We've recently spent some time chatting with Dan Mahoney, President and Chief Executive officer at Renesas Electronics America, Inc. We discussed how Renesas - the leading automotive semiconductor vendor - has recovered from the terrible earthquake and tsunami that hit Japan on 11th March 2011.  The story is one that blends a well-organised, efficient business recovery with the very human stories of loss, hardship and extraordinary hard work.

In the immediate aftermath, five of the company’s ten Japanese fabs were shut down, although four of these came back on line very quickly.  Worst impacted by far was the Naka fab, which contains 200mm and 300m production and testing facilities, and which provided around a quarter of the company’s automotive microcontroller capacity.

It took a week to sort things out enough to be able to enter the Naka plant with electricity available to enable an initial damage assessment.  Very early estimates were that it could take 6 months to restore the clean room, with full production perhaps not achievable for the remainder of 2011.  However, recovery has been much quicker than expected, due to a number of factors:

• Large numbers of highly dedicated people put in a massive effort.  This was while sometimes themselves living in very basic dormitory accommodation, with limited access to essentials such as running water.  Renesas estimates that across all the company’s recovery efforts, an additional 80,000 non-Renesas people were involved.
• Competitors allowed Renesas to “jump the queue” in gaining access to the replacement equipment that it required from its suppliers.  Although altruism and camaraderie were certainly key motives, there was also business sense in this.  End-product manufacturing that had stopped due to a lack of Renesas parts also meant that competitors were not shipping parts either.
• Renesas shifted much of the Naka product manufacturing to other domestic fabs, including its Tsugaru facility in Northern Japan
• Renesas accelerated its existing plans for the use of outsourced foundries, shifting some products (including some automotive ones) to TSMC and Global Foundries. In some cases this required a temporary relaxation of qualification requirements by customers until the requirements could be completed.

The scale of the effort can be seem in the photo below, which shows the rapid progress over (in this particular instance) a time period of only just over 3 weeks.

The result was that production at Naka restarted for the 200mm line on the 1st June, and the 300mm line followed shortly afterwards on 6th June.

Production is not yet back up to pre-quake levels.  Renesas estimates that will be achieved by the end of September, considerably earlier than first thought.  Electricity supplies throughout Japan remain problematical, and Renesas has brought in a number of on-site generators.  As the site includes a clean room, Naka is exempt from the planned rolling blackouts that still impact much of Japanese industry.

So, now that much of the hard work of the recovery process has been done, what has been the impact on Renesas and the wider semiconductor and automotive industries?

• Dan Mahoney asserts that Renesas now has better customer relationships than before the crisis.  He cites a number of accounts where they had limited visibility and access beyond the engineering teams, but now have good relationships with C-level staff. 
• The installation of new equipment at Naka, and the refurbishment of equipment that could be salvaged, means that yields for some products are now claimed to be higher than they were before the disaster.
• There has been a significant reassessment of the supply chain.  There is a general realisation that – in terms of continuity of supply – things could have been much worse.  If, for example, a similar tragedy had hit Taiwan, then the impact for the global electronics industry would have been much, much greater.  This has led to many customers now requiring manufacturing redundancy of supply as a basis for new contracts.
• This rethink on the supply chain means that the company’s use of foundries such as TSMC and Global Foundries will not be a temporary thing.  Renesas will emerge from the recovery process with about 10 per cent greater production capacity – without having put in any additional capital investment.  
• Although it appears that no firm decisions have been made on whether automotive-grade products that are currently outsourced will be pulled back to Naka, requirements for redundancy of supply makes it likely that outsourced suppliers will manufacture automotive products.
• However, this requirement for redundancy will cost more.  Renesas clearly believes that customers will have to share in this cost.  That is not always easy to achieve in automotive!

The recovery to date, and the dedication and hard work of all of those involved, is very impressive.  The wider industry impact of the disaster has clearly accelerated the outsourcing trend.  Strategy Analytics believes that future fab investment is highly unlikely to be concentrated in regions that already have a high density of such facilities.  

Redundancy of supply and supply chain robustness are now key competitive grounds for automotive semiconductors.  What costs can be passed on to customers remains to be seen.

Raw Material Threat To Semiconductors – Resulting In Disruption To Suppliers and OEMs

The overall impact of the earthquake and tsunami is yet to be played out for Japan.  What is clear is there is great uncertainty regarding the full impact on the automotive electronics supply chain and potential disruption for vehicle OEM production.  Damage to lower tier supplier facilities, particularly to the semiconductor and suppliers to the semiconductor industry, varies considerably and are causing knock-on effects that will affect upper tiers and OEMs on a wider scale.  Even undamaged facilities are being impacted by rolling electricity blackouts and some water shortages.

