‘Barrage’ Confronts Chipmaker as Quake Creates Go-To Supplier

Omega Protein CFO Bret Scholtes
Omega Protein Corp. Chief Financial Officer Bret Scholtes. Source: Omega Protein via Bloomberg

Microchip Technology Inc. Chief Executive Officer Steve Sanghi is fielding a “barrage” of requests for replacement parts as the Japanese earthquake disrupts global semiconductor supplies.

Customers should order at least 12 weeks’ worth of their needs for microcontrollers, used in devices from washing machines to coffee makers to car parts, Sanghi wrote in a March 21 letter. Many recent deals have only been for “near-term backlog,” he said, without elaborating.

“I am expecting a huge surge of redesign inquiries,” Sanghi wrote. “Our existing customers should get in line first. We work from backlog, and those who commit backlog to us secure the supply first.”

Three weeks after the March 11 disaster idled scores of Japanese factories, U.S. companies are bracing for rising demand for everything from fish meal used in shrimp farming to caustic soda that helps make soap and paper. Shortages may worsen in coming weeks as more manufacturers gauge which parts are unavailable from their suppliers’ suppliers.

“It’s a wake-up call for companies about the risk of a global supply chain: ‘Hello, now we have a huge disruption that’s going to be very costly,’” said Clyde Prestowitz Jr., president of the Economic Strategy Institute in Washington, which promotes U.S.-based manufacturing. “Business is going to be good for guys who have maintained a presence in the U.S.”

Omega, Dow

Omega Protein Corp., Caterpillar Inc., Tyson Foods Inc. and Dow Chemical Co. were among more than 20 companies singled out in interviews last week with analysts, executives and consultants as being among hundreds of U.S. producers that may benefit from shifts in purchasing patterns after the earthquake.

Japan sold $120.3 billion in products to the U.S. in 2010 and bought $60.5 billion worth, according to the U.S. Commerce Department. Lost Japanese production creates openings for U.S. companies to substitute their wares or expand existing markets.

While Microchip has had “zero” supply-chain disruptions, customers should act because the Chandler, Arizona-based company has “received a barrage of inquiries from customers in need of a quick ‘replacement’ for several non-Microchip microcontrollers that they had in production,” CEO Sanghi wrote.

Asking buyers to order enough microcontrollers to last a quarter would be more than normal, said Chris Caso, a Susquehanna International Group analyst in New York. That much lead time would be typical if supplies get tight, he said.

‘Have a Look’

“If you are a Japanese company that hasn’t used Microchip before, you have an incentive to have a look at them now,” said Caso, who recommends buying the shares.

Microchip’s main competitor in Japan is Renesas Electronics Corp., according to Caso. Kanagawa, Japan-based Renesas said March 28 that work resumed at two of five chip plants damaged in the quake. Its Naka factory, which produced about 20 percent of its microcontrollers, was among the hardest hit and remained offline, according to a company statement.

Microchip reported revenue of $947.7 million in the fiscal year that ended in March 2010, with 51 percent of its sales in Asia. It has manufacturing locations in Chandler and Tempe, Arizona; Gresham, Oregon; and Bangkok. Sanghi’s letter resonated with customers, said Eric Lawson, a company spokesman.

“We’re seeing a lot of interest,” Lawson said, without elaborating. “There have been a substantial amount of inquiries.”

Food Chain

Interest in U.S. food exports is rising in Japan on concern that local goods are tainted by radiation, companies and industry groups said. Japan’s Ministry of Health, Labour and Welfare said March 26 that 99 products, including milk and vegetables, were found to be contaminated in Tokyo and five prefectures.

“A real question is whether seafood consumption in Japan loses some of its share of stomach to U.S. protein,” said Timothy S. Ramey, a Lake Oswego, Oregon-based analyst at D.A. Davidson & Co.

Black cod coming into Hallmark Fisheries in Charleston, Oregon, are fetching about $9.30 a pound, $1 more than when the previous season ended in December as Japan confronts a shortage, Production Manager Scott Adams said.

“I’m not trying to make money off of someone else’s misfortune, but Japanese love their seafood,” Adams said. “They are going to want fish they know is caught from a safe area.”

Fish Food

Farm-raised salmon and shrimp in Japan also may be in for a dietary shift: Houston-based Omega may be able to boost shipments of fish meal because of earthquake and tsunami damage to the country’s fishing fleet.

