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Rebuilding Supply Chains to Erase Supply Uncertainty | Toshiro Fukura, Director, International Exchange Department Institute for International Studies and Training [Date of Issue: 27/May/2011 No.0195-0798]

Date of Issue:27/May/2011

Rebuilding Supply Chains to Erase Supply Uncertainty

Toshiro Fukura
Director
International Exchange Department
Institute for International Studies and Training


Companies hit by the Great East Japan Earthquake have been working furiously to restore production equipment and other facilities, with 90 percent of plants expected to be up and running again by the end of July. However, because the parts and raw materials shortage will take time to disappear, auto and electronics manufacturers and other industries affected by the disaster will probably not be back in full gear for a while yet. The breaks in global supply chains resulting from the damage sustained by certain number of companies have had a major impact. To dispel customers’ unease over supply security, these supply chains need to be rebuilt, which in some cases may mean creating new supply bases to serve offshore customers.


Speedy recovery

On 26 April, the Ministry of Economy, Trade and Industry (METI) released the results of its Emergency Survey of Actual Situations of Industries after the Great East Japan Earthquake and Survey on Impact on the Supply Chain. The former targeted 55 companies in the manufacturing industry (33 materials firms and 22 processing firms) and 25 in the retailing/service industry, investigating progress in restoring production bases in the affected regions and business conditions since the disaster. The latter drew on interviews with firms to ascertain the status of operations in key supply chain firms and examine recovery efforts on an industry basis.

The Emergency Survey discovered that as of 15 April when the survey was conducted, more than 60 percent of respondents’ production bases in the affected areas have been restored, and that almost 30 percent are expected to be restored by within the next three months. Three percent of respondents thought that it would be six months to one year before recovery. Seven percent answered that they were unsure about restoration prospects, suggesting that the restoration process could be protracted or that they might be unable to restore operations.

Given the scale of human and physical damage wrought by the earthquake and tsunami, the overall speed of recovery process is quite rapid, with lessons from past disasters such as the Off Niigata Chuetsu Earthquake in July 2007 evidently being put to good use.

Return to full operations still some distance away

Many companies that responded to the survey are having problems procuring raw materials, components and parts because their suppliers have suffered earthquake or tsunami damage. Alternative suppliers have been secured by 76 percent of processing industry respondents and 65 percent of materials firms, but 48 percent of processing firms and 12 percent of materials firms have not secured alternative suppliers for all necessary items. Such items include raw materials for cosmetics (skin-whitening agents), rubber-related items, semiconductors and electronic components. Twelve materials firms and seven processing firms have found their alternative suppliers offshore. Domestic suppliers may lose their clients against foreign competitors if the recovery process drags on.

Asked how long it would take to cover procurement shortfalls, only eight percent of materials firms and six percent of processing firms said that they have already secured sufficient quantities of raw materials. Even by October, only 85 percent of materials firms and 71 percent of processing firms expect to be back on track. It appears that a return to full operations will take some time yet.

According to the Tohoku Economic Federation (TEF), prior to the quake business in the Tohoku region was continuing to show positive signs despite difficult conditions. A questionnaire survey conducted by TEF in October 2010 on forecasts for the second half of FY2010 indicated that 20.3 percent of respondents expected sales to lift, while 41 percent felt they would fall. Similarly, 14.2 percent expected their ordinary profits to grow while 47.6 percent expected them to decline, revealing little optimism about upcoming profits. Post-quake, a major slump is now expected for economic activities as a whole, and particularly in the Miyagi, Iwate and Fukushima Prefectures, with restoration costs placing a heavy burden on firms.

Foreign investment by Tohoku firms undercuts national average

While the affected firms continue to work strenuously to restore their operations to pre-quake conditions, once that has been achieved, they must then face the task of becoming stronger than they were pre-quake in order to alleviate customers’ supply concerns. That will require rebuilding their supply chains and, in the case of some products, strengthening their organization to ensure the timely supply of products to offshore customers. Specific measures are likely to include (a) strengthening existing bases; (b) adding new bases in other places around the country or expanding warehouse facilities; and (c) building new bases in areas close to offshore customers or in third countries.


