The Impact of Japan's Disaster on Semiconductors

Morningstar’s Brian Collelo looks into the potential disruptions and possible opportunities that may emerge for semiconductor firms in the aftermath of Japan's earthquake

Brian Colello, CPA 19 April, 2011 | 9:08AM
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There is little doubt the tragic earthquake and tsunami in Japan last month (as well as any further aftershocks) will have macroeconomic effects that will hamper semiconductor demand in the country. Assessing the extent of the damage is still an ongoing process, and the final tally likely will take months to sort out. Perhaps the first attempt to size up the damage came from Taiwan Semiconductor (TSM), the global leader in outsourced chip manufacturing, which cut its forecast for global semiconductor growth in 2011 to 4% from 7% (excluding memory chips). We should be able to gain additional insight from a host of first-quarter earnings conference calls from chipmakers in mid-April, but in the meantime, we've summarised our initial thoughts concerning the damage.

Japan's Role in Semiconductor Supply and Demand
Japan is one of the bigger consumers of semiconductors and is home to many electronic device makers, including Sony (SNE) and Nikon. Aside from the country's fewer purchases of electronics and other goods that contain chips, such as PCs and smartphones, Japanese electronics makers have seen manufacturing stoppages due to both structural damage to their facilities and consistent power outages in the region, which likely will cause a near-term decline in new chip orders. Further, many chipmakers, especially analogue firms, are suppliers to Japan's automobile manufacturers, which also have seen production stoppages. Thus, chipmakers across the board likely will see lower near-term demand. Companies with notable exposure to Japan include Linear Technology (LLTC) and Analog Devices (ADI), which each generate about 15% of their sales from the country, and Intel (INTC), with roughly 10% of its revenue from the region.

On the supply side of the equation, Japan is home to many semiconductor firms and chip fabrication plants which were interrupted by the disaster. Texas Instruments'(TXN) plant in Miho contributes about 10% of the firm's total revenue, but was knocked off line and production won't resume until mid-April; full production won't resume until mid-July, and full shipments won't occur until September. Texas Instruments' digital light projector (DLP) devices are made in Miho, and although they account for less than 5% of TI's revenue, the business is dependent on springtime production, as these projectors are ultimately sold during back-to-school season. An article from Taiwanese trade publication DigiTimes indicated that TI's Miho plant also produced controller chips for motors in hard disk drives (HDDs), and if the HDD supply chain were to be disrupted, other chipmakers such as Marvell (MRVL) and LSI (LSI) also may suffer in the near term.

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About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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