The aquaculture industry, which uses fish meal as feed, will need products harvested from new locations, Omega Chief Financial Officer Bret Scholtes said in an interview. He said fish meal generated 69 percent of the $168 million in 2010 sales for the company, which operates a 49-vessel fleet harvesting menhaden from the Gulf of Mexico and Atlantic Ocean.

Tyson, which is based in Springdale, Arkansas, and is the largest U.S. meat processor, saw a short-term boost in Japanese demand and requests to fill orders more quickly for that country after the quake, Chief Operating Officer Jim Lochner said at a March 30 JPMorgan Chase & Co. conference.

Pork Demand

Smithfield Foods Inc., the world’s largest pork processor, recently has seen rising Japanese demand for the more-profitable fresh pork sold to retailers over the frozen meat typically used for ham or sausage, Chief Financial Officer Bo Manly said at the JPMorgan event. Japan accounts for 41 percent of the Smithfield, Virginia-based company’s international shipments, according to its website.

With the Japanese government estimating quake-and-tsunami damage at as much as $309 billion, almost four times as much as the U.S. toll from Hurricane Katrina in 2005, the recovery effort also may be an opportunity for manufacturers such as Caterpillar, the world’s largest maker of earthmoving equipment.

As Caterpillar gains, so would suppliers such as Parker Hannifin Corp., said Jeff Windau, an Edward Jones & Co. analyst in St. Louis who recommends buying both companies.

“Parker Hannifin makes the hydraulics that raises the bucket in the Caterpillar hauler,” Windau said. “They also make hoses, controllers and other parts. So they benefit, too.”

Jim Dugan, a spokesman for Peoria, Illinois-based Caterpillar, said the company had no comment on analysts’ predictions. Christopher Farage, a spokesman for Cleveland-based Parker Hannifin, also declined to comment.

Caustic Soda

With Japanese plants forced to idle 19 percent of their capacity for caustic soda because of the earthquake, U.S. chemical producers such as Dow and Occidental Petroleum Corp. may benefit, said Mark Eramo, executive vice president of consultant Chemical Market Associates Inc. in Houston.

Caustic soda, produced in tandem with chlorine, is used to make pulp, paper and soap. Midland, Michigan-based Dow is the world’s largest maker of chlor-alkali, followed by Occidental, Olin Corp. and PPG Industries Inc. Richard S. Kline, a spokesman for Los Angeles-based Occidental, declined to comment, and Dow’s Greg Baldwin didn’t return calls and e-mails.

Also hampered by the quake are producers of paraxylene, which is used in plastic beverage bottles, with 24 percent of Japan’s capacity offline, Eramo said. The country accounts for almost a quarter of global exports, he said. Plastic beverage bottles are primarily produced outside the U.S.

‘Not in Japan’

“If you are a large producer not in Japan, you’ll benefit from the pricing spike,” said Hassan Ahmed, an analyst at Alembic Global Advisors in New York. The biggest U.S. paraxylene producer is Exxon Mobil Corp.

U.S. electronics companies other than Microchip also may be able to take advantage of a Japan-built parts shortage that industry forecaster IHS Automotive says may have contributed to a global production loss of 585,000 cars and trucks in March.

These include Freescale Semiconductor Holdings, the world’s second-largest supplier of microcontrollers after Japan’s quake-disrupted Renesas, said Dale Ford, a senior vice president at industry researcher IHS iSuppli in Santa Clara, California.

“We’re continuing to work directly with our customers and assess the situation,” said Rob Hatley, a Freescale spokesman, who wouldn’t comment on any possible gain in sales or pricing.

With output slowed at plants operated by Toshiba Corp., the second-biggest maker of flash memory, rising prices would benefit Boise, Idaho-based Micron Technology Inc., Ford said.

Flash Memory

Micron expects quake-related supply disruptions, Chairman and CEO Steven R. Appleton told investors on a March 23 call. Any increase in flash-memory demand is probably more than two months away, and it’s also possible that orders will decline, Appleton said.

The benefits to companies that have kept factories in the U.S. may help generate support for President Barack Obama’s efforts to nurture more manufacturing jobs, said Prestowitz, author of “The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era.”

Asia became the center for so much of the world’s manufacturing and development because countries in region such as Japan developed policies to support it, he said.

“We haven’t had any real policy,” Prestowitz said. “We’ve just been in ‘let it happen’ mode, and they’ve been in ‘we’re going to grab it’ mode.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE