Ripple Effect

In September 2006, when Sapala Organics CEO Masami Nakane was setting up the custom research organisation’s facility near Hyderabad, he found having to pay for a power back-up, odd. “I was surprised to see captive power generation as part of construction cost,” he says. “I was equally surprised by the standby batteries attached to desktop computers.” Nakane was fresh from Japan, where blackouts are almost“non-existent”. “In Japan, electricity is like air. You just have to turn on the power switch and it is there and will be there as long as you keep the switch on,” he adds.

Not anymore. Nakane and his clients in Japan have had to face unprecedented disruptions in power supply after the March 11 earthquake and tsunami damaged generating facilities, including the Fukushima Daiichi nuclear power plant.

What happens in Japan is important for Nakane. Not just because it is his home country and his family lives there but also because 80 per cent of Sapala’s `7 crore revenues come from clients in Japan, most of them drug companies that have research needs. Sapala gets the rest from the United States and Europe.

Nakane, a former executive director of Pfizer Japan, has offered help to the two major Japanese clients who have been hurt, but is not seeing this as a business spin-off. “If my clients have a problem, I do not mind giving free service if required,” he says. “In times of emergency, we do not have to think of cost calculations, contract agreements.” He feels his clients and businesses in Japan have two options. One, wait for the infrastructure to be rebuilt before resuming work, thus conserving cash. Two, relocate businesses in the short to medium term.

Companies in Japan will need every yen they have to rebuild damaged facilities, so they may cut back on investments abroad or outsource more than before not just to ensure continuity but also to save costs.

Japanese companies present in India have felt the impact differently. Canon India, a leading player in cameras, imaging and printing, got away lightly. Kensaku Konishi, President and CEO, says while none of Canon’s facilities in Japan has been affected, some of its component suppliers have reported damage. “We typically hold stock for about one to three months and we will assess the situation with our suppliers. If recovery is going to take long then we will check for alternative suppliers,” Konishi says.

He does not expect the supply disruptions to affect revenue by more than five per cent. “We will try and reach`1,700 crore in India this year. Even if it does not happen we will be very near it,” he said.

A clear picture on the supplies side will emerge in around three weeks. “We have not changed any plans and all our launch plans in India are on schedule,” Konishi adds.

In the automobiles sector, Honda Siel Cars India, the Indian automobile venture of Honda Motor Co, said it would be difficult to quantify the im-pact on its factory near Delhi. It imports only one car, the Honda CR-V sports utility vehicle, in its local lineup of four vehicles, but its stock of spare parts will not last long.

“All our products use parts that come from Japan as for most automobile makers. In fact, much of the high-tensile steel we use for stamping body panels is also imported from Japan,” says a Honda Siel Cars spokeswoman. “We have enough parts to keep operating comfortably for a few weeks... The situation after that is yet to be worked out as several component suppliers based in northern Japan impacted by the disaster are yet to be reached.”

Some Japanese companies in India are going ahead with expansion plans. In Bidadi, near Bangalore, Toyota-Kirloskar Motor cancelled a grand opening ceremony for its second production line, but did get the line started anyway, as demand for the new Etios has been quite strong.

Still, the scale of the economic damage is significant.

A Daiwa Capital Markets report points out that the earthquake-hit region in Japan accounts for about nine per cent of the country’s power capacity, but less than four per cent of its manufacturing. Thus it is shortage of electricity that has been forcing plant closures. “While plants should resume operations within weeks, the short-term disruption will be acute— especially for users of key capital goods and components from Japan,”the report says. It also sees outward flows of foreign direct investment, or FDI, from Japan getting disrupted as companies look inward at the rebuilding job. “China (including Hong Kong) receives nearly $10 billion in FDI inflows a year from Japan, and India has recently begun receiving a significant flow — so the slowing in FDI should hurt both economies mildly (in April-June),” it notes.

Loco Steve at EconomyWatch. com, which calls itself the largest online economics community in the world, points out: “Japanese insurance firms, global insurers and reinsurers, hedge funds and other investors in so-called ‘catastrophe bonds’are all expected to bear a portion of losses likely to exceed $100 billion.”

“Nuclear plants operators have to buy liability insurance through Japan Atomic Energy Insurance Pool, an industry group. But they need to buy coverage of only about $2.2 billion for liabilities. The pool does not sell coverage for earthquake damage or business interruptions,” he writes. The government may have to foot the bill.

A Nomura research expects the disaster to “shave 0.4 to 0.9 percentage points off 2011 real GDP growth but to add 0.3 percentage points to 2012 growth.” But it warns that the implications go beyond GDP numbers. It says: “...an event like this — reminding people of their vulnerability in the face of Mother Nature and of the limits of their technology — can also be a shock to confidence and alter the way an individual, and a society, thinks and behaves.”

The ripple effect has also jolted the Japanese concept of on-time manufacturing. Little did Nakane, the Sapala Organics CEO in Hyderabad, realise the seriousness of the situation when he got a call from his wife in Japan on that fateful Friday. She was worried about their daughter who was stuck in a bullet train. As a routine procedure, bullet trains are stopped during earthquakes and resume service only after the route is inspected for damage and cleared.

The Nakane family, sticklers for time, may accept a 90-minute delay in the arrival of their daughter’s train. Japanese industry may not be as comfortable. It has the painful job of rebuilding its economy.