The World Feels the Ripples from Japan's Tsunami

As everyone knows, on March 11, 2011, a major earthquake hit northern Japan, followed by a major tsunamic that took thousands of lives and destroyed everything in its wake. After the first shock of hearing about the loss of life, managers in companies such as Microsoft, Ford, Nintendo, and Komatsu around the world then begin to feel the global impact caused by this major event on their supply chains. Those impacts may last for many years to come.

Major disasters hurt operations at companies globally, even if they occur in a single geographic area. For example, the volcanic eruption in 2010 in Iceland sparked flight cancellations all over Europe. Similarly, the tsunami has caused shortages in a number of industries, particularly for those companies that relied on “single-source suppliers.” In such cases, a company has only one supplier who is capable of providing a good or service. When that supplier shuts down due to a disaster, everyone of their customers feels the pain.
On the demand side, Japan accounts for nearly 9% of the world’s economic output and is an important entry point for Asia for companies in banking, retail, and other industries. The destruction disrupted sales, dislocated employees, and will cause many other problems. Companies such as Tiffany, Adobe Systems, Boston Scientific, IBM, and Intel rely on Japan for more than 10% of their revenue, which will be severely disrupted as a result of the earthquake.

Most of those problems, however, will be on the supply side. A number of companies in various industries had single source suppliers for critical materials. For example, the world’s automakers all source from a now shut-down Hitachi plant which produced airflow sensors use to measure the amount of air coming into engines. Hitachi makes 60% of the world’s supply, so companies such as General Motors, Toyota, Honda, and Peugeot-Citroen had to cutback production. Similarly, makers of computer chips have been impacted by major power shortages occurring due to the shut-down of the nuclear power plants damaged in the quatke. Japan accounts for 60% of the world’s supply of silicon wafers, and two factories acconting for 25% of the world’s wafers were shut down completely following the quake. So companies such as Toshiba, SanDisk, and Texas Instruements announced that many of their plants would not be able to produce at full tilt until six months later. Steel is another industry that experienced significant problems. In 2010, Japan surpassed China to become the world’s bigget steel exporter. Although other steel mills in other parts of the world may be able to make up the difference in the short-term, Nippo Steel and JFE Steel, two of Japan’s largest steel makers, will experience on-going problems due to energy shortages.

One of the hardest hit industries that will experience supply shortgaes is in heavy manufacturing. Japan based companies including Komatsu, Hitachi, and Kobelco Construction Machinery are the world’s largest producers of excavators. At Komatsu, 10 to 15% of its 300 or so suppliers have earthquake-related problems that will put production in doubt for an unknown period of time. This coujld have major ripple effects on leadetime for excavators in the US, and delay shipments of excavators for 60 days or more during the peak construction period over the spring and summer.

Other industries such as food, retailing, finance, and airlines are also expected to experience problems emanating from the earthquake and tsunami. These events illustrate how dependent people all over the world are on the global supply chain, and how an event in one part of the world has ripple effects that impact all of us.

I have had several discussions with managers who are only now beginning to understand the full impact of this event. At our upcoming SCRC event next week, Jason Schenker will also talk about these after-effects, specifically in the area of energy markets. As LNG hits peak demand and shortages due to the combined effects of the Libya war continue, aluminum is sure to be one of the hard-hit areas. In addition, there is certainly going to be additional impact in other components of steel and aluminum substitutes. The longer-term drag due to demand disruption is also certain, but almost impossible to measure at this point.

Reference: Dowell, Andrew, “Japan: the Business Aftershocks”, Wall St. Journal, p. B1, March 25, 2011. Kennedy, Simon, “Global Supply Chain Repairs May Boost Investment Driving Growth”, Bloomberg, April 21, 2011.