Four reasons why Japanese companies will abandon Japan

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The tsunami is the catalyst for an exodus of Japanese companies to move their factories off-shore. Here's why. By Karn G. Bulsuk

The tsunami is the catalyst for an exodus of Japanese companies to move their factories off-shore. Here's why.

By Karn G. Bulsuk


A surprising number of Japanese companies still maintain large manufacturing facilities in Japan, but the recent human tragedy of earthquake and tsunami have provided a wake-up call to Japanese executives that Japan as a geographical region is a risky place to place key facilities.

Unlike their American counterparts, Japanese companies have been slow to move their factories overseas for a multitude of reasons, including the kiretsu relationships between companies, a belief that Made in Japan signifies superior quality and economic nationalism. From here, we will see an acceleration of Japanese companies off-shoring for four main reasons.

Electricity Shortages

The Fukushima nuclear meltdown has left Tokyo Electric Power Company (TEPCO) only capable of generating 37 gigawatts of electricity compared to 67 gigawatts prior to the disaster - a 40% shortfall which has plunged Tokyo into silence and darkness after night fall.

Factories simply cannot continue manufacturing under these conditions. The Japan External Trade Organization (JETRO) estimates that around 190,000 companies in Iwate, Miyagi and Fukushima prefectures have not been able to resume operations since the tsunami, and many of these factories literally produce the majority of the world's supply of essential automotive and electronic parts.

As other forms of power generation simply cannot pick up the gaping hole left by the disaster at the Fukushima Daiichi nuclear power plants, while historical animosity between Tokyo and Osaka left a legacy of incompatible electricity systems in which the west cannot transfer power to the east, it is estimated that power interruptions will last well into 2011.

Read more: Why west Japan cannot transfer electricity to Tokyo

Cheaper and safer to Off-Shore

Rebuilding their factories in Japan may cost more than relocating them off-shore to a country where there the risks of natural disasters are low.

Japanese companies may take this as an opportunity to accelerate their move off-shore to places like Thailand, where there is a strong Japanese manufacturing community, stable and cheap labour supply, low risk of natural disasters as well as modern infrastructure.

Other possible winners also include Indonesia and China, although with China there are still significant political and historical differences which may make Japanese investors think twice before opening a key factory there.

Higher Shipping Costs from Radiation

Shipping premiums to and from Japan may reach new highs as shipping companies fear radiation damage. The Wall Street Journal has recently reported that higher rates are being charged to dock at key Japanese ports, especially those in the northeast close to the Fukushima nuclear power plants.

In addition, lack of fuel in the east of Japan will make logistics difficult, making the transport of raw materials and finished goods much harder.

The overall increased costs of transport will eventually play into the hands of those supportive of off-shoring.

The Need to Remain Competitive

Finally, Japanese companies need to remain competitive in a world that is rapidly changing. It has never been a matter of whether to off-shore, but when to off-shore. For years Japanese companies have slowly moved their production facilities overseas, and the tsunami will accelerate that process in order to continue producing at the quality Japanese companies are legendary for, at a price that remains competitive.

Japanese manufacturing may rise again, but be forever changed as their new factories rise in the east, and no longer in the Land of the Rising Sun.


* * *

Background

With the destruction of an entire swathe of Japan and continuing power shortages, entire factories have been destroyed while others have been rendered inoperable. Some of these factories literally control the vast majority of the world's supply of specific parts, such as silicon wafers which are used in computer chip fabrication in which Japan accounts for 60% of the world's supply.

The resulting disruption to global supply chains are unprecedented, especially in the automotive and consumer technology sectors in which the Japanese dominates production. The resulting shortage of parts and manufacturing capabilities have already forced companies such as Toyota to delay the launch of new car models, and Apple to delay production of the iPad 2.

References

Shippers Seek Japan Premiums - wsj.com

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Karn G. Bulsuk: Full Speed Ahead: Four reasons why Japanese companies will abandon Japan
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Karn G. Bulsuk: Full Speed Ahead
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