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Understanding the Impact of the Foxconn Explosion


As is well known by now, there was an explosion at one of Foxconn's factories in Chengdu, China, on Friday, May 20th.  Three are confirmed dead and 15 injured as a result of the explosion from a combustible aluminum dust mixture that built up in a duct in the facility's filtration system (see here, here, and here for the latest from EETimes).

The main work conducted at the site is the polishing process for Apple's iPad2.  Presently all facilities that handle Apple products are being reviewed by both Apple and Foxconn HonHai to ensure proper filtration and safety measures are in place, in order to make any necessary changes to avoid any future trajedies (see this report from MBT on Beijing's safety recommendations).  Many EMS facilities along the global electronics supply chain will be reviewing their filtration and safety systems as well.

At the time of the blast, only about 20% of production was handled at the affected facility, because a shift to other facilities had already occurred.  Most of the iPad2 production had already been moved to Foxconn's Shenzhen facility.  Foxconn HonHai has an exclusive production agreement with Apple, meaning that there are no other EMS players to cover any production shortage.  However, Foxconn's size, number of facilities, and the fact that only 20% of production was occurring at this facility are leading most analysts to believe that the supply impact is on the minimum side of estimates.

The supply chain ramifications of this explosion revolve around facility and product damage and loss.  The best estimates are believed to be a shortage of about 500,000 iPad2 products, equivalent to one month's production volume at the Chengdu facility (see this IHS iSuppli report), as recently confirmed in this interview between Bloomberg Business and Dale Ford of IHS iSuppli.  Other analysts are reporting similarly limited negative forecasts for supply chain disruption, such as in this interview with Bloomberg Business and Vincent Chen, a securities analyst with Yuanta.  The review of filtration and safety systems at Foxconn facilities handling Apple's products is NOT believed to require the shutting down of those facilities, rather it is anticipated that the necessary safety measures can be implemented without shut downs.  The Chengdu facility will obviously require the most lengthy disruption due to damage from the explosion.

In terms of delays and shortages of Apple's high-demand iPad2, Dale Ford reiterated in the Bloomberg interview that Apple's products were already facing supply shortages due to key component constraints, notably the displays, and that there is "not just one event" leading to supply shortages for the iPad2.  Regardless, as Ford reiterated, people are still standing in lines starting at 6am at Apple stores.

Lisa Ann Cairns, Ph.D.
Written on Wednesday, 25 May 2011 12:45 by Lisa Ann Cairns, Ph.D.

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