Modern Banking World Leading to a Financial Crisis Finance Essay

In 2007, the world was plunged in shock with revelations of the modern banking world leading to a grave financial and economic crisis. The bewilderment was actually triggered because of those dubious subprime loans leading to finance becoming malevolently complex and opaque. More precisely, the banking system had created numerous complicated, cross-border financial chains. Although these chains were believed to make the system more safe and efficient during the booming times but when the disaster struck, new risks were produced which took the market by storm. But the question arises that can the lessons learnt from this financial downturn be transposed to the worldwide manufacturing sector? This is the same question which is hanging over the markets as the long term impacts of the Japanese earthquake and tsunami are being assessed. In the last couple of decades due to the emergence of countries like China on the global economic stage, the role played by Japan has shrunk. But still Japan is playing a crucial role in some of the big manufacturing supply chains, especially in the electronics and auto sectors.

Japan manufactures about 30 % of the world’s flash memory which is used in electronic cameras and smartphones and also about 15 % of the D-Ram memory which is used in PCs. Many Japanese manufacturing units are facing temporary or partial closure and this has raised concerns with the investors as to how difficult it is to maintain complex cross-border linkages in manufacturing rather than in finance. The chunk of the problem is that big manufacturing organizations have their supply chains spanning across multiple borders. Taking the example of the A¿A½iPhoneA¿A½ and assessing how it was manufactured and the components used reveals a magnificently complex arrangement, typical of several sectors. Manufacturing a iPhone involves 9 major companies like Samsung, Toshiba, Infineon, Broadcom, Murata, Numonyx, Cirrus Logic and others. All major suppliers and producers are located in Japan, PRC, the Republic of Korea, China, Taipei, Germany, and the US. Looking at the dizzy patchwork of supply chain of organisations spanning over various countries implies that the companies are spoilt for choice as to from where to procure. But in real, competitive cost cutting strategies have forced companies to streamline their operations to such an extent that if something goes wrong with even one of the linkages in the cross-border supply chain, it can lead to the break-down of the entire system.

Also bottlenecks and vulnerabilities occur when such companies streamline their operations in this way. These strategies often fail to overlook the macroscopic effects again a prevailing pattern in finance. Even a small component bearing a small value when compared to the overall value of the finished product can lead to a standstill in the entire production process.

For example, some years back, European car manufacturers had to halt the production in their factory lines because of problems at an Asian factory which used to supply thread for seat belts to these car manufacturers and it was their only source. There have been more than 1000 examples tracked in the last five years when companies had to face disruption in the processes because of obstacles at a factory producing a perilous component, or at a crucial transport stage. The Business Continuity Institute last year published a report containing a survey of companies which faced three-quarters of production setbacks in their supply chain in the past year or so because of unexpected issues ranging from weather to health issues to earthquakes. One quarter conveyed that the problems were getting worse. This was because the global market had become highly competitive in the recent years and hence many businesses had implemented and adopted cost-saving strategies to sustain profit margins, also including just-in-time (JIT) deliveries of important components and resources.

But these strategies are becoming operational weak links, especially in extended supply chains. The corporate awareness for this problem is now slowly rising and many companies have started developing mitigation strategies to develop mitigation strategies to diversify their supply chains. But still many of the severe vulnerabilities in these chains remain unaddressed till date and are poorly understood. Hence, the uncertainty with Japan. Many analysts still are of the opinion that any knock-on supply chain disruptions have relatively limited effects. However, if several manufacturing units and factories are shut down for an extended period, the damage can be wide spread. On the other hand, such events have been a timely reminder that finance is not the only sphere of 21st century which investors evaluate.

Risk-off modes in supply chain are known to a few. JapanA¿A½s role in the world economy The importance of Japan on the global economic front can be seen from some of the statistics given below. As the table above depicts, the Japanese economy accounts for 9% of the global economy measured in nominal terms. However, as the growth in Japan is pretty low, when the economy expands at trend growth, the actual contribution to the global GDP is just 0.1%-points. Thus, Japan is only responsible for 3% of growth in the global economy. Comparing this with the global scenario in which the US contributes 18% and the Euro area contributing 12%. With imports of around 13% of GDP, Japan is a reasonably closed economy. The total exports to Japan from the US and the Euro area is only 3.3% and 2.3% of the total exports, respectively. The data stated above suggests that the Japanese economy is not contributing much in substantial to the global growth.

