03 Nov 2011 | World

Links in the Chain 

In the aftermath of the earthquake and tsunami,
Japanese companies discovered how dependent
they were domestic supplies.  Jonathan Soble
explains why the lessons learnt are important
for manufacturing companies around the world.

Natsuo Fujisaki got his first post-tsunami glimpse of the Nippon Paper Group’s factory in Ishinomaki, on Japan’s disaster hit Tohoku coast, about 10 days after the tidal wave had turned it inside out. It had taken an excruciatingly long time for Fujisaki and other executives at Japan’s largest paper manufacturer to reach the plant – roads and rail links from Tokyo were broken, and a radiation-leaking nuclear power station stood between Ishinomaki and company headquarters in the capital. They were shocked by what they saw. Giant rolls of uncut paper littered the ground and overturned cars lay in mud-caked piles in the car park, like toys thrown by an angry child. “At first, I was sure it was a write-off,” Fujisaki recalled.

Scenes like this were repeated all over Japan’s 300km tsunami zone in the days and weeks after 11 March, as executives tried to measure the impact on their businesses of one of the country’s worst modern natural disasters. Foreigners were watching closely too. As the world’s third largest manufacturing country, measured by output value, its companies play a crucial part in global supply chains for everything from cars to iPads.

In some cases, industry’s dependence on Japan is extreme. A single Japanese semiconductor maker (Renesas) supplies nearly half the microcontrollers used in vehicles worldwide. The factory that produces devices which move seats, lock doors and wind down power windows sat right in the tsunami’s path, and ended up smashed and waterlogged. “Recovery will not be an easy task,” reported Takanobu Ito, the chief executive of Honda, after touring Tohoku by motorcycle to survey the damage.

Six months on, pessimistic early assessments of the tsunami’s impact on global manufacturing look both right and wrong. In the short-term, disruption was both severe and widespread. 

Car production in Japan shut down completely for weeks, as Toyota, which has been the world’s biggest-volume automaker since 2008, estimated that some 500 ‘key components’ were in short supply. Even manufacturers outside Japan were forced to curtail production, for lack of Japanese parts. Some analysts believe that between 5 and 10 per cent of global industrial output was affected in some way, and the disaster has been blamed for exacerbating economic slowdown in the US and Europe. 

Arguably, both the severity of the initial disruptions and the speed of the recovery can be traced to Japan’s unique approach to manufacturing. Globalisation and competitive pressure have weakened the country’s traditional ‘keiretsu’ system – in which finished-goods makers maintain long-term, near- exclusive relationships with trusted suppliers – but they have not destroyed it completely. Even at their assembly plants overseas, Japanese manufacturers use more parts from their home country than do their US and European rivals, according to analysts at the Boston Consulting Group. The BCG report After Japan’s Earthquake: Rethinking the Supply Chain said Japanese groups “must now start extending their supply chains beyond Japan’s borders and seek alternative supply sources, mainly in China and other parts of Asia.” 

That appears to be happening. “The disaster has accelerated a trend that was already in place,” says Sumio Marukawa a spokesman for TDK, a maker of high-tech components. He notes that companies were already under pressure to move more production overseas due to falling demand in Japan and the record strength of the yen, which makes exporting less profitable. Renesas, the microcontroller maker with a washed-out factory in Tohoku, has already announced plans to split its production between several geographically dispersed plants. Developers of industrial parks in places like Vietnam have reported an upswing in demand for leases from Japanese groups eager to establish back-up facilities.

Executives in Japan and around the world have also been reminded of the value of information. Many thought they knew who their suppliers were and where they made their products, but complex networks of second and third-tier producers are difficult to track completely, even for large companies with plenty of resources. “We thought we had mastered our supply chain, but it had never occurred to anyone to look as far as our suppliers’ suppliers’ suppliers’ suppliers,” said a senior executive at Toyota. The car manufacturer is conducting a major expansion of its databases to ensure it is better prepared in the future. 

For all the chaos in Japan, the disaster has also highlighted the strengths of the Japanese system and how this has made the recovery process faster than expected. Close relations between assemblers and parts-makers may have left some groups dependent on a too-narrow supplier base, but it also allowed for an unusual degree of co-operation in recovery efforts. At Renesas, for instance, customers such as Honda and Toyota sent some 3,000 engineers and other personnel to help with repairs. That allowed the damaged factory to resume some production by June, several months ahead of initial projections. Honda, Toyota and other carmakers therefore could make as many vehicles as normal, and many groups have raised their full year forecasts, on expectations that they will be able to make up for lost production in the coming months. Even Nippon Paper’s Ishinomaki plant is recovering: on 10 August engineers restarted one of its huge boilers and paper production is resuming, albeit at a reduced rate.

“Japan’s had bad press in much of the world, for many reasons, but with this you saw the best of Japan in so many ways,” said Michael Woodford, the British president of Olympus - the digital camera and specialised optical device manufacturer which suffered several weeks of disruption at one of its Japanese plants. “You wonder what would happen if it was in Manchester or Liverpool or Madrid or New York.”

Impact on the US

At Baillie Gifford, US analyst Gary Robinson said that the knock-on effects - certainly on US manufacturing - have been surprisingly limited and even in the car industry, fairly short-term, writes Heather Farmbrough. On the whole, manufacturing is back on track even in the industrial sector. Indeed, said Gary, the surprising thing has been its resilience.

Apple is a company where one might have expected shortages of parts for iPads or iPhones but the company has said that the supply chain was generally unaffected. Whilst there were some component shortages, the company had contingency plans in place.

Elsewhere there was a bit of short-term distortion in things like semiconductor chips as customers built up safety stock as a precautionary measure, but overall supply shortages tended to be quite short-term.

Author: Jonathon Soble
Jonathon Soble has been a correspondent for the Financial Times in Tokyo since 2007. He writes mainly about industry – from Toyota’s recent recall crisis to Sony’s battle with the computer hackers who attacked its PlayStation Network videogame platform. Since March he has covered the impact of Japan’s earthquake, tsunami and nuclear crisis on business, with a special focus on energy policy.