Looking at the status of foreign investment by Tohoku firms in the context of supplying offshore customers, investments are currently limited, undercutting the national average. According to the Tohoku Bureau of Economy, Trade and Industry, 90 Tohoku firms had subsidiaries or affiliates offshore as of March 2008, representing a 5.9 percent ownership ratio which falls well below the national average of 16.8 percent. The number of firms owned per company was 2.5, also lower than the national average of 6.7 firms. Among Tohoku manufacturers, those with the greatest number of offshore subsidiaries and affiliates were firstly electronic parts and device manufacturers (41 firms), then information communications equipment manufacturers (33 companies) and production equipment manufacturers (15 firms) (see table). The vast majority of these offshore operations are in Asia (83.5 percent), with North America and Europe down at 8.9 and 6.7 percent respectively.

Offshore Affiliates Owned by Tohoku Manufacturers
Type of Industry
March
2004
March
2006
March
2008
Food Processing
6
8
14
Plastic product manufacturing
8
11
12
Non-ferrous metal manufacturing
3
5
7
Metal product manufacturing
7
11
9
Production machinery/equipment manufacturing
4
7
15
Business oriented machinery manufacturing
4
7
7
Electronic component/device/circuit manufacturing
29
34
41
Electrical machinery/equipment manufacturing
11
15
7
ICT machinery manufacturing
45
34
33
Transportation machinery/equipment manufacturing
4
4
6
Other
17
22
17
Total
138
158
168
Source: Basic Survey on Corporate Activities (results of FY2008 survey), Tohoku Bureau of Economy, Trade and Industry

The 2010 Survey of Trends in Business Activities of Foreign Affiliates, released by METI on 28 April, found that few foreign firms* were investing in the Tohoku region, with a total of only 17 firms investing in the six prefectures in Northeastern Japan as at the end of March 2010. This is not only a pale shadow of the foreign corporate presence in Tokyo (2,100 firms) and Kanagawa Prefecture (258 firms), but is even less than in the single prefecture of Shizuoka (20 firms). Japanese firms have been steadily establishing manufacturing bases in the Tohoku region since the 1980s, but foreign firms have not followed their example.

* While foreign direct investment and other statistics usually define ‘foreign affiliates’ as enterprises in which foreign firms hold 10 or more percent of stock, this survey limits its scope to “enterprises in which foreign investors hold more than one-third of the stocks or shares”.

Trend toward meeting foreign demand through foreign investment

According to the Development Bank of Japan’s June 2010 Survey on Planned Capital Spending (Major Firms), growth in foreign investment far outweighed growth in domestic investment, almost covering the amount by which investment had declined the previous year. From these figures, the DBJ concludes that there is a growing trend toward meeting foreign demand through foreign investment, particularly in newly-emerging economies in Asia and elsewhere.

METI surveys reveal a similar trend. The 40th Survey of Overseas Business Activities, released by METI on 21 April, found that 68.1 percent of respondents selected “strong current or expected future local demand for their products” as a key factor in their investment decision. This result substantially outweighed the second most popular choice—access to a high-quality and cheap labor force—which elicited only 26.2 percent of responses. Five years ago, these same factors recorded 61.2 percent and 46.7 percent respectively, with the gap widening every year. Foreign investment by manufacturers appears to be moving away from a search for cheap labor costs for export production purposes to a focus on host country markets.

In any case, the March disaster is likely to prompt finished product manufacturers and other demand-side firms to diversify their supplier networks to mitigate procurement risk, and parts and raw materials suppliers will have to find ways of dealing with this trend. To grow their business without losing foreign customers and to secure new customers, suppliers may well need to build new supply bases, some of them offshore. Rather than the hollowing-out of industry, this trend should be viewed as a positive step for firms in maintaining and developing their client lists and expanding and developing business.

(original article : Japanese)

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Strength of Tohoku Industry Reconfirmed

(For the Japanese version of this article)


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