TT-608 -- Disasters and Weakness of Manufacturing Monopolies, e-biz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, April 03, 2011, Issue No. 608

+++ INDEX

- What's New -- Problems with Manufacturer Monopolies
- News -- Which Charities are Safe to Support?
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback
- News Credits

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+++ WHAT'S NEW

One of the things that has made Japan a ferocious
competitor has been the ability of its largest companies
to continually improve systems, eliminate inventory, and to
integrate manufacturing operations with their hundreds of
suppliers. Toyota, Nissan, Sony and the many other brands
that account for much of the nation's exports are leaders
in this form of lean manufacturing and have used the model
to dent the impact of neighboring China's much cheaper
workforce and flood of investment.

But as the practice of Just-in-Time (JIT) and Kaizen has
evolved over the last 10-15 years, it has been inevitable
that from a diverse environment of many suppliers competing
for the business of the majors, smaller companies have
gradually disappeared and only the strongest of the
second-tier firms have remained. In some cases, despite the
obvious threat to JIT viability, only one supplier has
survived.

Toyota learned the dangers of having a single supplier when
in 1997 there was a major fire at the plant of a brake
valve vendor, Aishin Seiki. For a while it looked like
Toyota might have to shut down its auto production, and
this was only narrowly averted by Toyota finding ways
internally to resolve the shortages. This event has become
a business case study in JIT short-comings, and one would
think that Japanese firms have learned not to repeat such
experiences. But as the Tohoko-Kanto earthquake and tsunami
of March 11th have proved, over-reliance on single
suppliers still appears to be a problem.

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[...Article continues]

Of the 3,000 or so parts that go into the average car,
about 230 of them are in short supply or simply not
available at all following the earthquake. We have heard on
the grapevine that problems at key electronics suppliers
like Alps Electric, are holding up not just auto
production but also home electronics and other equipment
as well. We understand that 6 of Alps' 7 major factories were
in the affected areas and most of them were damaged, with
some being knocked out for months.

If you've been reading the papers, then you'll already know
that the top three makers of zinc and zinc coated steel
panels for auto production have been hard hit. Supplies are
down by a massive 70%, as around 40% of the market is
supplied by a single factory in Hachinohe, Amori, owned by
Mitsui Mining. Some of that factory is still under water.
You can add to this picture the shortage of finished
copper, ethylene, all kinds of solvents, and other
industrial products which are essential in the manufacture
of final consumer products.

An especially poignant story is that of Xirallic, a special
paint pigment that gives cars a shiny metallic finish and
which has helped significantly drive sales of upmarket
vehicles that bring most of automakers' profits these days.
Xirallic is produced by a German firm called Merck (not the
pharma company) in only one factory in the world -- at
Onahama, a short 40km drive from the stricken Fukushima
power plant... Uh, oh... Because this factory has been
knocked out for at least another 6-8 weeks, many thousands
of auto orders at Chrysler, Toyota, GM, Ford, Honda, and
others have been delayed or cancelled. Now Merck must be
hoping the government doesn't extend that 30km evacuation
zone around the Daiichi power plant to 80km, as the US
government has been advising them to do!

The problem of over-concentration doesn't just exist in
autos. Take for example the cleaning agent hydrogen
peroxide. About 75% of the supply of the substance comes
from Japan and this also impacts paper bleaching and
electronics manufacturing globally. The two major suppliers
of hydrogen peroxide are Mitsubishi Gas Chemical, which
produces about 50% and whose Kashima plant was knocked out
of operation, and Adeka which has had to reduce operations
at its Fuji Plant because of the electricity blackouts.
This is one reason why there is a shortage of printing
paper right now -- quite apart from the loss of six Nippon Paper
plants and a Maruzen Petrochemical factory that makes most
of the nation's printing ink...

Another challenge is the supply of electronics. Take IC
wafers and NAND memory for example. Japan accounts for 60%
of the world's supply of wafers and Toshiba supplies about
40% of the world's NAND chips, which go into pretty much
every home entertainment device, including the Apple iPod2.
Although the Toshiba plant is in Yokkaichi, hundreds of
kilometers to the south of the earthquake zone, the
momentary power outage when Fukushima Daiichi went off line
damaged sensitive equipment and Toshiba is saying that
production will be affected for some time.

Actually, for an interesting map of the many electronics
companies producing around Japan, take a look at this:

http://bit.ly/fAfEXv

Another single-supplier example that has been highlighted
by the disaster and which must surely result in legislative
changes in the future is that of power generation and Tokyo
Electric Power Company (TEPCO). The fact that TEPCO has had
a monopoly on power generation for the largest power
consumption region in Japan for over 100 years has meant
that the company has had little incentive to modernize and
future-proof its systems.

As we have watched the Fukushima emergency unfold, we
couldn't help wondering whether if Japan had had an open
power generation market then probably other suppliers
could have provided alternative power post-disaster. They
would also provide alternatives to the obsolete reactors
in the TEPCO generation network. Amazingly, the No. 1
reactor in the Fukushima Daiichi plant, at 40 years old, is
actually only the third oldest reactor... We wonder where
the other two are and why they are still operating?

Daiichi No. 1 was due to be decommissioned in February, but
the Nuclear and Industrial Safety Agency (NISA), which
after all only has one company to oversight, approved
TEPCO's request to extend operation for the reactor for
another 10 years. If there were other players approved
besides TEPCO, the government could require them to use
only the latest technology, which is much safer and
controllable, and to contribute funds to research into new
generations of reactors, such as thorium reactors. More
importantly, they would allow NISA to upgrade its baseline
for evaluations and decision making.

Our guess is that while TEPCO is struggling to put together
US$20bn-plus to address the replacement of the Fukushima
facility, the government could authorize 3-5 smaller
competitors to start operations and these firms would bring
at least the same amount of investment to the table to
create smaller, safer operations in more diverse numbers
and more diverse locations.

All in all, looking at the lessons learned from the
aftermath of the disaster, we think Japan needs to revisit
the wisdom of eliminating diversity in its supply networks.
Yes, we understand that large businesses, whether
authorized monopolies or not, want to have single-point
supply chains and more control over their suppliers, so as
to extract the best commercial advantage. However, just as
farmers have found with nature and factory farms,
over-focus and over-control removes the ability to deal
with calamities as they threaten such highly-tuned systems.
In the food production world, the calamities are new
viruses, insects, and the weather. In the manufacturing
business the threats are not so different.

We believe that the Japanese government needs to require
the nation's leading foreign exchange earners to urgently
engage in business continuity and supply chain diversity
planning. Companies should be required to evaluate and plan
for the effects of earthquakes, floods, fires, financial
collapses, industrial espionage, and even threats of war.
However, rather than just limiting these activities to
building scenarios and plans to deal with such challenges
-- all of which will be limited by the imaginations of
those involved in such work, companies should be required
to add back into their commercial equations another
important variable -- that of diversity. Companies need to
ensure that there is no instance of a single supplier for
key components, nor a single point (or region) of
production.

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+++ NEWS

- Demand for portable cookers up 400%
- Which quake charities are safe?
- How to finance the relief effort?
- Restaurant ranking firm stock price falls

-> Demand for portable cookers up 400%

One company making hay out of the disaster in Tohoku/Sendai
is the portable gas cooker maker, Iwatani. Many survivors
are still living in primitive conditions and are having to
find alternative means of preparing food while waiting for
official government assistance -- which may still take some
weeks. Iwatani is shipping 150,000 portable stoves in
April, about 400% of the normal volume. The number of gas
canisters being shipped is also up 50%, at 4.2m canisters a
month. (Source: TT commentary from nikkei.co.jp, Apr 2,
2011)

http://e.nikkei.com/e/ac/tnks/Nni20110401D01JFA05.htm

-> Which quake charities are safe?

One of the unfortunate side events of a major disaster is
the appearance of fake charities to skim cash from
concerned donors worldwide. While we haven't heard of any
specific instances, apparently the US FBI has warned that
such scams are proliferating. One way to ascertain whether
Japan-related charities are safe to give to is checking
whether they are registered with Charity Navigator, at
www.charitynavigator.org. As of March 25th, 32 major US
charities had donated more than US$163m and many more
donations are coming from individuals. ***Ed: Two charities
that we know to be safe, but which are not listed with
Charity Navigator because they are too small to meet the
organization's requirements are www.jhelp.com and
http://www.2hj.org/index.php/eng_home.** (Source: TT
commentary from wsj.com, Apr 2, 2011)

http://on.wsj.com/eNu6ku

-> How to finance the relief effort?

DPJ party sources are apparently saying that the government
is considering a number of measures on how to pay for the
massive relief effort needed for Tohoku/Sendai. The
government may need to find as much as US$300bn and among
the options being discussed are special taxes, including a
form of temporarily increased consumption tax, and issuing
"disaster bonds". Others have suggested having the Bank of
Japan buy the bonds (a type of quantitative easing measure),
but so far this appears to be being ruled out since it
could lead to inflation. ***Ed: Our guess is a temporary
increase in consumption tax from 5% to 7%-10% and
once there, it won't be lowered again.** (Source: TT
commentary from japantimes.co.jp, Apr 2, 2011)

http://search.japantimes.co.jp/mail/nn20110402a2.html

-> Restaurant ranking firm stock price falls

Regardless of what you might think after seeing shoppers
return to the streets of Tokyo, they are apparently not
spending as much as they did prior to the March 11 quake,
and they are going home earlier. As a result, restaurants
that are normally packed are now really hurting. This fact
hasn't been lost on stock buyers, who are dumping stocks of
"Gurunavi" (Gourmet Navigator), which not only ranks
restaurants but also sells ingredients and services to them.
We expect sell-offs of similar entertainment stocks in the
next few weeks. (Source: TT commentary from e.nikkei.com,
Apr 1, 2011)

http://e.nikkei.com/e/ac/tnks/Nni20110401D01SS659.htm

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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+++ UPCOMING EVENTS/ANNOUNCEMENTS

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-----------------------------------------------------------

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors@terrie.com.

*** No comments this week.

***********************************************************
END

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+++ ABOUT US

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Written by: Terrie Lloyd (terrie.lloyd@japaninc.com)

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Newsletter:

Comments

"Although the Toshiba plant is in Yokkaichi, hundreds of
kilometers to the south of the earthquake zone, the
momentary power outage when Fukushima Daiichi went off line..."

Are you sure that this is not a misunderstanding? I live in Aichi (just next to Mie/Yokkaichi), and there was no momentary power outage at all after the quake (my TV was turned on nonstop). Also how would a problem in the eastern Japan electric network be technically able to cause a problem in western Japan, given different frequencies (50/60 Hertz)?

Oliver

Oliver:

This is a good point and may well be our misunderstanding. What we heard from another reader some weeks ago is that there was a millisecond power hit around the country at the time of the earthquake, and that this impacted their wafer production facility, causing production for that batch to be damaged. However, as you point out the power facilities are different -- so perhaps this wasn't the cause of the disruptions in Yokkaichi but at one of the other facilities instead.

If that is the case, then probably you know that Toshiba also has a big fab facility in Iwate and that was directly hit by the earthquake. This facility does IC packaging and that could be another reason for the announcement of a pending NAND shortage.

Regards,

Terrie

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