Japan's Fear of the Blackout

The triple catastrophe of earthquake, tsunami and nuclear reactor failure one year ago yesterday had hit Japan hard – economically as well. Yet, Japan's industry recovered amazingly fast. Now reconstruction is overshadowed by the fear of energy shortages. And of a new quake.

by Sarah Sommer

Hamburg – In the summertime, the lights might go out in Tokyo. In the hot and humid summer months, temperatures in Japan rarely drop below 30°C, and air-conditioning systems in the capital's office buildings and residential areas will be running at a maximum. And just then of all times, Japan will have to get by without any nuclear power at all for a while. One year after the Fukushima nuclear accident, only two of the altogether 54 Japanese nuclear power plants are still in operation. That comes at a steep price for Japan's national economy.

For the first time since 1980, the exporting nation's trade balance is showing a deficit. Even the last remaining reactors are supposed to go off the line now: The government will shut down the atomic piles for maintenance work. Actually, a few other reactors already passed their safety checks – but public protests and opposition by local authorities prevent their being started up again. And that might stay that way in the foreseeable future: Fear of another nuclear disaster is great, although the government emphasizes that all nuclear reactors had passed the earthquake and tsunami stress tests. The shaken nation does not trust its government's solemn declarations – all too often in the past year, its promises had turned out to be half-truths. The situation has not been made easier after Japanese geologists recently warned of drastically increased earthquake hazards in the next four years.

Potential blackouts in the summertime present a serious threat for Japanese companies, warns the Institute of Energy Economics in Tokyo. It forecasts a shortage of about 7 percent in power supply if nuclear power plants stay shut down. In that case, short interruptions in energy supply would have to be expected time and again during the summer. "Interruptions in energy supply would hit the industry hard", states the Institute's analysis. The trend of Japan's industry moving abroad would accelerate, it predicts. Japan's trade deficit would become worse, and unemployment would increase. Should the forecast become true, this would present a major setback for Japanese enterprises which had so far come out of the economic low of the disaster amazingly fast.

What Japan had to cope with last year would probably have crippled the economies of most other countries for years to come: The major quake of a force of 9.0 and the subsequent tsunami destroyed over 260 towns and cost 16,000 lives. Nearly 100,000 people had to leave their homes in the Fukushima disaster area; many of them are still living in emergency shelters today. High radioactivity resulted in an area full of ghost towns. Aside from the human tragedy, the triple catastrophe had also dealt the economy a severe blow. The World Bank estimates a total of $ 235 billion in economic damage, making it one of the most expensive natural disasters in history.

VDMA expert Wack: "Speculations about weaknesses were inappropriate"

Plant downtimes and supply chain bottlenecks had caused the greatest financial damage for the industry – as calculated by Allianz AGCS, the industry insurer. In the wake of the crisis, industrial production went down by about 15 percent. Automotive construction suffered a 50 percent loss in production volume; the electrical industry lost about 18 percent. Japan's economy went into a recession. "But already during the summer, it seemed that the industry had largely recovered from the inroad", says Marco Wagner, expert on Japan at the German Commerzbank. In June 2011, industrial production had already returned to the level of the fall before the catastrophe. "Companies reacted fast. Cleanup work proceeded swiftly." If some international competitors had their hopes up high that, after the disaster, they would be able to snatch market shares from weakened Japanese companies, this proved to be a fallacy.

The Japanese machine building industry, for instance, recovered in record times – although many manufacturers were located with their plants in the tsunami-ravaged Tohoku region where wages are lower than in nearby Tokyo. "Immediately after the crisis, there were wild speculations that Japan's machine building industry would break down. It was said that especially German construction machinery manufacturers would profit from it", remembers Oliver Wack, expert on Japan at the Verband Deutscher Maschinen- und Anlagenbau (German Association of Machinery and Plant Construction – VDMA). Reason for the speculations: Japan's machine building industry is considered one of the fiercest competitors for German companies in that sector of the industry. Japan is one of the few countries exporting more machines to Germany than the other way around – Germany's machine imports from Japan are double that of Germany's supplies of machines to Japan.

"Speculations about the potential weakening of Japanese competitors were inappropriate for several reasons", says Wack. "For instance, major Japanese machinery manufacturers by now have built plants outside of Japan, especially in the growth market of China." The Japanese accordingly had spare capacities to fall back on when production was at a standstill in Japan. "So there wasn't any gap at all which international competitors could have used to advantage." On the other hand, foreign manufacturers – among them the German medium-sized company Trumpf – had to close plants in the disaster area and thus were affected themselves.
Yet: Off the record, some companies of Wack's own VDMA association are loathe to admit that they had profited, at least short-term, from the crisis in Japan. But for ethical reasons, they will never publicly admit it.

