Blast at iPad factory shows supply weakness

BEIJING – An explosion at one of two factories that make Apple’s new iPad 2 highlights the risks of a global manufacturing strategy that has cut costs but concentrates production in a few locations.

Foxconn Technology Group, the contractor that manufactures Apple’s iPhones and iPads, said Friday’s blast in the western city of Chengdu killed three employees and injured 15. The Taiwanese company said production was suspended but did not respond to questions Monday about how supplies of iPads might be affected.

Estimates by industry analysts of the impact on iPad production ranged from minimal to up to 2.8 million units in lost output. That is equal to just over half the number sold in the first three months of this year, but Apple says sales are so strong it already is struggling to keep up with demand.

“There probably is going to be no impact” if production resumes as expected in the next few days, said Citigroup analyst Kevin Chang in Taipei. “If this safety inspection drags on for two or three weeks, then there will be an impact on production.”

Coming as global auto and electronics makers struggle with parts shortages caused by Japan’s March 11 tsunami, the disaster emphasized the pitfalls for companies whose global sales depend on one or two factories.

“If you are trying to do as much as you can in one place to reduce the risks of an overextended supply chain, then you are very dependent upon the safety of those one or two factories,” said David Dayton, owner of Silk Road International Inc., which manages purchasing and manufacturing in China for foreign customers.

Electronics makers such as Foxconn have flocked to China, drawn by a low-cost work force and good infrastructure, making it the global manufacturing center for computers and consumer electronics.

All of Apple’s iPads are produced at Foxconn factories in Chengdu and Shenzhen, near Hong Kong, Chang said. But, he added, that is not overly concentrated in an industry in which a contractor with a single factory might supply a laptop computer sold worldwide.

The potential pitfalls of such massive concentration were driven home when Japan’s tsunami forced thousands of factories to shut down, abruptly cutting off supplies of key auto and electronics components. Auto factories as far away as Louisiana were forced to suspend production.

In China, potential supply chain problems can be traced in part to companies’ decisions over the past decade to use fewer suppliers both to save money and to be able to monitor them more closely.

Dayton said some of his customers that buy millions of dollars worth of Chinese goods each year choose to deal with only one or two suppliers.

“The major problem is quality and consistency,” he said. “If we diversify the number of factories we work with, we are just adding headaches and adding that many more opportunities to get lesser-quality products.”

Apple’s market position is so strong that it can easily ride out potential supply disruptions, said David Wolf, a technology marketing consultant in Beijing.

“A few issues on the supply chain aren’t going to hurt it now,” said Wolf, CEO of Wolf Group Asia. But he said Apple could face challenges from products such as Google Inc.’s tablet computer.

“They’ve got competitors who are running very hard to catch up,” Wolf said. “So these aren’t issues today but that will not always be the case.”