Are Tech Stocks at Risk following the Second Earthquake in Japan?

Brittney Barrett |

The global supply chain of technological goods including computer and chip developers is currently  at risk following yesterday’s earthquake according to executives from computer makers and other technology firms, Concern surrounding future production is at the forefront for  developers who are unsure of how long production will be halted. Japan is responsible for around 12 percent of the demand for global technology goods and over 40 percent of the production of electronic components and advanced electronics materials. Both Toshiba and Hitachi expect to encounter manufacturing halts at Japanese plants producing the liquid crystal displays utilized in mobile phones. Toshiba and Hitachi are only two of a huge number of Japanese electronics makers that have been affected by the rolling blackouts and other disruptions.

As a result of these halts, which are occurring during the 4th quarter of the Japanese financial year and the 1st quarter of the American fiscal quarter. the consequences on the global supply chain will be extremely significant. Already, Japanese and American companies dependent on Japanese manufacturing have cautioned that first quarter outlooks will reflect the difficulties.

Among the reasons for this, is that the Northeast region of Japan, the hardest hit by the earthquake is responsible for the production of 70 percent of a resin used for substrates to package semi-conductors. Production in this area has been sorely affected by the earthquake and without the resins; a huge number of semiconductors will go unproduced. Semiconductors are used in most all modern electronics from iPods to computers to radios and plethora other items. If new semi-conductors cannot be manufactured neither can new consumer electronics, meaning the companies in this sector will suffer dramatically in coming months.

The problem is essentially that the global technology supply chain has become increasingly fragmented relies on a multitude of different suppliers for each component. As a consequence disruption to one minute part will prevent the completion of the entire device.

Some consumer tech companies are already going into damage control mode, Apple (NYSE: APPL), for instance is securing supplies currently in the plants and seeking production elsewhere in Taiwan, where a significant percentage of similar manufacturing is completed. Some executives at the company are attempting to avoid earnings consequences down the line, by sending executives to make purchases on existing supplies, which would both put them in a secure position and prevent other competitors for access to the components.

Depending on the amount of chips the company is able to procure between Taiwanese production sources and existing Japense quantities, they may be able to make it through without too many losses. For the most part though, between the reduced demand in Japan and the production decline in components that will reverberate internationally, it seems inevitable that the sector as a will suffer the consequences.

Investors with long-term positions; however, may want to hold on as once supply resumes there may be a reserve of demand for certain products experiencing a pause in production.

 

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