Further the main scenario of the Japanese economy and its impact on the global economy is sketched and a comparison is made with the bad scenario where Japan is suffering from a wide-scale emission of radiation hitting Tokyo post the earthquake and tsunami. Trade dynamics JapanA¿A½s World Exports Break-Up JapanA¿A½s India Export Break-Up JapanA¿A½s India Import Break-Up The earthquake and proceeding tsunami have caused untold loss of lives in north-eastern Japan last week has resulted in an untold loss of lives and has badly crippled JapanA¿A½s economy. This is now sending ripple effects throughout the supply chain of major organisations especially electronics companies. As a primary nuclear power plant of north-eastern Japan is not operational, the power supply in the entire region is significantly affected. TrendForce is expecting a complete power outage or limited power supply in its manufacturing units over the next two weeks even though plan ton distribution of limited power have been drafted. SUMCO and Shin-Etsu Semiconductor have been forced to shut down their production of silicon wafer fabs. Significant damage has also been caused to the production lines of both companies. Hence global players for semiconductors will now compete for materials citing the drop in silicon wafer supply. Shin-Etsu Semiconductors primarily manufactures 12-inch silicon wafers and 95% of their production is used in the semiconductor industry.

Shin-Etsu Semiconductor is also a major supplier of wafer silicon to Elpida and Toshiba. The majority of Japanese semiconductor companies are still estimating the damage caused by the earthquake and tsunami. Minor injuries have been reported to some employees of Panasonic at several of its companies including Panasonic Electric Works Co., Ltd. Koriyama Factory (manufacturing electronic materials), and SANYO Electric Co., Ltd. Gunma Factory (manufacturing washer/dryers etc), AVC Networks Company Sendai Factory (manufacturing optical pickups), AVC Networks Company Fukushima Factory (manufacturing digital cameras). Damages to equipment, production lines and building were also reported. The sites of Texas Instruments (TI) in Miho and Aizu were also affected by the initial earthquake. No injuries to employees at these sites were reported and their fourth site in Hiji was not impacted. Spot price quotes halted for DRAMs Japans earthquake and tsunami has also impacted the DRAM market.

Spot price information is not being provided by Samsung and Hynix, according to DRAMeXchange. In Taiwan, spot price quoting has been stopped for DRAM by PSC and Nanya Tech. These firms are waiting to listen to more information on the current situation and then will make necessary adjustments. The spot prices in China have started increasing because of the impact on the expected supply according to DRAMeXchange. Although there has been only a minor setback to ToshibaA¿A½s NAND production line, the impact of the earthquake and tsunami on their supplies, traffic and JapanA¿A½s construction is enormous. Toshiba has a 12-inch plant producing logic and consumer ICs in Iwate Prefecture. As this facility is very close to the epicentre of the earthquake, the production has been impacted severely while on the other hand, the production facility in Kansai has noted minor damages. Fab3 and Fab4 Flash memory plants of Toshiba and SanDisk are located approximately 800 miles away from the epicentre of the earthquake and hence there is no serious damage.

The official statement from SanDisk stated that no employees were hurt but production did halt temporarily. Majority of the solar cell manufacturers like Sanyo, Sharp, Kyocera etc are located in the Kanzai region which has a minimal impact cause of the earthquake as reported by EnergyTrend which is a green industry research subsidiary of TrendForce. SonyA¿A½s production units manufacturing Blu-ray discs, magnetic heads and batteries are located in north-east Japan and faced power loss problems. At the time of the quake, all employees had to be evacuated. In the aftermath, Korean and Taiwanese battery manufacturers saw increased orders as there was temporary but significant impact on the supply. The shutdown of SeikoA¿A½s plant in Japan has had the biggest impact on the overall supply and this could see Korean and Taiwanese battery protection IC manufacturers benefit largely. Considering upstream material suppliers, the main casualties are Mitsubishi Chemical and Seiko. The anode powder manufactured by Mitsubishi Chemical is used in the Japanese market mainly for NB applications. Many NB brands, especially AppleA¿A½s new Ipad 2 use battery protection IC manufactured by Seiko. Also impacted was the battery cell manufacturing unit of Sony. These cells are required for NB applications and power tools.

