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The Political Dimension of Supply Chain Disruption and Risk

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Readers are all too aware that supply chain risks stem from many broad dimensions of internal and external events.  One that is too often not mentioned is that of external risks as a result of political or inter-governmental events.  A significant reminder of this dimension of risk surrounds current political and economic tensions concerning China and Japan, which has a spillover impact to Japanese OEM supply chains.

Both countries have been wrangling over ownership of a group of uninhabited, fishing centric Islands located in the East Chain Sea, which has escalated to a rallying of overt nationalistic based actions. Both Japan and China lay claim to these disputed islands known as the Sankaku Islands in Japan and the Diaoyu Islands in China. Both have increased their military and fishing presence in waters surrounding the disputed islands and China’s senior Finance and Banking officials have gone so far as to recently snub the annual meeting of the Internal Monetary Fund and World Bank because the meetings were being held in Tokyo.  Chinese citizens have participated in active demonstrations condemning Japan for its actions, and also transferring their nationalistic based rage to shun the purchase of Japanese branded products.

The implications of these incidents are now manifesting themselves in the supply chains of Japan’s automotive, consumer electronics and other services focused supply chains. In mid-September, many factories with Japanese brand interests were forced to close their China factories for several days as anti-Japanese protests caused a concern for production worker safety. Tensions among the two countries, as well as perceptions of Japanese branded products, have been inflamed and amplified by the consequent effects of social media.

Earlier this month, Toyota announced that it will reduce output by up to 50 percent in its China based factories, and temporaily suspend exports of its Lexus brand autos to China’s market because of falling sales. News reports indicate that Toyota’s sales in China were down by as much as 40 percent in the month of September. Toyota had plans to sell more than one million vehicles in China during 2012. Similarly, Honda sales declined 41 percent.  Nissan sales fell 35 percent, and Mazda sales fell 35 percent. These are all significant reductions which bring with them a concern for longer-term impact. In its reporting, The Wall Street Journal quoted a Credit Suisse equity analyst as indicating that a risk of 50 percent capacity utilization continuing for the next twelve months is not out of the question and has been discounted in share prices. Further noted were concerns of prolonged production cuts among Japanese focused factories posing a problem for ever further declining output in China’s current economy.

In the services sector, the WSJ reported that Japan Airlines had passenger cancellations amounting to 19,500 seats on Japan-China routes for the months of September through November. All Nippon Airways experienced 43,000 seat cancellations as of the first part of October and has elected to switch to smaller aircraft for some Japan-Beijing flights in the coming weeks.

Various Japan based industry executives are quoted as being somewhat puzzled or taken-back by the effects of the escalating tensions between the two countries. The collective hope is that tensions will eventually subside and supply chains can return to normal activity levels. There is obviously no doubt of the critical importance of China’s consumer market. Meanwhile, diplomats remain concerned that the steady stream of tensions and ongoing maritime surveillance activity surrounding the disputed islands does not result in an accidental sinking incident that could lead to a breakout of open hostilities between these two important nations.

The reminders of external supply chain risk come in many dimensions and now there is a concrete example of political tension between countries as evidence, not to mention, the increased risk of foreign based firms doing business within China when tensions rise.

Bob Ferrari

 

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  1. It’s amazing to see how much national pride can impact the supply chain. There are so many tangible things that can disrupt the supply chain (earthquakes, tsunamis, etc) but you don’t often think about how an attitude can impact business. Clearly it is having significant impact.

  2. Johannes Dietrich says:

    This appears to me as another excellent example of why strategic sourcing is becoming more and more important. The world is becoming increasingly globalized, which increases the effects of such events on the supply chains of international companies. Given this correlation and the fact that there are many more looming international conflicts (think about all the other disputed islands) as well as additional sources for political unrests, it takes a lot of effort to identify and include these factors in sourcing decisions. Even if the companies like in this example haven’t been able to foresee such an event, it is still highly necessary that Supply Chain Managers analyze these possible risk-factors or at least prepare for unexpected disruptions in their supply chain. In today’s globalized world strategic sourcing has to consciously address such issues instead of writing them off as “unforeseeable factors”.

  3. Bob Ferrari says:

    Hello Everyone,

    An update to the above commentary regarding the supply chain impacts surrounding the ongoing political dispute between China and Japan.

    Business media has reported that according to preliminary data from Japan’s finance ministry, shipments to China from Japan dropped 14.1 percent in September from a year earlier. That is on top of the 9.9 percent decline reported in August.

    The Wall Street Journal also featured a recent article highlighting the impact of the dispute on the local economy in Guangzhou province, one of the main clusters of auto manufacturing in China. Some Chinese workers at Japan based auto plants are being called traitors while many fear for their jobs if the situation continues.

    Bob Ferrari