On Friday, EPS posted the breaking news of the 6.4 magnitude earthquake that struck Japan during Thursday evening and reported some of the early information available while what were then believed to be aftershocks continued to affect the area.
We made the comparison to the 2011 disaster almost five years and a month to the day not realizing that as we have moved into this week, the current situation would grow to be the worst natural disaster since the 2011 offshore earthquake that triggered the devastating tsunami.
Since Thursday, roughly 470 aftershocks of varying strengths but averaging around 4.0 levels, and a second, stronger, 7.0 magnitude earthquake on Saturday have rocked the same area with slightly different epicenters. The Japanese officials are anticipating the tremors to continue potentially through this week. The two major quakes and the high number of aftershocks continue to occur at relatively shallow depths, 10km, as we reported last week. The impact of these shallow events is significant because the infrastructure damage is significantly greater. The northern area of the island is becoming the major logistics point for supplies to arrive and be distributed to support residents.
At this point, Kyushu Island and the epicenter, Kumamoto Prefecture, home to a number of semiconductor, industrial, and automotive factories and supply chain support centers, are facing a devastating situation. According to the Kyushu Economic Federation, the area is known as Japan’s Silicon Valley, and represents approximately 25% of the total production of semiconductors in Japan. The area is also a major automotive production hub supporting the global automotive and automotive-related industry.
Air traffic and rail are at standstills. Major landslides are washing away transportation lines and roadways leaving mud and debris in the wake. The suspension of air, rail, and ground traffic critical to getting supplies of much needed food and potable water to the over 100,000 displaced residents of the areas, 41 of whom have lost their lives, nine to 11 are still missing, and over 100 are in hospitals in serious or critical condition.
Business markets too are beginning to face the impact of this devastation. There is a significant amount of automotive and electronics production based on Kyushu with companies including Toshiba, NEC, Kyocera, Denso, Texas Instruments, Nissan, and many others. Toyota, Honda, Sony, Renesas, among some others have reported the suspension of at least some of their operations; others have not provided publically available information at this time. Toyota has the greatest suspensions and they expect those to continue.
Due to the ongoing aftershocks, it will be at least another week until full factory evaluations are likely to be reported; initial evaluations have been occurring, Renesas and Sony are still evaluating the situation. Analysts as well as economists underscore that these events will have a lingering negative impact on the overall Japanese economy due to reduced production levels with downed factories.
Concerns are mounting along the global supply chain regarding the impact of the disasters coupled with the practice of lean inventory management. The problem at hand is not only the stoppages and damages at the affected factories (notably automotive and electronics) but importantly, their reliance on numerous supply chain partners in the vicinity of the factories to provide the just-in-time materials and supplies to resume production.
Given the severe infrastructure issues as well as the logistics issues with destroyed transportation systems, energy, water, and supplies for life, let alone factories; the problem does not rest with the major factories and manufacturers themselves, but with the full, local supply chain.
Renesas’ notices include confirmation of damage with their subcontractors and supply chain partners. Renesas’ notice indicates there will be a longer impact on production from factories in the affected areas. The logical assumption is that similar situations will be confirmed for the other major manufacturers who have yet to provide details. Sony’s Kumamoto Technology Center is a critical supplier of CMOS chips for smartphones, notably a main source for Apple’s iPhone camera. This Sony facility produces approximately 60% of the global market share of CCD chips, according to the Kyushu Economic Federation, any significant disruption will have a real impact on the global electronics supply chain. Over the next week, we should begin to piece together the extent and some forecasts into return of operations and the (likely reduction) in production. Japan will not be the only affected nation, the export of goods from Kyushu Island to Korea, China, Hong Kong, Taiwan, Europe, North America, and the Middle East will be impacted.