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3/18/2011
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Japan Earthquake Pushes Component Prices Higher

Apple's iPad 2 and other electronic devices are vulnerable to potential supply chain disruptions resulting from damage to Japan's infrastructure, according to iSuppli.

Apple iPad 2 3G Teardown
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Slideshow: Apple iPad 2 3G Teardown
As Japan recovers from its worst earthquake on record, fears of possible disruptions in device manufacturers' supply chains for electronic components has caused prices to spike in the spot market, in which goods are sold for cash and delivered immediately, despite the absence of any real shortages, a research firm said.

Spot prices for high-density NAND flash memory found in smartphones and other mobile devices have climbed as high as 10%, while prices for DRAM system memory used in PCs have jumped as high as 7%, HIS iSuppli says. The increases do not indicate a real shortage of either component. Rather, the hikes reflect the psychological impact the disaster has had on buyers, particularly smaller ones without contracts for future purchases from suppliers.

"It's very premature to say how it (the quake) is going to impact overall component supply," iSuppli analyst Rick Pierson said in an interview Thursday.

If shortages and price hikes occur in the regular market, they are unlikely to be seen before the end of March or the start of April, the research firm said. That's because manufacturers have enough inventories to last at least that long, and because prices have been set in current contracts.

The largest companies, such as Apple, Hewlett-Packard, and Nokia, are unlikely to feel the impact of higher prices for a while, because of long-term contracts with suppliers. Companies unable to negotiate such contracts will be the first to feel the bite from higher prices, Pierson says. Companies with revenue of $1 billion or less usually negotiate new contracts with each purchase, because they don't buy enough for longer-term deals.

One large manufacturer not seeing any disruptions in it supply chain to date is Qualcomm, the world's largest supplier of semiconductors for mobile phones. A recent review by the company showed no significant impact from last week's quake and the massive tsunami that followed.

"Qualcomm has multiple, geographically diverse sources for supply as well as production processes specifically designed to enable us to mitigate disruptions in our supply chain," the company said in a statement.

Samsung Electronics said in a statement e-mailed to InformationWeek that it was still evaluating the problems in Japan with its component suppliers. "We will continue to cooperate to secure our supply and ensure there is no disruption to production," the company said. "Samsung is in the process of assessing potential business implications brought about by the tragic events in Japan."

While large companies like Qualcomm and Samsung will likely be able to switch to other suppliers, those that cannot face several hurdles in getting components from suppliers in Japan. Those difficulties include receiving raw materials and shipping products on Japan's damaged highways. Other problems include employee absences because of the crippled transportation system and power outages and aftershocks that could have an impact on delicate manufacturing processes. Most component suppliers are not in the worst-hit areas, so they didn't suffer severe damages to facilities.

Apple's ability to ship sufficient quantities of the iPad 2 is vulnerable to these potential supply problems, iSuppli said. The device's touchscreen-overlay glass, which iSuppli has identified as likely from Asahi Glass, and the electronic compass from AKM Semiconductor present the greater risks. That's because the components are not easily replaceable, which could cause a delay in finding another supplier, if needed. While AKM has reported no damage to its facilities, Asahi says three of its plants were damaged. Apple has not said whether it faces any potential supply problems.

How quickly Japan can patch its infrastructure will determine how much of an impact the quake will have on electronics manufacturers. "There's a lot of things in play here that will have an effect sooner or later on the global price and availability of these components," Pierson says. "Right now, it's very premature. I don't think anyone out there can really put their hand over their heart and say, 'This is exactly what's going to happen.'"

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