All eyes on Japan

March 20, 2011
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The repercussions of the earthquake and tsunami in northeast Japan will be felt for a long time, not least by the inhabitants of the area. The possibility of a large no-go area of radioactive contamination will simply add to the certainty that life in that part of Japan can never again be the same.

It is too early to say exactly what disruption there might be in the entertainment supply chain, though as one senior executive notes, the length of the supply pipeline from Japan to Europe will mitigate the problem.

“The amount of product in storage, on the ocean and in inventory over here will act as a buffer to a short-term shutdown. The Japanese are extremely resourceful and they will get those facilities up and running with little or no bubble in the pipeline. We need Japanese consumer electronics to drive the inevitable changes in the home entertainment market,” she says,

Although Japan no longer dominates the manufacture of CE devices in the way it once did, Japanese companies supplied up to 60% of the silicon and met 40% of the world demand for CE components last year. Factories rely on Japan for the high-tech chips and sophisticated components at the heart of Blu-ray players, flat screens and digital devices produced elsewhere in Asia and beyond.

The market research firm IHS iSuppli reports that shortages are not likely to appear until early April, though the impact on prices could linger until the third quarter of 2011. “Companies are likely to encounter difficulties in getting raw materials supplied and distributed and in shipping products out,” the researcher predicts.

One of the crucial links in the Blu-ray supply chain is the laser that reads the disc. The Sony Shiroishi factory, about 100km to the northwest of the Fukushima Daiichi nuclear power plant, is the largest of its kind capable of delivering 170 million blue-violet lasers a month. Its output goes to both Sony and external customers for use in most Blu-ray players and all PS3 consoles, and there was significant damage to buildings and the integrated production line. Operations are suspended currently and although the company says it will restore production at a relatively early stage, the rolling power cuts throughout the region could make that difficult.

In the city of Sendai, 45km further north, the Sony Corporation Technology Centre suffered serious earthquake damage and has ceased operation. Altogether, Sony has shut down eight factories for inspection and repair including a plant that makes the lithium-ion batteries used in many laptops. Fortunately, there are no reported injuries to employees who work at any of the Sony sites affected by the earthquake or the subsequent tsunami.

Sony DADC has two production facilities in Japan. The main factory at Shizuoka, 180km south of Tokyo, produces CD, DVD and Blu-ray discs and is unaffected. A second CD and DVD plant at Ibaraki, 125km to the north, suffered only minor damage, though power cuts have affected capacity.

A Sony representative says, “Production shortfalls in Ibaraki are covered by our Shizuoka facility and, if necessary, through other manufacturing plants within our global network, such as Shanghai and Hong Kong. The provision of raw materials and production materials of Japanese origin is secured in Sony DADC plants worldwide through conservative inventory holdings and, if necessary, through alternative suppliers.”

Sony has responded to the widespread power outages by suspending operations voluntarily at several sites in the affected area. In common with most other Japanese Corporations, Sony has cut power to outdoor advertising sites to conserve energy.

Panasonic says it will switch off all signs and non-essential lighting for at least 12 days, though most of its capacity is located much further south around Osaka. The company announced plans to resume operations when the infrastructure is secure but the factory that makes Lumix digital cameras in Fukushima, 80km from the nuclear power plant, and the Sendai Blu-ray optical pick-up plant are closed currently. No Panasonic staff suffered more than minor injuries. The company says, “The damage caused by the earthquake is uncertain at the moment. An announcement will be made promptly if there is a significant impact on Panasonic’s consolidated financial outlook for fiscal 2011.”

Toshiba has several factories in the north-east, including a ¥15 billion (£120 million) plant at Iwate making key components for LCD screens. The facility is 90km inland from the suffering coastal area yet there was considerable earthquake damage and the plant is not operating. There is concern about the status of the normally dust-free “clean room”, which could cause delays. Despite this, shipments from stock will begin next week if transport is available, and the company hopes to restart production by March 22.

In a statement, Toshiba management says, “Our problems with logistics will become apparent as we discover the severity of the damage incurred by our suppliers. We are actively reviewing the current procurement situation.” A bottleneck here could affect flat-screen manufacturers across the region.

Apart from the obvious elements, the challenge in keeping the supply chain filled could come from relatively minor breaks in the supply of key items. The IHS iSuppli report notes that Hitachi provides the display for the Nintendo DS handheld video game system and for LG cell phones. “If the display production is shut down for a month or more, it could impact delivery of these panels,” the report says.

For the people living in the region, snow and cold weather have added to their misery. More than 850,000 households are reported to be without electricity and there seems little prospect of the lost capacity of the Fukushima reactors being replaced in the near future. The people in this part of Japan know that they live with the threat of earthquakes, though rarely as ferocious as this one.

All the well-known CE manufacturers have announced donations to the earthquake disaster fund, including Sony Corporation, which has pledged ¥300 million (£2.35 million) and offered to match all employee donations on top of that. Panasonic and Hitachi will each give ¥300 million (£2.35 million) and Toshiba has promised ¥500 million (£3.9 million). Many of the big names also will give away relief supplies of radios, LED torches and batteries.

Asda’s parent company Walmart, which owns 371 Seiyu stores (pictured) in Japan including 24 in the earthquake-affected Sendai area, has announced a $5 million (£3.1 million) cash-and-kind donation for emergency relief efforts. All but one of its distribution centres are operational, and supply chains are near normal, according to the company. Walmart operations around the world plan or have implemented fundraising drives among associates and customers to provide additional relief funds for the victims, says Walmart Asia CEO Scott Price. He says that Walmart has mounted a full-scale operation to get additional relief supplies into Japan.

Bloomberg reports that reconstruction in Japan might help revive a farming and manufacturing region that already lagged behind the rest of the economy. It says, “A new international airport at Sendai, better road and telecommunication links and incentives for businesses to move to the region could help foster a rebirth.”

The tragedy in the northeast of the country has made change inevitable. It will take time, but a small bump in the supply chain this year could presage the birth of a modernised region created from the ground up. The rebuilding might be the stimulus for the Japanese CE industry to compete on level terms with Korea, Taiwan and China – economies that have taken an increased share of a market that Japan once thought its own.