June 24, 2011 / 5:13 AM / in 6 years

Japan Inc balks at staying put amid quake, power risks

TOKYO (Reuters) - The threat of more quakes, power shortages and loss of clientele is forcing Japanese firms to shift more production, much of it offshore and with a new sense of urgency.

<p>Carlos Ghosn, Chairman and CEO of Nissan and Renault, speaks during the Reuters Rebuilding Japan Summit in Tokyo June 22, 2011. REUTERS/Toru Hanai</p>

Big manufacturers, hurting after the March 11 earthquake, tsunami and subsequent nuclear crisis wreaked havoc with the supply of parts, are demanding that suppliers diversify output facilities, especially those with key technologies.

“If you are the only supplier for any particular good, we’re going to ask you to have at least two production plants and not in the same area,” Nissan Motor Co (7201.T) Chief Executive Carlos Ghosn said at the Reuters Rebuilding Japan Summit this week.

“You don’t want to be in a situation where you have one supplier in one plant producing everything you need,” he said. “If there’s one supplier, we need two plants. If not, we need two suppliers.”

This type of pressure may be the final straw for many who have until now stayed put, accepting Japan’s high labor and electricity costs as a necessary price to pay for quality and intellectual property control.

Some 70 percent of domestic manufacturers expect at least one partner in their supply chains to speed up relocation efforts overseas, a trade ministry poll showed, accelerating a nearly two decade-long migration of Japanese manufacturing capability overseas.

“Relocating is on the table for many executives. If a key supplier or partner moves, that could trigger a large exodus,” said Shuzo Takada, director of the ministry’s industrial revitalization division.

Several Japanese companies have already announced moves offshore as part of post-quake strategies to diversify output.

Hoya Corp (7741.T), the world’s second largest maker of optical glass for cameras, is planning its first overseas plant in China while Mitsui Mining & Smelting Co (5706.T), which supplies 90 percent of the ultra-thin copper foil used in smartphones, is building a backup production line in Malaysia.

Fujitsu (6702.T) plans to shift more chip output to a factory in China. Renesas Electronics (6723.T), which decided to outsource more microcontroller production to Taiwan’s TSMC (2330.TW) and Globalfoundries in Singapore CSMF.UL after the quake shut down a key semiconductor plant for nearly three months, is also considering moving some output overseas.

Japanese manufacturers are making steady progress in restoring supply chains and expectations are high that output levels will return to pre-quake levels in the July-September quarter but the potential for power shortages in the summer and beyond has rattled and irked the corporate world.

With much nuclear capacity still offline, large industrial customers in Tokyo and its surrounding areas face a mandatory 15 percent cut this summer while others, including those in western Japan, have been asked to try to cut back usage by 15 percent.

“We will do our best to meet utilities’ calls to conserve power, but we will not sacrifice work quality and volume to meet a power quota,” Shigenobu Nagamori, the visibly annoyed president of precision motor maker Nidec Corp 6594.OS, said at a recent news conference.

On one hand, the potential power shortages have been a boon for generator makers like Kawasaki Heavy (7012.T) and Meidensha Corp (6508.T), which are working at full capacity but are still unable to meet a sudden surge in orders.

But in a world of clean rooms, lithography machines and silicon furnaces, generators offer little comfort. Even a momentary blip in wattage can mean wasted raw materials as well as days of recalibration and testing before production can resume.

Japan has also been shutting down its nuclear reactors one by one for scheduled maintenance, and regional officials, fearful of widespread anti-nuclear sentiment, have so far refused to allow the reactors to restart. That has sparked fears that all of the country’s nuclear reactors could be offline in April next year.

Public jitters about nuclear power have prompted government officials and Bank of Japan policy board member Yoshihisa Morimoto, a former Tokyo Electric Power (9501.T) executive, to warn that prolonged shutdowns of nuclear plants would have a serious impact on the economy.

Power outages would also probably raise Japan’s high electricity prices even further. In 2009, Japanese companies grappled with industry-use electricity prices of 15.8 cents per kilowatt hour, compared with 5.8 cents in South Korea and 6.8 cents in the United States.

Average operating profit margins for manufacturers remain under 5 percent in Japan and transferring production sites abroad just makes sense, said Yukio Noguchi, a professor of finance at Waseda University.

Japan’s government hopes to stem the tide, calling for corporate tax cuts, support for new technology research, and incentives for consolidation. But those measures have little hope of quick fruition given the dire state of public finances.

“The quake has reduced even further the advantage of keeping production in Japan,” Noguchi said. “It is impossible to stop firms from producing overseas.”

(This story is corrected in the 10th paragrapth to say the cause of the Renesas plant shutdown was an earthquake, not a tsunami.)

Editing by Edwina Gibbs

Our Standards:The Thomson Reuters Trust Principles.
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