Foxconn explosion: Apple iPad supply impact unclear, dangers of combustible dust

Combustible dust appears to have been a trigger for the explosion at Hon Hai, which makes Apple's iPad.

An explosion at a Hon Hai plant on Friday killed three and may impact Apple iPad supplies, according to analysts.

The Hon Hai---also known as Foxconn---explosion was at a plant that builds iPads for Apple. Analysts have been handicapping the impact on Apple's supply chain and thus far it's unclear. Short-term there's likely to be little impact. In the long run, however, regulation may force plant changes as Hon Hai retools and cleans up its operations.

The biggest reason why regulation may become an issue is the cause of the explosion. The blast was reportedly traced to combustible dust that gathered in a polishing workshop. Hon Hai has suspended polishing operations in its factories.

In 2008, 60 Minutes did a story on combustible dust and examined why things weren't regulated better. An excerpt and video from that story:

Since 1980, there have been at least 350 such explosions in the U.S., killing 133 people and injuring hundreds more. There are at least 30,000 factories in the nation vulnerable to dust explosions, and yet, some top federal safety officials tell 60 Minutes the government agency whose job it is to protect workers is ignoring a tried-and-true way to prevent those explosions.

The fix is to focus more on simple housekeeping and improving shop floors. There's a set of Occupational Safety and Health Administration (OSHA) standards that companies fail to adhere to in many cases.

How does this impact China? Let's say the Chinese government begins a crackdown on combustible dust. If Foxconn wasn't clean enough other contract equipment vendors probably aren't either. These equipment vendors may have to shut down and retrofit as needed. At the very least, these plans will have to clean up.

Given the supply chain for components is already tight, production could go well beyond Apple. It's not like Hon Hai only manufactures Apple goods. China is the factory for the world.

In the short term, analysts are mixed on the Hon Hai impact. Morgan Stanley analyst Jasmine Lu wrote:

While the impact on supply appears manageable given the Chendu plant is not the main site, this may tighten supply of iPad 2 production to meet high target. As Hon Hai only recently opened its iPad production line in Chendu back in late 4Q10, we estimate the monthly run rate could be below 400k or less than 20% of total production year to April and less than 30% from mid 2Q while the main production stays in Shenzhen. We believe the ramp-up of Chendu plant will play a key role in supporting iPad 2 volume in 2H11 especially as Apple iPad 2 has been under tight supply owing to unsatisfactory yield at the early stage of ramping up.

Barclays Capital analyst Kirk Yang wrote:

Even in a worst-case scenario in which there are significant iPad 2 production disruptions in Chengdu, in terms of either metal casing component shortages or assembly line shutdown (which we do not believe is likely), we expect Hon Hai's original facilities in Shenzhen could quickly make up some of the shortfall from Chengdu by ramping up the idle capacity. The worst case scenario could negatively impact iPad 2 shipments in 3Q11 if the Chengdu plants were to shut down for more than 2-3 months, which again we do not believe is likely.

Daiwa analyst Calvin Huang downplayed the Hon Hai explosion's impact on iPad supplies. Huang said supplies will remain tight for another reason:

For now, the major bottleneck for iPad production remains IPS panel supply. The weaker-than-expected iPad shipments in 1Q11 were due to supply constraints. As the constraints are continuing, we forecast 7-8m units of iPad shipments for 2Q11 and expect very back-end-loaded shipments of the iPad in 2011.