Apple Inc. (Nasdaq: AAPL) is overcoming a supply disruption that nearly crippled shipments of its iPad2, affirming the importance of a robust supply chain.
In the wake of the devastating March 11 earthquake, tsunami, and consequent nuclear crisis in Japan, key parts of Apple's iPad 2 suddenly became difficult to find.
A breakdown analysis by research group IHS iSuppli identified five parts sourced from Japanese suppliers: NAND flash (which is used for device storage) from Toshiba; dynamic random access memory (DRAM) made by Elpida Memory; an electronic compass from AKM Semiconductor; the touchscreen overlay glass from Asahi Glass; and the system battery from Apple Japan.
Getting raw materials supplied and distributed remains a challenge in Japan. Disruptions to the country's transportation systems have made employee absences common. Interruptions in Japan's electricity supply have hindered maintenance of sensitive processes such as semiconductor lithography. Because of the setbacks, Apple delayed iPad2 shipments by one week from the original March 25 launch to allow it to catch up with production, given the shortfall in Japan-sourced parts.
Japan is not the only country that makes electronics components, but it is key to certain manufacturing processes. Ten percent of the world's memory chips are made in Japan, as are 35 percent of its flash memory and 6.2 percent of large LCD panels, according to iSuppli.
While Apple is tight-lipped about its partners and processes, it has been reaching out to other countries to find alternatives. Taiwan's Economic Daily News reported that AU Optronics will help out by manufacturing some of the iPad2's displays. That could be a tall order to fill for any supplier. Apple needs as many as 100,000 screens a day, or 30 million a year, about half of the demand in the global tablet-PC market, according to industry estimates.
South Korean semiconductor giant Samsung Electronics and US memory maker Micron Technology have been noted by iSuppli as possible replacements to satisfy Apple's NAND flash needs. Samsung could also be tapped to pick up the demand for the iPad2's DRAM. If Apple were looking for alternative sources for the electronic compass, it could consider working with Yamaha, Aichi Steel, or STMicroelectronics, iSuppli analysts suggest.
As Apple reconfigures its own supply chain, it's worthwhile to consider what could happen if a production disruption were to strike other key electronics production regions where manufacturing is highly concentrated. These regions include Taiwan, South Korea, and certain areas of China.
"The disaster in Japan has exposed how the focus of electronics manufacturing in a single country can massively impact the highly interconnected global technology industry," iSuppli analyst Dale Ford blogged.
For example, Taiwan Semiconductor Manufacturing and United Microelectronics are two foundries in Taiwan that build computer chips and other semiconductor parts for more than 150 design firms, representing more than $30 billion in annual revenue, Ford noted. Additionally, nearly half of all global production of DRAM occurs in a 20-mile area around Seoul, South Korea. If manufacturing were to be disrupted by some event in either of these areas, the impact on the global electronics supply chain would be devastating.The reminder for enterprises is clear: Constant monitoring is needed to prevent lapses in production or shipments.
— Michael Singer Senior Editor, Internet Evolution, Moderator of the Executive Clan and Midmarket Clan.