Following the quake in northern Japan, mighty Apple's
I'm here to tell you that those worries got a bit out of hand. Between the market close on Monday and the closing bell on Wednesday, Apple lost some 6.9% of its market value. That's nearly $22 billion in market cap going up in smoke. It ain't all that bad, folks.
The two components mentioned most often as pain points in the Japanese part of Apple's supply chain are flash chips, for which Toshiba fulfills about 35% of global needs, and the more esoteric BT resin, for which Mitshubishi Gas Chemical and Japanese rivals reportedly control 90% of the world's supply.
Let's attach these concerns one at a time.
Memories (no cats required)
Toshiba is a giant in the flash memory field, and Apple absolutely cannot make smartphones and tablets without that critical component. On the other hand, it's a global market with alternative suppliers, including American memory specialists Micron Technology
Flash chips are commodity parts, easily replaced with a competing chip. Moreover, the industry very recently started showing signs of coming out of another long cycle of oversupply and stuffed distribution channels. Chances are pretty good that a major player like Apple will be able to scoop up the memory it needs from distributors and intermediaries as needed -- it's the kind of customer that gets high priority when supplies are short.
That might mean buying at higher prices, which would be bad for Apple's margins in the short term. However, analysts say that the company has a habit of locking up long-term supply contracts on this type of component, which would insulate Apple from that effect to some degree.
And most importantly, the manufacturing facilities of Toshiba were far away from the epicenter of the quake and appear to be out of the rolling blackout zone. While initial fears surrounding NAND flash memory were understandable, the company's production appears to be in relatively good standing, all things considered.
Obscure chemicals for popular gadgets
The resin situation is a little more sticky, given the massive concentration of global supply among Japanese providers. The largest player, Mitsubishi Gas, went through about $1.4 billion in sales last quarter, and only has about $500 million worth of finished goods on hand.
On the other hand, Mitsubishi has reported only partial damage to its operations at two out of at least seven manufacturing locations, not a total collapse of the system, indicating a reasonable industry supply. Mitsubishi has moved its BT production from one plant to another before, but the process took almost a year to complete. My point here? There's no particular reason why production would need to be tied to the Fukushima region -- the old plant was in Tokyo, and the chief raw material used is simple ammonia.
Moreover, Mitsubishi is a leader and innovator in the field, but hardly the only supplier. There's no reason why the entire microchip and circuit board industries, which rely on BT resins, would be held up for too long by this setback.
To wit, both Intel
If anything, this looks like a chance for Mitsubishi's rivals to enjoy a temporary boost in resin orders, just as Micron, Spansion, and others should see decent pricing and high order volumes until the situation in Japan has been resolved. Incredibly, those memory-making stocks are trading lower since the quake. That's just backwards and upside-down. If there ever were a time to call memory stocks a safe bet, this would be it.
What it all boils down to
All things considered, Apple will be able to work around whatever supply disruptions the quake may have triggered. At worst, you'll see a temporary hit to gross margins, since Cupertino is unlikely to pass extra costs on to customers. And don't forget that Apple outsources its manufacturing to third-party providers such as Hon Hai Precision Industries -- those partners may absorb some of the financial impact and also help Apple find additional component sources.
Is Apple up the creek without a paddle? Not hardly. If Motorola Mobility
Want to stay on top of Apple's supply chain? Here's how you do it:
- Add Apple to your watchlist, because that's what you're really interested in, right?
- Then throw in second-stage suppliers Micron and Spansion. Why not Toshiba and Mitsubishi Gas? Because they are lightly followed stocks on the Pink Sheets, and following their peers will give you a better payoff.
- Reasonable proxies for Mitsubishi would include Dow Chemical and El DuPont de Nemours.
Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisorrecommendation. The Fool has written puts on Apple. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Intel. The Fool also owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.