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Japan Crisis Severely Impacts Korean Supply Chain

Wednesday, May 25th, 2011
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As the far-reaching effects of the 9.0-magnitude earthquake in Japan have become more apparent, damages to Korean companies are also surfacing.

The earthquake and massive tsunami hit Japan’s supply chains, which provide key parts for car manufacturing and electronics. As a result, Korea’s automobile industry and high-tech industry are facing price increases in production and delays.

According to Moody’s Analytics, a subsidiary of Moody’s corporation, the global economy will not be negatively affected by the incident in Japan; the impact on global growth will be minimal since Japan compromises less than 0.5 percent of the global economy. However, for Asian countries such as South Korea and Thailand, which depend on importing manufacturing parts from Japan, it will be difficult to avoid severe, short-term damage from the earthquake’s aftermath.

On March 31, South Korea’s Financial Supervisory Service announced that five small and medium-sized businesses hurt by Japan’s supply chain damages received loans totaling 7.5 billion won from national banks. The Busan Chamber of Commerce & Industry also released figures that 11 percent of 80 business suffered actual damages after the earthquake. These businesses included electrical and electronics manufacturers, chemical businesses, steel producers, and carmakers. Most of the businesses were related to disruptions in obtaining supply parts. The figures are likely to grow after mid-April.

Last year, South Korea imported more than US$1.5 billion worth of key parts used in car manufacturing from Japan, which contributed 32.3 percent of the total amount used in imports of car manufacturing parts. The shortfall of supply parts has hit Korea’s car manufacturers, including Renault Samsung Motors and General Motors Korea Co. Renault Samsung, GM Korea, and SsangYong Motor Co. import engine parts and transmissions from Japan. GM Korea, which imports 4 percent of its auto parts from Japan, also announced that it will limit overtime at its manufacturing plants, but started its normal operation after the supply situation showed improvement.

After the earthquake, Renault Samsung Motors also announced on March 30 that it would cut production by 20 percent as a result of a shortfall of component supplies. The strategic alliance between Renault and Nissan also contributes to Renault Samsung’s high dependency on components from Japan. The damaged factories in Japan are showing progress in recovery; however, it is critical to handle the crisis of key part supply factories near the Fukushima No. 1 nuclear power plant.

Along with the automobile industry, electronics manufacturers face shortages of key parts as well. Bismaleimide triazine (BT), a resin critical for smart phones and smart pads, is manufactured by Mitsubishi Gas Chemical, which supplies approximately 80 percent of all BT worldwide. Whether Mitsubishi Gas Chemical’s factory in Fukushima will operate again will be critical to the future manufacturing of smart phones and smart pads.

Graphic cards and main boards also are expecting price increases due to their use of Japanese-sourced key parts. According to several reports, once Japanese key parts are out of stock in April, price increases will be inevitable for goods using Japanese components. More increases are expected in May. Korean analysts say that, in addition to the shortage of key materials in Japan, increases in raw materials will also affect price increases in consumer electronics.

Reports by the Korea Institute for International Economic Policy (KIEP) have stressed that the earthquake will bring more damage to businesses in South Korea in terms of imports from Japan than exports. Since little weight is given to exporting goods to Japan, and as the yen will be strong for quite some period, exports to Japan will improve. However, companies relying on components supplied from Japan “will run into operation difficulties for the next few months.”

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