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Japan’s earthquake and nuclear crisis – The business impact

18 March 2011
Channel NewsAsia – Business Tonight

Japan’s earthquake and nuclear crisis – The business impact

Channel NewsAsia: With manufacturers in Japan forced to suspend production, supply chains are clearly at a standstill. That in turn is disrupting supplies to manufacturers across the globe, and expert says this has exposed crucial weaknesses in a number of businesses ranging from the electronics to auto sectors. Japan as we know is a key supplier to the global auto and tech sector. For now, some manufacturers say they can cope as they still have some inventories. But how long can that last?

Spire: Well I think the inventories that they have in stock may be 30 days or 45 days or longer. These are the typical value of inventories that are kept in stock within these supply chains. But I think the more important factor is really to look at the planning processes that these companies have put in place. The impact of this disaster may not completely disrupt and knock out supply chains for an extended period of time, if you look at similar earthquakes and similar disasters and their effect on Japanese output in the past. Let’s bear in mind that these are companies that are in an earthquake prone region and they have processes in place to plan for this. So I think probably the greater danger is not so much that there will be huge prolonged disruptions that will stop production of products going to the end consumer, but more so the price effect. For example, NAND semi-conductors have seen a price hike in the double digits because of this disruption.

Channel NewsAsia: We saw the disaster hitting transport networks and causing power outages. Do you see that as a bigger problem for companies in the coming weeks?

Spire: I would actually say that it’s a bigger problem. I think you’re quite right to point that out. Essentially there is a shortage of electricity that will be going to the manufacturing sector. There will be the prospect of rolling blackouts affecting both consumers as well as manufacturing. Basically the Tokyo Electric Power company is under tremendous strain as a lot of its capacity is coming offline because of what’s going on with the nuclear reactors. The volume of production would most probably be affected because of this. Once again, that is going to feed more into the prices of these components rather than these supply chains being completely knocked out.

Channel NewsAsia: Some experts warned that the just-in-time delivery systems which are often used in the tech and car sectors are vulnerable to unexpected supply shocks like what we’re seeing right now. What lessons do you think we can draw from these series of events?

Spire: Well I don’t think that manufacturers are going to react to this by necessarily increasing the amount of inventory of key parts and components, or of finished goods. The thinking behind just-in-time is certainly still valid. I think what this argues for is more global diversification or geographic diversification of production and inventory, rather than just increasing the value of the inventory as such. And in particular, I think, this incident is going to prompt companies to re-look at their supply chains and look at areas that are prone to earthquakes, close to fault lines and close to the coastline, and, in particular, close to nuclear reactors. I think this could really be a game changer in terms of the business and global attitudes to nuclear power and also a game changer in terms of manufacturers locating facilities close to nuclear reactors. Probably the diversification and location of the inventories are going to be the thing that manufacturers rethink more rather than just increasing inventory and rethinking just-in-time as such.

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