Natural Disaster impact on business: 2011 Japan Earthquake & Tsunami affect on Semiconductor Industry & Recovery case study

On March 11, 2011, 8.9magnitude earthquake hit the east coast of Japan that triggered a 23 foot tsunami, followed by more than 50 aftershocks of 6magnitude and many cities, villages in prefectures of Fukushima, Miyagi, Aomori, Yamagata, Iwate and Akita were destroyed. Thousands of people died, thousands were missing, massive damage to homes & infrastructure and explosions at nuclear plants were the aftermath of the earthquake and tsunami. Northeast Japan is one of the Japan’s major manufacturing locations for semiconductors and major semiconductor manufacturers’ like Toshiba has 8-inch wafer fab in Iwate, Freescale has a 6-inch wafer fab in Sendai, Renesas Electronics has factories in Aomori, Hokkaido and Yamagata, Elpida Memory's backend manufacturing facility in Akita, Shin-Etsu Handotai (SEH) has a plant Fukushima Prefecture that produced about 22% of total silicon wafer demand in the world and Fujitsu's plants in Fukushima. Most of the manufacturing units in the earthquake zone were severely damaged and tsunami had submerged some of the units. There was also an explosion in the Fukushima Daiichi Nuclear Power Plant that worsened things further and nuclear power plants across Japan were also shutdown due to the earthquakes that led to severe power shortages both for the people and industry. Japan accounted for 20% of worldwide semiconductor market in revenue terms and any disruptions would have significant affect on the global semiconductor industry.

According to SEMI, the global supply chain association Japan contributes about 23% of the world’s semiconductor capacity and Japanese semiconductor material suppliers comprise approximately 55-60% of the total market, and companies produce about 35% of the world’s semiconductor manufacturing equipment by revenue. 2011 earthquake had a significant effect on the Japan semiconductor industry as the manufacturing facilities within the earthquake zone were damaged both in terms of manufacturing equipment and buildings, infrastructure damage like roads, ports and electric power shortages due to shutting down of nuclear plants. Other fabs that are away from the earthquake zone were also affected by the electric power disruptions as power is critical for the facilities to run and shortage of raw material supplies like chemicals, wafers, etc. Overall there was a significant effect on the Japan semiconductor industry which had seen significant fall in the semiconductor sales due to the earthquake and subsequent tsunami that had affected other industries like electronics, automobile, etc. ( Chart: Semiconductor Industry Association- Global Billings Report)

Post Earthquake Recovery Japanese Semiconductor Industry

As highlighted in the chart above there was fall in sales of semiconductors in Japan in the months of April, May & June due to earthquake and the sales grew since July when the semiconductor industry started recovering from the earthquake related damage and power shortages. Japanese companies are well prepared for the earthquakes and they include this risk in their business strategy and have elaborate disaster recovery plans and they are the best prepared in terms of technology and infrastructure to face the worst earthquakes. This is proved again during the aftermath of the earthquake in 2011. Despite facing severe damages to the infrastructure, manufacturing units and suffering human loss in thousands, Japanese semiconductor companies, employees, semiconductor equipment suppliers and government worked together and with in three months brought back the production levels to pre earthquake levels. In case of the semiconductor industry there were few units in the earthquake zone that suffered severe damages which were expected to take up to six months to recover and start full production, but the fabs that were away from the earthquake zone started production in one to two weeks. Both Renesas Electronics' fab in Naka and Texas Instruments' Miho fab were not expected to recover full production until the end of September according to IHS iSuppli.

Fujitsu recovered its units quickly and all seven of the Fujitsu Group manufacturing facilities that were damaged resumed operations at 100 percent of capacity by April 20^th   and two out of seven resumed by March 28^th . Fujitsu's disaster-response strategy which it implemented in 2008 after an earthquake in Japan’s Iwate prefecture helped it in planning recovery during the aftermath of the 2011 earthquake. Freescale announced that it would not open the fab that was damaged in the earthquake. A Semiconductor Industry News survey revealed earthquake halted operations at 27 semiconductor front-end fabs in the Tohoku and Kanto regions and 24 had resumed operations by April 11. By June 2011, with the full restoration of the Shirakawa Plant where 20% of the world’s raw 300mm wafers are produced, the restorations of all of the Shin-Etsu Group’s affected production bases had been completed. MEMC, another leading producer of wafers, had resumed partial production of 300-mm silicon wafers at its facility in Utsunomiya by April and total production by June. Apart from the damages to the factory buildings and manufacturing equipment, electric power disruptions caused by the power plant closures were responsible for the majority of supply chain disruptions as the chemical processing and fabs require secure, stable and continuous power. Damaged facilities have been repaired; electrical power supply interruptions were avoided for fabs as per formal requests from SEMI and others, the Japanese government has excluded semiconductor fabs and chemical plants from the 15% power cuts planned.