• Immediate damage to operations has lasted for two weeks since the disaster struck (by March 25th), mainly confined to the affected Tohoku region.  This is to ensure safety inspections are carried out following a major earthquake.  Limited operations have now resumed in many facilities.  Certain upper tier vendors have also transferred some production to areas unaffected by the disaster, such as in the west of Japan.
• Full production is likely to resume four weeks or one month after the disaster struck (by April 11th), although facilities that have suffered direct damage may be closed for longer, perhaps for another two or three months.  Aftershocks in Tohoku have prevented the reopening of several plants. 
• Even when production operations resume, the immediate challenge is the lack of a continuous supply of electricity, gas and water

• Fujitsu’s wafer fabs have been idled and will not proceed to full production capacity due to a lack of water and electricity, perhaps three or four weeks later.  The facilities that have restarted production in other companies have had to operate with limited lighting to conserve power.
• Furthermore, restrictions on fuel supply and damage to transport infrastructure will mean the difficulty of transporting components, systems and finished vehicles – although Mitsubishi Motors can assemble vehicles, it is having difficulty transporting them to customers because of damaged roads, resulting in a further shut down. 
• The plants that have received direct damage from the disaster include a Toyota plant supplying batteries for electric and hybrid vehicles, causing delay to launches of new hybrid models; and the Nissan engine assembly plant in Iwaki – possible alternative supplies for Japanese vehicle assembly plants could be sourced from Decherd, Tennessee, USA. 
• Among the worst affected Tier 1 vendors include Alpine and Yazaki, where one facility remains evacuated being located close to the Fukushima power station, and Hitachi Automotive. 

However, particular concerns in the potential lack of raw materials reaching the semiconductor vendors will have a longer effect on the automotive supply chain.

• Nearly all of the world’s supply of BT (bismaleimide triazine) resin, an epoxy resin used in the packaging of some chips, comes from two plants located in Fukushima and owned by Mitsubishi Gas Chemical.  These were directly damaged by the disaster and could take three months to repair and bring back into service.  Qualcomm, meanwhile, is using its buffer stock and is making adjustments to its near-term material mix as a result.
• Hitachi Chemical also supplies 50 percent of the world’s ACF (anisotropic conductive adhesive), used in panel module driver ICs and silicon wafers, according to the China Times.
• New supplies of copper-clad laminate, which is needed in the production of printed circuit boards, have been delayed following disruption in two chemical supply companies: Mitsubishi Gas Chemical and Hitachi Kasei Polymer.  These suppliers amount to 70 percent of the world’s supply of the material. 
• Silicon wafers supply has also been disrupted. Two major plants, Shin-Etsu Chemical's Shirakawa and MEMC Electronic Materials’ Utsunomiya facilities, have stopped production. These plants reportedly accounted for 25 per cent of the global supply of silicon wafers.

A raw material shortage will restrict the production of semiconductor components and delay assembly of systems, all the way to vehicle assembly, no matter where these are assembled. 

• For example, disruption in the supply of electronic components has delayed the assembly of diesel engines at PSA Peugeot Citroën in France.
• General Motors has also blamed the shortage of parts from Japan that led to the suspension of engine assembly operations at Tonawanda, New York, and of vehicle assembly operations at Shreveport, Louisiana. 
• GM has halted or slowed production of some model due to shortages of Mass Air Flow (MAF) sensors supplied by Hitachi Automotive.
• Overtime and other shifts have been cut at other assembly plants.  For example, the supply of some infotainment systems could bring disruption to some OEMs assembling outside of Japan.
• Should problems persist with the semiconductor supply chain, knock-on disruption to OEMs may worsen by early- or mid-April, when inventories run dry.
• Leading automotive semiconductor vendor Renesas has been badly affected and is issuing regular updates on progress on restarting its worst affected wafer fabs.

A further impact will be on Japanese OEMs that have a large proportion of exports sold in North America, especially with models assembled exclusively in Japan.

• The absence of Acura, Infiniti and Lexus-branded models will enable rivals to increase their market share in profitable luxury segments.
• Volume sales of compact models, such as the Honda Fit and Scion models, will also impact on sales turnover.  By the end of March, lost car production could amount to 450,000 units in Japan and 10,000 units overseas.

The vulnerability in the electronic supply chain may bring about the substitution of raw materials or the localization of raw material production to different regional markets (away to Europe and North America).  And flexibility may also be required from the lower tiers, to bring about contingency plans to their production capabilities.

The situation at suppliers can be expected to remain fluid for weeks to come with perhaps some acute shortages coming into sharper focus.  Although this is an exceptional event, vehicle OEMs and their tier suppliers are likely to review future supply policies in light of its impact on their business.