How will Japan earthquake affect Apple's iPad supply chain?

How will Japan earthquake affect Apple's iPad supply chain?

Summary: Apple releases the iPad 2 on Friday and on the very same day a 9.0 earthquake rocks Japan, one of the centers of NAND flash production. What might the fallout from the quake be to Apple's product availability and rollouts as well as to prices?

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Author's Note: A number of readers have complained that this article is insensitive to the pain and suffering of the Japanese people. Please accept my sincere apology. I have friends and former colleagues in Japan and I offered them my prayers for their safety and recovery last night. I have been to Japan and have a respect for its traditions and people. The devastation from the quake is terrible.

At the same time, my editorial mission here is to look at Apple, its products and markets. If that appears callous, I ask your forbearance. Some of the comments in the story were made several months ago, so please keep that context in mind.

Apple releases the iPad 2 on Friday and on the very same day a 9.0 earthquake rocks Japan, one of the centers of NAND flash production. What might the fallout from the quake be to Apple's product availability and rollouts as well as to prices?

According to analyst Jim Handy at Objective Anaysis Semiconductor Market Research, a number of Fujitsu and Toshiba manufacturing sites are located near the earthquake epicenter. In addition, Tokyo, Kobe and other centers are located on the east coast of Japan.

In a letter this morning he said the market in Japan as well as production for the world markets will be affected.

Over 40 percent of the world's NAND flash and roughly 15 percent of the world's DRAM are manufactured in Japan.  Japan is a significant source of chips to support consumer electronics devices.  A two-week shutdown would remove from production a sizable share of each of these.  It doesn't take a large production decrease to cause prices to increase dramatically.  Objective Analysis anticipates phenomenal price swings and large near-term shortages as a result of this earthquake.

Demand will be impacted as well since many electronics manufacturers are in Japan, and their consumption of semiconductors will be halted until earthquake damage is repaired.

Apple NAND suppliers are not all in Japan. According to iSuppli, Apple is supplied by Toshiba and Samsung as well as other vendors. However, Apple primarily purchases flash memory from "top flight" vendors, such as Samsung and Toshiba. Most of Apple's DRAM comes from Korean vendors and would be unaffected.

In the January financial call with analysts, Apple Chief Operating Officer Tim Cook talked about supply chain issues for flash as well as the Japanese market, which had been a surprise for the company.

And there are several other Asian countries doing extremely well. Japan is not in the segment that you're looking out, but Japan by itself, the revenue was up 83 percent year-over-year. And if you're familiar with the Japanese economy and the growth there, to grow 83 percent on the base that we're doing is stunning. And so we are placing more and more resource in these areas and continue to look for expansion possibilities throughout Asia.

Cook said in January that the company expected a favorable pricing environment for DRAM. And they had expected prices in certain commodities to fall.

Cook was asked about long-term commitments in on supply. He offered some details on flash supplies.

From our point of view on the design side, we design components where we believe we can innovate beyond what's available in the market. And the most recent example of this is the A4 chip. But with the A4 chip, we didn't feel like we had to invest in the fab itself and build the fab because we felt like they were good options in the market for doing that, but not good options in terms of buying a design, and so we really focused on design.

On the operational side of the house, as you probably remember, we've historically entered into certain agreements with different people to secure supply and other benefits.

The largest one in the recent past has been we signed a deal with several Flash suppliers back at the end of 2005 that totaled over $1 billion because we anticipated that Flash would become increasingly important across our entire product line and increasingly important to the industry. And so we wanted to secure supply for the company, and we think that, that was an absolutely fantastic use of Apple's cash. And we constantly look for more of these.

And so in the past several quarters we've identified another area and come to some recent agreements that Peter talked about in his opening comments, in that these payments consist of both prepayments and capital for process equipment and tooling. And similar to the Flash agreements, they're focused in an area we feel is very strategic. And so I'd prefer not to go into more detail about what specific area it's in, but it's the same kind of thinking that led us to those deals that led us to the Flash deal.

Of course, the iOS devices are flash based. But Apple is also showcasing the performance benefits of flash memory in its Mac products, such as the MacBook and MacBook Air. Solid-state drives are an option for MacBook Pros. Customers want the flash goodness.

So here's my guesstimates: Apple has locked in prices for flash memory components. It must have a reasonable supply already in the chain. And with $43 billion in cash, the company can get what it needs. But likely it won't have to stretch far.

As one of the world's biggest customers for the technology, it will get its supply before the smaller buyers — even if those "smaller" companies are Hewlett Packard, Motorola and even Samsung. In the manufacturing business, Japanese manufacturing giants and the arms of Korean chaebol conglomerates can't play in-house favorites. The biggest customer gets first choice.

That means that everyone else, big and small will feel the pinch more than Apple. Way more.

