News of Last Week’s Factory Fire at DRAM Facility Provides Deja Vu on the Effects of Unexpected Supply Disruption
Last week, a factory fire occurred at the SK Hynix Dynamic Random Access Memory (DRAM) semiconductor production facility in Wuxi, China. According to reports, this facility accounts for 15 percent of global DRAM supply and Hynix is a key supplier to some of the largest consumer electronics brands.
This September 4th incident had an almost immediate effect on the pricing of benchmark 2-gigabit DRAM chips and the value of the company’s stock as markets immediately reacted to the initial news.
According to a Reuters published report, high demand incurred from both smartphone and electronic tablet manufacturers had already incurred a market wide increase in DRAM pricing. On Thursday and Friday of last week, news of the fire caused DRAM prices to immediately spike an additional 19 percent, the highest spike in three years. Hynix stock also incurred a 3 percent immediate drop on this news.
Over the weekend, reports from Bloomberg and Reuters indicate that SK Hynix has resumed some partial operations on the impacted production line. However, Hynix is still inspecting its production line and clean room affected by this fire and according to both reports, it is still not clear when full production can be resumed at the impacted facility and how long disrupted supply will continue. Reuters quotes a source familiar with the situation that Hynix may resume operations within two to three weeks.
Bloomberg observes that OEM’s with long-term contractual supply relationships with Hynix such as Apple and Samsung will more than likely have little disruption in supply. However, OEM’s such as China based mobile phone and tablet manufacturers, who elected to be aggressive in price by placing orders in short-term spot situations and who lack long-term supply agreements may not fare as well if DRAM supply becomes significantly constrained.
A chapter or two in the book, The Resilient Enterprise, Overcoming Vulnerability for Competitive Advantage by Yossi Sheffi, describes the situation concerning a fire that occurred at a Phillips Semiconductor plant that initially seemed not to be significant. Later after a complete assessment of damage along with the subsequent dynamics of pressure placed by influential OEM customers, the disruption turned out to be much more significant in dollar and service terms.
We do not in any way imply that this current Hynix incident is of the same scope, but rather it serves as another current day reminder that supply risk occurs when you least expect it. Without comprehensive planning, and solid supplier relationships, it can be far more disruptive for all parties involved.