JAPAN - Risk management is now high on the agenda for Japanese companies that have been gradually expanding their production base due to the seemingly ironclad yen since 2008. This has been in the wake of the slides that saw the US dollar fall 6.3% since January 2011 (a full 49% since hitting a record high in 1985) and the slow motion train-wreck that the Euro has become.
The Japanese earthquake and tsunami (see AsiaPhile story here: http://www.packwebasia.com/index.php/japan-trends/1485-a-lesson-from-japan) resulted in insurance claims reaching US$35 billion, making it one of the most expensive catastrophes in history. Yet to all intents and purposes, industrial recovery is now complete, and the supply chain is back to normal. Shortages of domestically produced materials such as PET and PP persist but the slack has largely been taken up by imports from overseas.
Japanese companies have, for more than two decades, followed the general trend of off-shoring their main export industries, electronics and automotive manufacturing, to take advantage of the strong yen when making their investments and the lower cost of production in South East Asia when selling their product to Europe and the US.
But the shocking reality of shortages in Tokyo supermarkets – caused by the failure of the supply chain to deliver packaging materials for even the most basic food shipments – in the immediate aftermath of the triple whammy of earthquake, tsunami and nuclear shutdown - has forced a reevaluation of the fragile supply chain and given added impetus to overseas investment in order to supply domestic markets.
Since the disaster, Japanese direct investment in the ASEAN Region (the 10-country grouping of the Association of South East Asian Nations) has increased massively.
In Indonesia, the cumulative total Japanese investment for the first nine months of this year reached US$1.16bn, a full 60% increase in the total amount for 2010.
Vietnam-Japanese trade grew by more than 20% last year to US$16.7bn and for the first nine months of 2011 reached US$15bn.
Investments have been mainly directed at developing infrastructure and industrial parks as Japanese real estate developers anticipate large scale relocation, with a US$100 million investment in constructing the Long Duc industrial zone in Dong Nai province, owned and operated by the Japanese with scope to attract up to 150 Japanese enterprises.
Hedging their bets
Thailand has always been a popular destination for Japanese direct investment. In 2010 corporate Japan pumped more than US$3.3bn into the country, 35% more than the previous year.
But such overseas expansion into developing countries can be precarious as demonstrated by the massive flooding that coursed down the river system the size of Florida towards Bangkok.
As if to reiterate the need for a more diversified supply chain, the Thai flood inundated the Ayutthaya industrial zone north of the capital and knocked out some 5,364 factories employing 380,000 people.
The Thai floods replicated many of the effects of the Japanese tsunami: immediate loss of industrial production. Food shortages were exasperated, not by the loss of crops or livestock, but by shortages of packaging materials.
Maruha Nichiro Holdings has suspended some product lines due to shortages of cardboard and other packaging materials for transporting frozen food products from Thailand and is now looking at procuring materials in neighbouring countries such as Vietnam and Indonesia.
It was the Japanese consumer electronic goods that were first to be hit with their tight just-in-time supply chains. Hard disc drives (HDD) became scarce as prices surged in Tokyo’s Akihabara geek district with the price of a 500 gigabyte HDD virtually doubling to US$220.
Toshiba postponed the launch of new product lines of refrigerators and microwave ovens planned for November, while Sony delayed the launch of a digital camera. Nikon, which makes 90% of its products in Thailand, has been forced to halt production as its plant was inundated by two-metre-high floodwaters, while Canon has suspended production at its Thai ink-jet printer plant.
“This will not only impact Japan’s exports to Thailand, but also affect the global supply chain of Japanese companies,” said Yoshimasa Maruyama, a chief economist at Itochu Corp in Tokyo. “Production of Japanese firms in the US, Japan and other areas may also decrease.”
Takahiro Sekido, chief Japan economist at Credit Agricole CIB in Tokyo added: “Executives recognise the concentration risk after the floods. The recent trend of accelerating investment into Thailand will cool despite the fact that Thailand was such an ideal destination.”
Meanwhile, Asian Development Bank analysts are speculating that the impact from Thailand’s floods on Asia’s production networks may last longer and be deeper than that from Japan’s March earthquake, tsunami and nuclear crisis.
“I don’t expect a big withdrawal of investment from Thailand,” said Yoichi Yajima, business support centre representative for the Japan External Trade Organisation (JETRO). “As long as big firms like Toyota, Nissan, Honda, Toshiba or Hitachi stay here, their suppliers won’t leave.”
However, Japanese food companies may be required to take some countermeasures or prepare for supply shortages and price hikes toward the peak year-end shopping season, while insurance premiums are at an all-time high.