The earthquake that swept through the Northeast yesterday easily brings to mind the tragic events that occurred in Japan earlier this year, prompting discussion about the impact natural disasters can have around the world. The physical damage caused by these disasters is generally obvious, but often the tremors can extend to the economy, as well.
The immediate effects of the earthquake and tsunami that shook Japan have been clearly visible in the devastation that swept the country, but in a global economy, one in which virtually every region is inextricably linked, the impact is likely to reverberate on a much larger scale. For many electronics companies, these indirect effects have come in the form of manufacturing delays, shipment delays, and inventory imbalances, all largely caused by disruptions in their supply chains.
Essentially, companies on the other side of the globe, which have suffered no damage to their production facilities, are now struggling to meet production demands. Japan plays a key role in the supply chains of many electronics giants, including Apple (AAPL), as it provides many of the components that make up popular gadgets around the world. For example, production of both the iPhone and iPad require parts from Japan, and delays in acquiring these necessary pieces could reduce the number of devices brought to market. General Motors (GM) has also noted concerns surrounding possible delays in its supply chain.
Recently, the global marketplace, and notably the electronics industry, has become increasingly complex and convoluted in that many supply chains cross back and forth across geographic borders, and even over continents. Too, electronic devices are made up of numerous small parts, leaving plenty of room for the possibility that there could be a kink in the chain. In the case of Japan, the delays in production at damaged facilities in the region have caused a bottleneck for many electronics companies, which cannot carry out their own manufacturing procedures as a result.
Too, the industry is now so interconnected that some companies, which do not themselves rely on Japan for parts, are being affected because of their relationships. For example, Applied Micro (AMCC), a provider of connectivity solutions to the communications industry, is facing headwinds due to disruptions in the supply chains of a number of its customers. The shortage of components from Japan will likely have a negative impact on demand for the company’s own products, as these customers will probably take a cautious approach when placing orders with Applied Micro, given the low visibility surrounding other parts needed to build their products.
For investors, the threat of supply chain troubles can cause a great deal of uncertainty and concern. It is likely the ripple effects from the Japanese earthquake will put pressure on revenues, and possibly affect near-term performance considerably. However, these issues should be alleviated over time. As the recovery in Japan continues, companies will probably resume adequate production levels, and the global manufacturing of electronics should be restored to normal. In the meantime, investors should take into account the possibility of short-term effects when considering committing funds to companies in the electronics arena.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.