Earthquakes, Floods, Epidemics: Is The Supply Chain Strong Enough?

Potential Breaks In The Global IT Supply Chain

Just-in-time manufacturing techniques, under which components are delivered to factories for assembly into larger components or final products only as needed, are key to eliminating the cost of carrying inventories of those components. To work properly, just-in-time manufacturing requires careful control of supply chains.

IT supply chains can be precarious in the best of times. But a natural or man-made disaster can snap otherwise efficient supply chains, resulting in shortages and price spikes that could disrupt an entire industry.

The IT industry has already experienced such breaks in the past few years, including the impact of Thailand floods on the hard-drive industry and the impact of a Japanese earthquake on supply of a variety of key components.

How precarious is the global IT supply chain? Here are some of the potential disasters and several examples of real disasters that did impact IT production.

Potential Breaks: Earthquakes

Japan, Taiwan and the Philippines all sit on the Ring of Fire, which traces the tectonic plate under the Pacific Ocean. Stretching from South America northward to Alaska, and then south again through east Asia, that tectonic plate is actively shifting relative to its neighbors to account for 75 percent of the world's active volcanos and 81 percent of the world's largest earthquakes, according to the U.S. Geological Survey.

Earthquakes frequently hit all three countries, and have in the past disrupted production of semiconductors, components and IC wafers, as well as put a temporary halt to call center operations.

Potential Breaks: Tsunamis

Tsunamis are a series of waves caused by sudden displacements in the sea floor, landslides or volcanic activity, and can range in size from a few inches to massive walls of water, according to the National Oceanic and Atmospheric Administration.

When it comes to IT supply chains, tsunamis hitting Japan because of its location on the Ring of Fire have caused the most disruption. Other tsunamis have caused massive damage and loss of life throughout much of Asia's island nations and coastal areas, but to date Japanese tsunamis have had the greatest IT impact.

Potential Breaks: Floods

Floods caused by typhoons, monsoons and human activities are common throughout Asia and have in the past impacted both IT production and the shipment of IT products.

While it is easier to build infrastructure such as dams and canals to mitigate the potential damage caused by floods than it is to mitigate damage from earthquakes or tsunamis, the fact remains that huge investment would be needed to control flood damage. And given the unpredictable nature of flooding, such investments are long shots.

Potential Breaks: War

Except for revolutions and a few short border skirmishes, Asia has been mostly peaceful since the end of the Vietnam War.

But that could change, specifically in North Korea and South Korea, and in China.

Potential Breaks: Pandemics

China was Ground Zero for two of the scariest pandemics of the past decade: the Severe Acute Respiratory Syndrome (SARS) outbreak of 2002 and 2003, and several strains of influenza.

SARs infected more than 8,100 people worldwide, resulting in about 774 deaths. While more people die from influenza every year, SARS was feared because of how quickly it was transmitted and its high mortality rate. The outbreak disrupted tourism and air travel, and led to dubious border checks and quarantines, but did not significantly impact supply chains.

The world has suffered several serious bouts of influenza, including the Spanish Flu of 1918 and several varieties of swine flu and avian flu. China, which because of crowded living conditions often has humans and animals in close proximity to each other, is one of the countries often cited as at most risk for the start of an new influenza-related pandemic.

Actual Breaks: Philippines Earthquake, October 2013

A 7.1 magnitude earthquake that struck the Philippines in October 2013 damaged government buildings and a major hospital in Cebu City, and temporarily shut down a major center of the call center industry.

The Philippines news site ABS-CBN reported that Cebu City is home to the world's eighth-largest concentration of call centers worldwide.

Actual Breaks: SK Hynix Fire, September 2013

A fire in September 2013 broke out in a Wuxi, Jiangsu Province, China-based DRAM factory owned by Korean-based SK Hynix.

A month after the fire, the actual impact on the worldwide supply of DRAM was still being debated. However, the impact on price was not. DRAM contract prices rose by more than 6 percent in early October, according to DRAMeXchange, a research division of TrendForce. Contracts with tier-one PC and server makers have protected their supplies and prices, while second-tier and third-tier manufacturers were suffering from higher prices.

Actual Breaks: Thailand Floods, Fall 2011

In fall 2011, massive floods inundated many of Thailand's industrial parks where hard drives are built. Analyst firm IHS iSuppli estimated about 25 percent of the world's hard drives are manufactured in Thailand. The flood also disrupted the production of components including electric motors and slider assemblies needed to make the drives in other countries.

Western Digital was especially hit, and was forced to curtail its Thailand production and put both storage OEMs and reseller customers on allocation. Most of Seagate production was done in other countries, but the company still saw severely constrained component supplies from Thai factories.

The floods resulted in a shortage of hard drives, which led to price spikes and supply allocation, especially for PC vendors that were more likely to see curtailed shipments than server or enterprise storage vendors. Those constraints took almost a year to clear up.

Actual Breaks: Hong Kong Floods, September 2011

Hong Kong, along with the Philippines and southern China, in September 2011 was pummeled by Typhoon Nesat. Winds of up to 100 miles an hour forced the closure of the Hong Kong harbor and airport.

Because of the amount of finished IT products and IT components that are sent via air freight from China via Hong Kong to other parts of the world, system builders were for a few days on the edge of their seats over potential disruptions to their business. Fortunately, the air freight disruption was short-lived, and left only a minor impact. However, it underscored the dependency of the IT industry on overseas manufacturing and the potential harm to business that could result from a disruption in air freight services.

Actual Breaks: Japan Earthquake And Tsunami, March 2011

The huge March 9.0 earthquake and subsequent tsunami that struck Japan caused massive flooding several miles inland and disrupted the world's semiconductor supply chain for months afterward.

The tsunami damaged facilities that produced DRAM wafers, gasses and color filters used in LCD panels, and cells used to produce mobile PC batteries. Production of certain components such as LCD panels in factories outside the earthquake impact zone also took a hit from power blackouts, which required recalibrating the production lines.

Actual Breaks: SARS Epidemic, 2002-2003

SARS, which started in late 2002 in southern China, by spring 2003 had disrupted travel to and from Asia and shut down several Asian IT manufacturers even where only a single case had appeared.

Eventually, about 8,100 people worldwide became sick with SARS during the 2003 outbreak, of whom 774 died.

While the IT supply chain impact was limited as infected countries quickly moved to contain outbreaks, the SARS epidemic's bigger impact was the realization that a similar epidemic, if not contained, could cause massive business disruptions as factories closed and workers refused to go to work for fear of getting infected.

Actual Breaks: Taiwan Earthquake

A massive 7.6 earthquake hit Taiwan in September 1999, causing a huge disruption in the supply of crucial components including DRAM and leading to a price spike of up to eight times normal prices before production was restored.

That earthquake struck central Taiwan, about 90 miles south of the capital city of Taipei and close to the Hsin-chu Industrial Park, home to some of Taiwan's most advanced high-tech companies.

These included the world's two largest IC fabrication plants and several ASIC and other semiconductor manufacturers, which at the time produced more than 70 percent of the world's graphics chips and 40 percent of the world's chipsets. Taiwan also supplied about 10 percent of the world's DRAM chips.