Tremors still with us

Posted on 26 May 2011 by The Manufacturer

Shockwaves from the Japanese earthquake continue to shake markets and impact trade for UK manufacturers, explains Zeb Bham, senior commercial dealer at Global Reach Partners.

Two months after a devastating earthquake hit Japan on 11th March 2011, manufacturers are facing disruption due to a shortage in supply from Japanese factories.

The devastating earthquake that rocked Japan in March sent reverberations worldwide to global financial markets and the effects were felt by Manufacturers everywhere. Not only was there a direct impact on the Japanese yen but all major currencies experienced heightened volatility. This led to worrying times for companies that rely on currencies to manage their business as unwanted volatility directly affects their bottom line and ability to remain competitive. There were also impacts to the supply chain and the results are still being felt by manufacturers in the UK today.

A blow to confidence

The currency volatility that accompanied this disaster and the results are compelling. Japan, a long standing ‘safe haven’ currency of choice for central banks and global investors was extremely volatile in the aftermath of the record breaking quake. Sterling to Yen prices fluctuated by a rarely seen 7.5% in the space of a day.

Not only did this have an immediate effect, there were also wider effects amongst currencies worldwide and it continues to have a direct implication for any UK manufacturer who either buys from or sells to Japan. Global stock markets and traded major currencies experienced heightened volatility during that period, bringing with it the uncertainty of doing business. Management and stakeholders watched with dismay how profit margins and potential losses were unfolded in front of their eyes by events that didn’t necessary directly affect them. Sterling to US Dollar exchanges also faced increased volatility over the same period – and if your company operates on a 10% profit margin, a 1% swing in currency hits your profit by 10%.

The UK automotive industry in particular has faced severe disruption from the aftermath of the quake due to the ever increasingly complex supply chain. This is evident with news of Toyota, the world’s largest car manufacturer, announcing that their employees will be having an elongated Easter break from 3 May until the end of the month. Even the car manufacturing giant, Honda, said a 50% cut in output would take place at its Swindon plant until the end of May. Nissan UK also introduced a scaled back production schedule due to a disruption in the supply of component parts.

The latest feedback is that the production of vehicle parts will be impacted for the next three to four months which may also result in a shortage of some new vehicle models. Manufacturers, based in countries other than the Far East may also be affected, as Japanese parts manufacturers act as suppliers to the motor industry across the world.

The global semiconductor industry has also faced it fair share of woes. Japan and Taiwan make up a huge amount of the global semiconductor manufacturing, and even the smallest amount of downtime could have a large impact on chip supply and prices, analysts say in various reports. According to Jim Handy, an analyst with semiconductor market research firm Objective Analysis, more than 40 percent of the NAND flash memory chips and about 15 percent of the global DRAM supplies are made in Japan, which is also a key source of chips that support such booming consumer electronics devices as smartphones, tablets and PCs. UK manufacturers are playing a key role in the production of these devices and the effects of a fall in supply has been measurable.

“A two-week shutdown would remove from production a sizable share of each of these,” Handy wrote in a report. “It doesn’t take a large production decrease to cause prices to increase dramatically. Objective Analysis anticipates phenomenal price swings and large near-term shortages as a result of this earthquake.”

Shortsighted supply strategy

Analysts are keen to point out that the major impact of the disaster will not be in semiconductor production, but to the supply chain. Suppliers are likely to encounter difficulties in getting raw materials supplied and distributed and shipping products out.

So how can manufacturers plan or avoid the worst from future natural catastrophes? Well, much criticism can be aimed towards executives of firms that consolidated so much of their operations in the region to save money while ignoring the benefits of diversification, in everything from location to suppliers.

How many more warnings do the balance sheet-driven CEOs and CFOs need? You can fiddle with spreadsheets all you want, but the bottom line is: If you can’t guarantee the supply of component parts, you will have zero sales; 100% correlation. And if everyone buys from the same (now very limited) source, the risks of a problem are getting higher and higher.

Diversification of the supply chain is key. No one component supplier should be given 100% of the company’s requirement. Sourcing from many suppliers regardless of small differences in price is what’s required to protect manufacturers from sudden unplanned disruptions in supply.

From a currency point of view, having and executing an effective hedging strategy is key. Having currency rates secured acts as a safety net to protect from not only natural disasters but also to the ever common shocks to the financial system. It is almost a daily occurrence where some country is reporting a near failure of their public finances and this has major effect on the volatility of currencies. Not having a suitable hedging strategy is like playing Russian roulette with a company’s ability to remain competitive and ultimately profitable.

What the Japanese earthquake has taught us is that the world is unpredictable and whilst you cannot plan for every eventuality, building certainty through a truly diversified supply chain and effective currency management can take the sting out of things that are out of your control.

“Plan for the worst……hope for the best”