Industrial Aftermath Looming Large

The recent earthquake and tsunami in Japan is casting a cloud over the industry of Korea. Companies are checking the damage while keeping a close eye on how things are unfolding there. Especially, they are concerned that a huge ripple effect is about to be made given their high dependence upon Japanese components.

Korea’s Ministry of Strategy and Finance said the earthquake will have only a limited impact on the Korean economy, but officials are continuing to monitor the situation. Japan is Korea’s second biggest trading partner, with total bilateral trade amounting to US$92.4 billion last year.

The biggest concern, however, is that local manufacturers are heavily dependent on Japanese parts and components for key products. Korea imported US$38.1 billion in components from Japan last year, which accounted for a quarter of total component imports. For now, automakers, shipbuilders, steelmakers, and electronics and semiconductor industries have a stockpile of components and industrial materials, such as petrochemicals, and will not have serious problems producing goods. But if the situation gets worse, these industries may also be affected.

In addition, as the transportation relies heavily on shipping and airfreight, a delayed restoration of the road networks and ports can affect industries of Korea. Because of the powerful quake, communication was cut off during the afternoon of March 11, driving Korean companies to an emergency situation. Fortunately, however, it has been restored and damage inspection is well on the way now. Korean electronics manufacturers running local subsidiaries there are busy inspecting the damage.

While a number of Japan’s leading auto, semiconductor, steel and oil refiners halted operations, some are saying that it will benefit rival Korean exporters. At least for short term, however, some domestic electronics, semiconductor and auto industries may be able to take some of the global market from their Japanese competitors or take a break from fierce competition for the time being, analysts say.

Mixed Impact on Auto Industry

Production at Renault Samsung and GM Korea is expected to hit a snag. Renault Samsung depends entirely on Nissan for six-cylinder engines and imports some of the core parts for the four-cylinder engines from Japan. GM Korea imports transmitters for the Chevrolet Spark and the old Lacetti for the Eastern European market. But the Hyundai-Kia Automotive Group is likely to suffer very little damage and may even benefit in the global market now that Japanese carmakers including Toyota halted production, according to the Hyundai Securities Research Center. However some market observers say while the production plants of Toyota, Honda and Nissan have been affected, it will not affect global auto production, even if the plants remain shut for only a week or two.

Semiconductor and LCD Supply in Peril

On the 4th day of the earthquake in Japan, Korean electronics manufacturers are still keeping a close eye on how things are unfolding, providing against contingencies. Though most experts are saying that the effect is and will be rather limited, they are concerned that their business could take a hit by an inadequate supply of any single component or material.

“There would be only a minor risk in terms of supply or price, although there may be delays in shipping the components overseas for packaging and testing, which could affect the production of finished products by Samsung or Apple in the U.S.” an industry analyst said. “If there are disruptions in importing crucial parts and materials from Japan, Korean manufacturers won’t be able to avoid the fallout,” said another analyst.

Korean semiconductor companies are, however, paying great attention to the damage suffered by Japanese wafer makers as all of them, including Shinetsu and SUMCO, fell victim to the quake. Taking up over 60% of the global market, they have supplied 50% to 60% of Samsung Electronics’ and Hynix Semiconductor’s wafer demands.

Once the operation of a wafer plant is halted, the yield can be restored in at least two to four weeks from the resumption of production. As such, a supply shortage might continue for a month at this time according to a worst-case scenario. Korean semiconductor firms, which have purchased wafers mostly from them, are observing the situation closely though they have adequate inventories for now. “As we have diversified our supply sources and have goods in stock, the impact will be restricted,” said Samsung Electronics. However, the supply shortage might be prolonged since uncertainties like the explosion of the nuclear power plants in Hukushima are still everywhere. The transportation problem cannot be ruled out, either.

“It might not be that disastrous for the moment, but if lengthened, the story is different,” said a corporate executive, continuing, “We are mulling over resorting to other suppliers.” Market research agency DRAM eXchange forecast that, if Shinetsu’s and SUMCO’s damage becomes gigantic, Japanese companies like Toshiba and Elpida are likely to receive an especially severe blow because of their higher dependence.

The display sector is seeing that more time is needed to make any judgment in that the supply channels are intertwined among Korea, Japan and Taiwan. Korean LCD panel makers are predicting a limited industrial impact as the factories of Sharp, Panasonic and so forth in Japan avoided a direct hit and are not subject to a lengthened production suspension. The combined share of Japanese firms in the global large-sized LCD market is no more than 13% on a turnover basis.

“It is said that major LCD plants are out of harm’s way as they are located away from the epicenters,” said an industry insider, commenting, “If so, the ripple effect is unlikely to be enormous.”

In the meantime, Korean LCD component firms are deeply concerned. They are having difficulty getting a clear picture of the situation as the original materials are procured through a lot of steps. To add to their worry, some are forecasting there is a chance that the industrial situation might be exacerbated if the supply of the TAC (triacetyl cellulose) film went wrong. The film is an original material of polarizing plates and Korean TAC film manufacturers’ reliance on Japanese suppliers reaches some 80%. Small- and medium-sized enterprises (SMEs) in Korea may feel the biggest impact. “SMEs are expected to undergo much hardship even if there is little disruption in securing parts,” said a director with the overseas market division at the Small and Medium Business Administration.

Impact on other Industries

Although the plants of Japan’s leading steelmakers like JFE Steel and Sumitomo Metals have also halted their operations, an industry insider said, “The impact on the steel industry will be relatively small” adding “But once Japan starts rebuilding, Korean construction firms are expected to see exports to Japan rise.”

Airlines and travel companies are nervous since the earthquake hit Japan ahead of the peak seasons. Some 3 million Japanese tourists accounted for 35 percent of foreign visitors here in 2010. With the Golden Week public holidays in Japan falling in late April and early May, a lot of Japanese may forego traveling abroad and choose to stay home during one of the most lucrative periods for local tourism operators. “Amid uncertainties, it appears that Japanese corporate and individual travelers will refrain from overseas trips,” said an official at the travel agency. A drop in the number of Japanese tourists will mean lower sales at Korean department stores, duty free shops and cosmetics stores, where Japanese consumers are major customers. Koreans may also avoid traveling to Japan.

In addition, Japan may be off the list of travel destinations for Korean holidaymakers for the time being. “Korean Air offers about 70 daily services on Japanese routes,” an airline industry insider said. “Domestic airlines are expected to be hit hard since they have a high proportion of services between the two countries.”