IC supply will be affected by the Japan earthquake in a series of four stages

IC supply will be affected by the Japan earthquake in a series of four stages, says Future Horizons.

Stage one - the immediate few days – will see some minor disruptions due to logistic-related issues but otherwise ‘business as usual’; there is sufficient inventory in the supply chain to keep the processes rolling, other than maybe the NAND Flash memory spot

market (30% of the whole) where some price hikes are inevitable and

unavoidable.

The next stage - the next 1-2 months – will see supply shortages caused by the destruction of work-in-progress; anything being made at the time of the disaster would have been lost and unsalvageable.

The medium-term – the next 3-6 months – will see further supply shortages caused by reduced production capacity, either due to factories destroyed, factories unable to restart

for (lack of) electricity supply issues, lack of piece parts – from resins to wafers;

ICs to displays.

The longer term – the next 6-24 months) –will see supply chain constraints while damaged factories get repaired or replaced and new capacity comes on line.

So the industry faces an extended period of supply chain uncertainty and a

frantic order book re-jiggling by firms directly hit by factory disruptions, seeking

to reschedule their orders with alternative suppliers, says Future Horizons.

This will not be as easy as it sounds. For a start, the pre-disaster supply chain

was already maxed out so even if a firm wanted to place an order elsewhere, there

is little spare capacity to service these new requirements.

Secondly there are issues of qualification. For consumer products, changing

suppliers at a whim might be de rigeur, but for other applications this inevitably

involves a qualification and testing process, often requiring 1000 (i.e. three

months) life tests.

There are also potential yield and reliability issues in changing wafer substrate

suppliers and packaging materials, some of which manufacturers may take a risk

and hit on, some of which they will not be allowed to do.

For example, change the airbag controller or other safety critical MCU and you almost certainly have to re-run the airbag qualification test once you get qualified samples of the new parts from the new sources, adding even further delay.

‘It is here where the real supply chain risks, so readily cast aside over the past

decade or so, are the most profound,’ says Future Horizons, ‘we have squeezed inventory and just-in-time beyond all degrees off reasonableness.’

The fact is, the IC production cycle, from order placement to final end product

delivery to the customer is typically six months, and that is when everything

works like a dream. That would mandate a global inventory level of at least three

months overall; today’s industry, and especially the financial community, would

fret if this started to come close to half that level.

Add to that the passion to out source everything – with no one responsible for

o-seeing the overall increasingly extended and complex supply chain links, just

their own in-out interface to an increasingly reduced often single/dual-sourced

number of suppliers means a supply chain balancing like an inverted triangle. On

March 11, 2011, that triangle fell over.

Future Horizons is sticking to its 9% forecast for 2011 revenues expecting any unit reductions to be compensated for by increased ASPs.