Most of the reports soon after the earthquake in March 2011 have predicted that there will be shortages in the semiconductor industry as some of the big players like Toshiba, Fujitsu, Shin-Etsu, Renesas etc have manufacturing facilities in the earthquake zone that were damaged and some of the component suppliers and wafer makers manufacturing facilities were also damaged. There was also certain amount of panic in the industry and to calm the situation some of the chipmakers announced that they are capable of shifting production to alternative locations and positive announcements were made stating that inventory particularly sufficient wafer inventory existed. But this was not necessary as Japan semiconductor manufacturers reviewed the situation instantly and some of the manufacturers that are not near to the earthquake zone restarted production with in two weeks of earth quake. Some of the manufacturers were facing supply chain related issues and electric power related issues which were sorted out easily with government support and were able to restart certain amount of production. These manufacturers attained their pre earthquake level of production by April 2011.

As for the manufacturers whose units were within the earthquake zone and damaged severely started repairs and made sure production started slowly by April 2011. By June most of the fabs have been restored and all of the fabs except three were at 100% production capacity. Mitsubishi Gas Chemical electronic materials production subsidiary that manufactures the BT resin used in the majority of semiconductor packaging also recovered to pre-quake levels in June. Renesas Electronics which was the most severely damaged fab resumed production on both the 200 mm and 300 mm wafer fabrication lines in June and said its supply capacity will return to pre-earthquake levels in September. The Miho fab of Texas Instruments also resumed operations by July. With strong disaster recovery plans, support form the employees and equipment suppliers and government, Japanese semiconductor industry restored its manufacturing units within a shorter time frame and made sure there were no major supply disruptions in the semiconductor industry. In fact since July 2011 the manufacturing and sales of the Japanese semiconductor industry picked up and proved that the industry is resourceful, resilient and global. The slowdown in sales of semiconductors in Japan has fallen in the later part of the year as people were not buying devices like phones, computers, and tablets as Japanese economy and people are still recovering from the devastation caused by the earthquake and subsequent tsunami. 

Software License & Asset Management (SLAM) 2012 – Increase in Compliance Audits by Major Software Vendors & Opportunity for Outsourcing Vendors

Analysts at Gartner & Forrester predict Software License Compliance Audits by Software Vendors will increase in 2012 with significant revenue targets. There has been an increase in such audits since 2008 and major Software vendors have set up exclusive audit teams internally and taking help of external consultants for conducting software audits in the client/non client organizations to check whether customers are complying with their contracts and paying for what they’re using. Businesses spend significant amounts of money on the software licenses and software like ERP, OS, productivity software, etc are vital for day to day operations. Software is often bought by the centralized procurement teams who buy the necessary software after evaluating them based on the Organization IT policy. Common types of software licenses are User (access for limited users), Enterprise (unlimited within enterprise), concurrent (simultaneous users limit), CPU/Processor based, device based, etc. Software licenses are complex and entitlement information is not easy to understand. Large organizations have thousands of employees spread across the globe and have of millions dollars worth of software licenses. Software licenses have to be managed efficiently which otherwise lead to rise in costs & penalties due to non compliance or breach.

Drastic rise in number of Software License Audits  

According to Gartner Report titled “The Software Vendors That Are Auditing Now and What to Do About It” in 2011 65% of 228 respondents reported being audited by at least one software vendor in the past 12 months which is significant rise when compared to 61% of 144 respondents reported being audited in 2010 and the percentages were 54% in 2009 and 30-35% in 2008. The reason for such a drastic rise in the software audits can be attributed to the Global Financial Crisis in 2008 which affected the revenues and profitability of major software vendors. Major software vendors started using the software license audits and subsequent revenues generated through non compliance by the clients as a way to bridge the revenue gaps. The top five vendors in terms of numbers of audits were: IBM, Adobe, Microsoft, Oracle and SAP who are also looking for significant ROI from audit teams and providing their total support. Audits not only lead to revenues but also help vendors to safeguard their IPR and proper usage by clients. Most of the major software vendors conducted the license audits intended to increase the revenues. (Chart: E&Y SAM Survey)

