A Bolt From The Blue Sea

Despite the temporary difficulties, Japan will continue to remain attractive for outsourcing
By Nayan Chanda

What do the Boeing 787 Dreamliner, the Caterpillar Tractor and the Apple iPhone have in
common? They are all reeling from the aftershocks of the Japanese earthquake. The triple
whammy of a magnitude 9.0 earthquake, 10-metre high tsunami waves and a level 5 nuclear
threat, has also given a powerful reminder of our tight interconnectedness. Not only do the live
images of a tragedy thousands of miles away tug at our heartstrings, the waves from an industrial
Japan cascaded through the tightly intertwined world economy. The new evidence of
vulnerability of supply chain dependence, however, could accelerate the search for solution to
help manage volatility and adapt to new situations (see ‘Volatility In A Flash’).

Within hours of the news of destruction and power outages from Japan, managers of major
global firms got busy in devising solutions to overcome the disruption of their Japanese supply
chains. Boeing had to assess the impact of the production stoppage at Jamco, its Japanese
supplier of galleys for the state-of-the-art airplane, already way behind schedule due to supply
chain problems. General Motors swiftly decided to shut down its pick-up truck production
facility in Louisiana, fearing that workers would sit idle without components arriving from its
Japanese subsidiary. Volvo factories in Sweden face closure if the Japanese cannot resume the
supply of navigation and air-conditioning components.

A fifth of the world’s microchips that run gadgets is produced in Japan. Analysts are worried
about Apple’s ability to meet the skyrocketing demand for its iPad2, given that Toshiba produces
the flash memory and batteries that power the device. Toshiba has already had to shut down its
LCD factory to recalibrate sensitive machines shaken by the earthquake. With Sony closing
down operations at five of its six Japan-based factories, companies depending on Sony
components may also have to suspend operations once their stocks are depleted. Caterpillar, not
as dependent on sophisticated components as Boeing or Apple, seems to have found alternative
suppliers. However, given the sheer complexity and scale of aircraft manufacturing, that option
may not available to the likes of Boeing.

Japan has always been a net exporter, but in the aftermath of this disaster, its imports may
decline even further. Western corporations that traditionally export high-fashion or high-
technology products to Japan are looking at sharp declines in sales as dozens of Japanese outlets
have been shut down. Companies supplying meat and other fresh foods wonder when Japan, with
its crippled electrical grid, would be able to resume the normal power supply required for
refrigeration. One area where foreign corporations may win some entry into Japan is in
construction. Despite Japan’s vast construction industry, the task of rebuilding the devastated
nation is too massive to exclude foreign firms.

Another side of this transformation may see an outward move by Japan. As companies scramble
to find alternative sources, Japanese suppliers may be forced to move their operations to low-cost
countries in Asia or near their main markets in the US and Europe. Just as the rise of yen
following the 1985 Plaza Accord led Japanese companies to move their operations to cheaper
locations, the cost of rebuilding in a devastated region with uncertain power supply may provide
new spur to relocate factories.

The latest turmoil in the global supply chain has come at a time when the role of the world’s
factory, China, is being reviewed. Rapidly rising wages and a government-led effort to reduce
the urban-rural income gap have raised the cost of manufacturing in China, prompting some
companies to shift production to lower-wage neighbours such as Vietnam, Thailand, Malaysia
and Indonesia. The shift away from China has been slow as others lag behind China in quality
infrastructure, skilled labour, and tax and other benefits. Japanese innovation and its highly
skilled workers will ensure that despite temporary difficulties, Japan will continue to be
attractive for outsourcing. Western firms would also feel more comfortable sharing technology
with Japanese counterparts than with many Chinese counterparts suspected of stealing patented
knowhow.

The latest destruction and losses in Japan will add to the urgency of reorganising the global
supply chain, but Japan’s lead in science and engineering and its manufacturing excellence will
ensure a central role for it in the global economy.

The author is director of publications at the Yale Center for the Study of Globalisation, and
Editor of YaleGlobal Online.

(This story was published in Businessworld Issue Dated 04-04-2011)