Thus, the German machinery industry overall did not profit from the crisis in Japan: It's true that German companies increased their exports to Japan by 16 percent last year. At the same time, however, Japanese machinery manufacturers sold 22 percent more machines to Germany. "In our sector of the industry, Japanese companies did not have to accept any sustained losses in market shares", says Wack.

"Japan still is and will remain one of our strongest competitors on the world market." Especially in the Asian region, the Japanese are up front: "In Asian countries, Japanese machinery manufacturers rank first; German companies rank second", says Wack. Companies in the electrical industry did not get through the disaster year as well as the machinery manufacturers. "Contrary to the automotive industry for instance which is back again at a pre-crisis level, the electrical industry has not yet entirely recovered until today", says Commerzbank analyst Wagner. On the one hand, the sector had been especially hard hit by the energy fluctuations in the summer: "Production downtimes are fatal for the manufacture of sensitive high-tech parts such as semiconductors", he says. And also that the sector had been recovering only since the end of the year. "Since December, energy supplies have stabilized because Japan imports oil and gas on a large scale", explains Wagner.

What's more: The electronics sector had to first recover from another setback in the fall of last year. Thailand's flooding disaster in October proved to be also devastating for Japanese companies, says Andreas Gontermann, Senior Economist of the Zentralverband Elektrotechnik- und Elektronikindustrie (Central Association of the Electrical and Electronics Industry – ZVEI). "The companies have many subcontractors and also their own plants in the Thai flood area", Gontermann explains. "So that had set them back again." But here as well, the Japanese were able to also get a rather swift grip on these problems. "Japanese companies really had to suffer a lot in the past year", the economist summarizes. "Accordingly, some Japanese enterprises certainly had to suffer short-term losses. Production capacities failed; other South-East Asian providers stepped into the breach and took away market shares from them", he says.

On the other hand, he says, German companies were no direct competitors and could accordingly not profit from it. "Generally, Japanese companies are rather subcontractors for German companies in the sector". Immediately after the catastrophe, there had been accordingly great fears that there might be delays and bottlenecks in supply chains. "The industry was just in the middle of the recovery period after the financial crisis and, due to the unexpectedly fast upswing, there were anyway bottlenecks already with some suppliers."

"Electronic companies began to scrupulously analyze their supply chains: Which components contained elements from Japanese production? Which suppliers had been affected by the disaster? Would they have to examine deliveries for radioactivity? "From today's viewpoint, it can be said: Even before that process of analysis and crisis preparation had been completed here at home, the Japanese had already restarted their production again."

However, those enterprises who depend on precisely timed deliveries of components actually had not been particularly fast with their analysis – and still slower yet in finding a solution for the problem. Even the United Nations were concerned about the protracted management reaction – and last year, they urgently appealed to the senior executives of the global giants to finally act.

It would now be the European debt crisis in particular which is considered a risk for future business developments – in Germany, but in Japan as well. "It has once again been made more than clear to German as well as Japanese companies that local events anywhere in the world may impact one's own business very fast", says Gontermann. No company could any longer disregard mutual global interdependencies. "Accordingly, many companies now concentrate on setting up their production more flexibly – for instance, by searching and developing alternatives for certain critical components."

This is also confirmed by Gerd Kerkhoff, Managing Director of the consultancy of the same name specializing in supply chain management. "After Fukushima, many companies had reacted and looked for alternative suppliers for their products", he reported. "We also had many last-minute emergency contracts from our clients where we were looking for suppliers at short notice." Fukushima together with the economic and financial crisis which went hand in hand with supplier insolvencies and supply shortages had made enterprises more aware of supply risks, says Kerkhoff. Natural disasters, political instabilities, currency risks, raw material shortages and oligopolies on various supplier markets: 2011 had brought about many different risks all at once, he said.

Japanese companies might suffer another damper due to the new safety consciousness in the industry, says Kerkhoff: "Because of the increasing energy costs and the strong yen, exports from Japan are currently very expensive. Buyers are looking for cheaper alternatives and will change to multi-supplier systems", says Kerkhoff. Industrial heavyweights like Panasonic, Canon and Nikon already moved their production to Taiwan and Malaysia; Toyota and Nissan also have their manufacturing done in South-East Asia.

The hot Japanese summer might accelerate the exodus – and thwart all efforts by Japanese companies for a swift recovery.