Over the past few weeks, numerous questions have been raised about the impact of the Tohoku earthquake and the devastating tsunami on the global technology supply chain. There are two important consequences for demand and supply in the global technology sector.

First, Japan accounts for roughly 12 percent of global technology goods and services demand. I think it is very unlikely that any business has been done in Japan in March.

Second, Japan still accounts for 40 percent of global electronic components and advanced materials supply. I think that there has been a severe supply disruption by the earthquake, the tsunami and subsequent electricity issues due to production problems and logistic issues.

While Japan only accounts for about 12 percent of global technology goods and services demand, the first quarter of any calendar year is very important in Japan, as it is the fourth fiscal quarter for any Japanese company. This means that the largest part of annual budgets are usually spent in this quarter. Due to the earthquake and the effects it has had on businesses throughout the country, I think it is extremely unlikely that any business has been done.

A number of Japanese and US companies have warned on their outlook for the first calendar quarter of 2011 as a consequence.

However, I do think that the impact of the Japanese earthquake on global technology supply may be much more severe. While Japan is less relevant today in terms of the global technology supply chain than it was ten years ago, over 40 percent of electronic components and advanced electronics materials are still produced in Japan. There are a number of reasons here that are important to mention.

First, there are a number of specialty components and chemicals that are only produced in Japan. An example is BT resin, which is used for substrates to package semiconductors. Japan accounts for 70 percent of production of this resin, and incidentally all the production facilities of Mitsubishi Chemical and others were located in the Northeast - the area hit hardest by the tsunami. As a consequence, all production of this resin is currently suspended and it may take a while before it can be resumed.

A second-order effect is that the global technology supply chain has become very fragmented and has come to rely more and more on just-in-time planning. As a consequence, the various participants in global hardware production do not tend to have large component inventories, as they have come to rely on others to be able to quickly supply them with components. Therefore, a production disruption at one location will lead to more severe disruption further down the supply chain.

A third phenomenon is that product designs do not tend to be flexible. If a producer lacks a particular component, it may be impossible to build the entire final product. It is possible that a computer or piece of network equipment costing hundreds or thousands of dollars cannot be built, simply because the producer lacks components or materials costing only a fraction.

To summarize, I expect that there has been some fall-off in demand for technology goods and services, specifically in Japan.

However, the effect the earthquake and the tsunami have had on the supply chain has probably had more impact on global technological hardware supply. I will learn more about this during the first-quarter results season.

The author is a senior IT sector analyst for the Global Equities team at Robeco Institutional Asset Management. The opinions expressed here are entirely his own.

(HK Edition 04/08/2011 page2)