OUR THOUGHTS ON:

How will Japan affect global manufacturing?

Manufacturing

By Mary Richter

Undoubtedly, we’ve all been aware of the recent devastation in Japan. Parts of Northern Japan have been wrecked and the damage extends throughout the nation. The full effects will not be known for some time. Last week’s earthquake and tsunami struck hardest in Tohoku, the northern region of Honshu, which accounts for about 8% of Japan’s GDP (source: Moody’s). What does this mean to global, national and local manufacturing sectors?

Perhaps the most affected sectors are the auto and electronics sectors. Virtually all new consumer goods contain some type of electronic component, many of which are made in Japan. While companies may be able to move certain manufacturing activities to other parts of the country, there is no easy fix. Predicted rolling blackouts may further hamper production activities. Assuming the Japanese economy recovers, the impact may be relatively short-term; however, there could be some pain until then. Perhaps, the recent decline in the US stock market is a reaction to expected fallout.

Given the geography, Japan’s manufacturing sector is highly dependent on imports and exports of raw materials and finished products. It will take some time for the production to restart or be shifted to other facilities, for ports to reopen and components to arrive, and then for production and export activities. In the meantime, industries that rely on “just-in-time” supply chains (e.g. automotive), will just have to wait. This means that businesses which use Japanese produced components may also be affected by this event.

That’s the bad news. The good news - most observers expect significant capital investment in Japan to rebuild. Short term production of steel and structural items may increase and, given the country’s current situation, it may need to export fewer products. Good news for manufacturers outside of Japan, as they can absorb some of this shifting demand- at least in the short term.

Kozo Okamura from Schneider Downs translated How will Japan affect global manufacturing?  to Japanese. 

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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