Other reasons include protection of the Intellectual Property Rights, as Software vendors invested million of dollars in developing the software and they should protect from piracy, misuse, etc, make sure that clients are using the required number of licenses as agreed and not breaching the license terms. Software vendors as part of their internal compliance should also monitor the clients usage, educate the clients about the importance of the software asset management, cost savings that can be attained due to efficient software license management and issues when breached the license terms like penalties, legal issues etc and use the audits to check customer satisfaction, software improvements and updates, etc. Software Vendors are targeting such clients, who have inconsistencies in purchasing patterns; poor license compliance history, size & growth of businesses in various geographical locations, and during M&A. Vendors are keeping close eye on their clients businesses and are collecting the necessary intelligence regularly. There are many tools available for vendors that help them to track the unauthorized use of software, pirated software and vendors have come across instances where customers have over used which led to million of dollars of fines and also some customers were found using  pirated versions of the software. Software Vendors are working with software asset management tool suppliers to guide & support customers.

Reasons for Client’s Software Non Compliance

Reasons for non compliance range from lack of proper tools for the management & end users to track the software licenses, usage and lack of understanding about non compliance of software license terms. Software licenses have complicated terms and conditions which are very difficult to understand and the types of licenses and the various terms for each type vary so much that it is not easy to understand them and experts are needed to understand the license terms. Another reason is managements often overlook and depend on the IT department on the purchase and maintenance of software but managements has to actively involve and keep track of the software license usage as non compliance penalties run into millions and hurt the company reputation. Some of the Software that businesses use is very costly costing million of dollars and their purchase also involves the hardware up gradation and users in the company have to be informed about the licensing terms and make sure they understand the risks. Software licenses and assets have to be valued during due diligence at the time of M&A and businesses have to be very careful in terms of software assets. Businesses often unintentionally non comply the software license terms and most of them do not have tools and expertise to conduct the software audits and are not serious about audits until the software vendors ask for a audit. (Chart Source: E&Y Software Asset Management (SAM) Survey)

Positive aspect of Software Audits

Software Compliance audits are tedious and both the vendors and clients have to invest resources like time, people and money for conducting such audits. Non compliance may lead to penalties in millions of dollars, legal battles, reputation damages and problems in vendor client relationships. Software audits are costly as it involves buying new tools and technologies, recruiting people or engaging expert third party consultants and also involves IT management time & focus. But there are positive aspects of the software compliance audits like cost savings both direct & indirect in terms of buying additional software or using efficiently existing software, audit is a good practice that provides control on the internal software buying and usage that leads to reduction in non compliance and risk of vendors asking for audits and also helps in preparing in advance so as to face the software vendor audits confidently. Many organizations have framed a formal Software Asset Management policy, bought tools, technologies and have recruited Software Asset Managers and also took help from third party consultants. Most of the large businesses are maintaining a database of all the software within the organization and inventory is constantly updated for effective use.

Software License Asset Management – Opportunity for Outsourcing Vendors

Simply buying a tool, formulating SAM policy and employing Software Asser Manager/experts will not be sufficient; SLAM is a complex process that involves creating a comprehensive database, inventory of all the licenses, verifying each and every license, documenting the license terms, rights, etc, track usage in terms of installations, number of licenses and also safe guard all the relevant documentations in central repository which is easily accessible to all the relevant stake holders. The database has to be constantly updated and should be integrated with the procurement and purchasing teams so as to check the availability internally before purchasing and software license can be easily transferred to the required user without delay as the new software purchases have to go through complex approval process at various levels from IT to finance. The tools generate data about the software being used with in the organizations but relevant reports have to be developed from the data and use it effectively in decision making. SLAM can be outsourced to IT/BPO Vendors.

Outsourcing vendors can support the clients in SLAM by playing a pivotal role in updating the software database, managing software inventory, manage license documents repository, checking the availability in the present inventory, generating savings by reducing the spend on buying software licenses, generating weekly and monthly reports regarding the software licenses, identifying the over usage and informing the procurement and IT teams before the vendor audits and help them renegotiate the licenses. Employees in the client’s organizations have to be made part of the process in terms of the software they are using and making sure they report the usage and understand the license terms. Outsourcing Vendors can play a major role in educating the Client’s employees in terms of the risks both financial and legal involved in SLAM. Software Asset managers also use the support of the outsourcing vendors in the Vendor Audits and face the audits effectively without any problems, conduct internal audits to know the present usage status and outsourcing vendor resources are low cost and have domain expertise in the SLAM process which helps in decoding the complex Software license terms and agreements and make sure that the breaches do not occur. SLAM is one of the areas of revenue growth for Outsourcing Vendors in 2012.