Wall Street Beat: Markets recover from Japanese temblor

But damage to the global technology supply chain raises serious doubts about third quarter performance

Global stock markets and industry supply chains have started recovering after a 9.0-magnitude earthquake struck off the coast of Japan and sent a massive tsunami roaring ashore to sweep away towns and factories.

But despite a clearer picture of what Japan faces in cleaning up after the disaster, the impact on the global technology supply chain is yet unknown. Most analysts say shortages of key parts will start to show up late in the second quarter and really start to bite the supply chain in the third quarter of this year. A lack of some key parts could mean people will have to wait a while for certain smartphones, tablets and other gadgets.

Shares on Japan's Nikkei 225 Stock Average have rallied 19 percent from their earthquake low to close Friday at 9755.10. The index dropped 21 percent from the day before the earthquake to a low of 8,227.63 in mid-day trading on March 15.

Other stock markets followed Tokyo, though not quite to the same extremes.

The U.S.'s technology-laden Nasdaq Composite Index has gained 6.6 percent since hitting its post Japan temblor low of 2,603.50 on March 16. The index closed at 2,781.07 on Thursday. The Dow Jones Industrial Average has performed similarly, rising 6.6 percent from earthquake lows to close Thursday at 12,319.73.

Japanese technology companies have been working hard to put factories in northeastern Japan back in order, though they face a daunting task. In some places, roads and railways have been washed away, power lines remain down and rolling blackouts remain in effect where there is power, all hindering activity.

The country remains vital to the global electronics supply chain.

"Though production has increasingly been outsourced to China, South Korea and other lower-cost markets, there are over 40 factories in Japan producing a significant proportion of the world's PC and smart phone components," said market researcher Canalys, in a report. The market researcher lists batteries, flash memory, chips and displays as some components that have been hit, but the worst threats to the tech supply chain "will be for complex or proprietary components. Apple's iPad 2 is assembled in China, for example, but a number of components are only manufactured in Japan."

The number of components and materials made mainly or only in Japan is impressive.

For example, a Sony factory in Sendai that was inundated by the tsunami is the only facility in the world capable of making HDCamSR tape and SxS flash cards for a range of video cameras and other gadgets. The company has not said for sure when production will resume.

One plant at another company, Shin-Etsu Chemical's Shirakawa factory, turns out about a fifth of the world's 300-millimeter (12-inch) silicon wafers, a raw material vital to the chip industry because chips are etched directly onto the wafers. Shin-Etsu has been working to repair damage, but "it is still unclear how long will be needed for restoration," it said Friday.

Another company, Mitsubishi Gas Chemical, makes a huge portion of the world's bismaleimide triazine (BT), a resin vital to chip packaging. It hopes to restart production at a factory this month, but that will only bring back one fourth of its pre-earthquake output. The next stage of recovery will start in May.

"The earthquake, tsunami and nuclear reactor disasters in Japan have significantly impacted the country's semiconductor manufacturing industry," said Gartner, in a recent report. The market researcher estimates that there are around 30 chip factories in northeastern Japan that may be affected by the disaster or rolling blackouts.

All gadgets need chips, and in most cases, multiple chips. A shortage of these materials will certainly mean some production delays.

Japanese companies expect the disaster to affect their earnings.

Electronics maker NEC, for example, has already scrapped its dividend for the year and said it's not yet sure of the full financial impact on its business. The company said some of its own factories as well as those of key suppliers were hurt by the earthquake and tsunami, while transportation has also been hampered.

The company has been able to restart its facilities but a "broad range of impacts to the business such as the material supply is expected," NEC said in a statement.

The number of component shortages affecting so many different categories of goods, and the hurdles to ramping production back up quickly to pre-earthquake levels, makes most analysts believe that even a speedy recovery for Japan won't save the global technology supply chain from feeling the impact of the disaster.

"We believe overall electronics products shipments will suffer from the end of the second quarter," said Eric Chen, analyst at Daiwa Capital Markets.

Daiwa expects that, at the very least, prices for a host of materials and components will rise, and some of those costs may have to be passed on to consumers.

The world should get a better view of how the disaster in Japan will affect global gadget supplies over the next several weeks.

The financial year for Japanese companies ended on March 31, and investor conferences in coming weeks will mean management will have to give their latest updates to how quickly they will be able to resume operations and what impact their reduced output might have.

The earthquake on March 11 was the biggest ever recorded in Japan. Estimates of the cost of repairing damage caused by the temblor and resulting tsunami run into the hundreds of billions of dollars, and the death toll has moved up steadily since the disaster. The latest tally was 11,620 dead and 16,464 missing, Japan's National Police Agency reported Friday afternoon.

"While the country faces a costly and painful recovery, Japan has shown its ability to rebuild in the past," Canalys said. "With the support of the international community, this could give the country the economic boost it needs to emerge stronger than before."

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Dan Nystedt

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