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.