Topics: iPad, Apple, Hardware, Mobility, Processors

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94 comments
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  • Not only NAND flash; condensators, resistors and some other components

    are done in Japan. However, for now, main concern is people.
    DDERSSS
    • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

      @denisrs I think that you and others are correct. If my headline and analysis appears heartless, I apologize to you and to those with friends and family in Japan. Like me. I contacted them last night, offering my prayer for their safety and recovery. However, my editorial mission here is to look at Apple, its products and markets. If that appears callous, I ask your forbearance.

      thanks for reading,

      David Morgenstern
      davidmorgenstern
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @davidmorgenstern
        I'm glad you're actually addressing this. I would suggest adding links to websites to help the people affected by this disaster. If we want to lessen the impact on everyone, we ALL have to help.
        misslemonade
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @davidmorgenstern
        Dude,
        Really not good enough! You could still show some compassion. Look of the depth of disgust you've provoked. Your overblown myopia is stopping you from rejoining the human race.
        teoverton
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @misslemonade

        <i>I'm glad you're actually addressing this. I would suggest adding links to websites to help the people affected by this disaster. If we want to lessen the impact on everyone, we ALL have to help.</i>

        For all the time you're spending giving suggestions on a tech blog, you could actually be knocking on doors and soliciting donations for the actual relief efforts.
        zeth06
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @davidmorgenstern
        My mom's family is in Japan but I still was wondering about the subjects that your article covered.
        Don't worry, you are not being callous at all.
        MoeFugger
      • What is Apple thinking at this time?

        @davidmorgenstern
        I concur that it is not a situation anyone should want to find themselves in, and the loss of life sadens even me, but you are only asking the same questions that Apple is at the moment.

        They are not rushing aid to those in need, they are in fact looking to secure from different sources.

        The consumers of this world do not want to hear "We are sorry that we have no iPads" to sell you due to the earthquake in Japan, stop back next year", and Apple want does not want to tell that to consumers and investors, alike.
        Tim Cook
  • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

    Appalling headline and article. Are you sure The Onion's editors haven't taken over your content today?
    limahuli
    • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

      @limahuli <br><br>Forgive me for being shallow and stupid, but this is zdnet, a <b>tech blog</b> that addresses technology and business-related issues. Zdnet isn't expected to provide live coverage of the tsunami victims on a daily basis. They work for a living too. <br><br><br>Any stock investor will do his due diligence by paying attention here.
      zeth06
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @zeth06
        "Any stock investor will do his due diligence by paying attention here."

        harsh.
        tyania
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @zeth06
        Money isn't everything. Get a heart.
        elppa234
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @elppa234<br><br>Did I ever say it was? As I've said in other posts: People die all the time. If anything, America is complicit in the deaths of hundreds of thousands if not millions for the role it has played in supporting authoritarian regimes all around the world. WE of all people CREATED Osama bin Laden. WE helped the Taliban grow into the monster which sprouted the horns to carry out 9/11. WE supported Saddam Hussein with money and weapons so he could control his own people via brutal means and funnel oil to the rest of the word. US news anchors did a nice rendition of Saddam's mass graves but guess what? None of that would've been possible without our grand strategy of supporting thugs like him. Our blindness and our stupidity made us mass murderers in a sense.<br><br>Call me callous if you will, but it sickens me more inside that you're crying about a tech blogger posting an article. Newsflash: He didn't kill people. We all did in some way shape or form with our tax dollars.
        zeth06
      • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

        @zeth06
        Why should we forgive you for being shallow and stupid. I can only agree with your self-diagnosis. Yes it is a tech blog, but not only for socially inept socio-paths with no regard for human life or suffering.
        teoverton
  • See it's stuff like this...

    That makes us Americans look like a bunch of shallow, self-absorbed idiots. Japan just started counting up the casualties and trying to keep a nuclear reactor from overheating and we're worried about toys.

    P.S. I totally agree with the comments being collected. One of the most tasteless and ill-timed articles EVER.
    oncall
    • You are g@damn right on the button

      @oncall .. no matter how the author(s) try to paint this, this article is an absolute disgrace and tantamount to figuratively p*$$ing on the plight, pain and suffering currently being experienced by the folk of Japan.

      Bad timing, bad idea, s@#t for brains, gutter tabloid material if ever there was any. This is typical of ZDNet for always resorting to the lowest common denominator to get a story out .. i really shouldn't be shocked at that fact regarding ZDNet - but i am.

      Well done Morgenstern for scraping the festering bottom of the barrel.

      thx-1138_
  • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

    I am sure the people who "feel the pinch" most are the people who have had their lives destroyed by the tsunamis and earthquakes. The lack of forethought in writing this article is appalling.
    Brian Tdot
    • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

      @Brian Tdot
      I missed the "feel the pinch line" I was so appalled and outraged by this article. I didn't think I could be more disgusted and revolted. How the hell could the author be looking at the pictures of houses and cars full of people being obliterated and washed out to see and think "but what about the ipad2 launch". My god it boggles the mind! Do people like this really exist? Would this man see genocide and worry about its effect on inflation?
      teoverton
  • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

    Err, I think there are more important things happening in Japan. I don't think this article reflects well on ZDNet. You guys really don't have any class do you?

    I think you could have waited to write this until you have actual information, and not on the same day as so many lost their lives. But I guess if you can sleep at night then you're gonna write it. Just not much of a human being are you?
    jeremychappell
  • Wow!

    Way to be amazingly insensitive when people are dealing with the aftermath (and aftershocks) of a huge earthquake. They haven't finished counting the casualties and you're worried about IPAD SALES? Why don't you get off the internet and come back when you grow some empathy?
    misslemonade
  • RE: Will Japan's Great March Earthquake ding Apple's iPad 2 rollout?

    To echo everyone else here, you are pathetic Mr. Morgenstern! People have lost their lives, Japan's economy was already a mess and this will make it worse, and the only thing you can write about is how this affects your precious Apple and the iPad!!!

    We all know you are Apple's biggest cheerleader, but you should be completely ashamed of yourself, and I for one will be leaving this site and get my tech news/entertainment elsewhere after reading this (which I didn't even finish).

    This is simply PATHETIC!!!
    omdguy