not possible to know how this will exactly play out. Some have said that the loss of Japanese production in 2011 will be made up for by the additional stimulus to the economy of rebuilding efforts after the quake. Market research firm IHS iSuppli had warned about an inventory build-up in the supply chain that was happening prior to the earthquake. They now state that the inventory buffer could mitigate the worst effects of lost Japanese production. But it is still likely that on one account or another, a lack of adequate second sourcing and disposable manufacturing capacity is going to affect global GDP in 2011.
There was a time when electronics was seen as strategic in a military sense and domestic suppliers and second sources were seen as mandatory. That has now been largely forgotten. The pursuit of the highest possible volume at the lowest price created vertical disintegration, caused companies to leave markets unless they could be a market leader, and to drop activities where they did not have economies of scale.
The result is that the semiconductor industry has become a constellation of specialists that are all highly dependent upon each other. But when one is stricken there is no-one able to take the strain. The adage "for want of a nail" is called to mind and we must consider that some automobile may not be made in Germany, for lack of a chemical or a gas or a film or an IC that was in the process of being made in the north of Japan last Friday.
The result, on just one count, is now likely to be that automobile companies, white goods manufacturers, consumer electronics companies will see loss production due to a lack of microcontroller ICs. At the same time, notwithstanding IHS iSuppli’s comments, such chips as they can source are likely to be much more expensive.
It must be born in mind that global chip manufacturing has been running at greater than 90 percent capacity utilization throughout 2010 and into 2011, which effectively means sold out. With wafer fabs likely to be out for up to six months as surrounding infrastructure is rebuilt it seems unlikely that building from inventory will suffice. No other manufacturers can take up the slack and if the provision of raw wafers becomes an issue than manufacturing capacity will be further hobbled.
This is likely to manifest itself in the second and third quarters of 2011 while any shortages of chipmaking equipment could effect the chip industry’s ability to increase manufacturing capacity in 2012.
Malcolm Penn, founder and principal analyst with consultancy Future Horizons Ltd., has long spoken out against the fablite chip company business model and the attenuated supply chain. He has long said that average selling prices for ICs cannot go on falling forever. He also, like a prophet without honor in his own country, repeatedly said that losing control of strategic capabilities such as chip production and manufacturing more generally, are expendiencies that in the long-term would prove detrimental to companies, nations and regions.
It now looks like the Japan earthquake and tsunami could make Penn’s points for him although I am sure he would wish that his analysis had not been underlined in this way.
The move from state-supported national and regional champion chip companies to a globalized electronics industry has provided us with a decade of cheap electronics. Globalization is now going to ask for the rest of the bill to be paid.