The shutdown of battery supply for NB applications is around 2 weeks and the impact is 8M. But considering the existing inventory with Sony and as the battery pack is assembled in China there is a chance that not much loss will be caused. If Sony can manage to restart its production within 2 weeks with successful shipment, there will be minimal impact. The suppliers of LCD panels are located in the Kansai region and hence are not greatly impacted. But the impact of the earthquake and tsunami in the Kanto area of Japan has led to temporary shutdown of the PLD (origin IPS) six-generation fab supplies to Panasonic for TFT-LCD TV panels. This is a closed supply chain and the unit is located in Mobara. Another player in this industry is Corning Japan. ItA¿A½s plant at Kakegawa, Shizuoka has capacity which accounts for 70% of the total capacity of Corning japan but it hasnA¿A½t faced much equipment damages.

Also the leading LED manufacturers of Japan namely Toyoda Gosei and Nichia have their facilities far off from the disaster area in north-east Japan but LED production line of Chiba may be impacted. According LEDinside, there is not much impact on this industry. Globalisation, intense business competition, sustainability etc. have leveraged hidden cost embedded in efficiency for companies. Companies aim to lower operating costs by sourcing raw materials and production inputs from overseas. At the same time, many companies started taking efforts for simplifying and streamlining their supply chain involving systematic consolidation of suppliers through re-engineering initiatives and thus leading to administrative efficiency and cost reduction. Companies can negotiate for greater volume discounts and better service quality by reducing the number of transactions through consolidation. On the other hand, there is a hidden cost situated behind these benefits of global sourcing and supplier consolidation and that is increased exposure to the risk of supply-chain disruption. The potential risks that come along are increased distance and more complex linkages.

Also the risk of failure is concentrated among a few suppliers. The supply chain of companies needs to be insulated from disruptions so that full advantage can be taken of these flexible, efficient and predictable strategies. The paper also caters to one of the most important categories of supply chain risks and that is the risk to the physical assets along the entire supply chain.

These are the risks that can be caused due to the impact of natural disasters such as hurricanes, earthquakes, floods as well as non-natural adversities such as fires or explosions; and poor physical asset management, both at company-owned facilities and at partnerA¿A½s facilities. These risks have come up and have assumed a significant impact in wake of the recent disasters that have taken the companiesA¿A½ supply chains by storm. The recent examples of catastrophic events like Hurricane Katrina and Rita, earthquakes and flooding in China, tsunamis in Southeast Asia etc. have spread their destructive impact not only on humans, families or communities but also on the global economy. THE VIEW FROM FINANCE global sourcing vs. risk exposure A survey was conducted to find out how much do companiesA¿A½ supply chain depends on foreign sourcing activities, especially after the global economic recession. The current sourcing practices and policies were evaluated as to whether their current activities regarding sourcing would increase, decrease or remain at the same level over the next couple of years. The findings were that a lot of companies-almost more than two thirds (67%) of the companies are sourcing inputs for production from abroad and such trade practices are being encouraged to cut down on costs.

Another finding is that a big majority of companies surveyed are expecting the overseas sourcing activities to increase of the next couple of years. The research survey also brought forward the fact that finance personnel find a connection between overseas sourcing and risk exposure. 39% of the companies surveyed agreed to the fact that their overseas sourcing policies and strategies increase physical risks along the supply chain. Another finding was that just-in-time (JIT) inventory and lean manufacturing practices which are proven to optimize the supply chain were less common at most of the companies. Also nearly two-thirds of companies surveyed (66%) suggested lean manufacturing practices lead to increased risks while 64% said just-in-time (JIT) inventory practices lead to increased risks. Another aspect of the research was that physical and natural hazards which include natural disasters and physical failures at companiesA¿A½ facilities have had a negative impact on the companiesA¿A½ performance. Chalking out the reasons for supply chain performance shortfalls, 55% believed it is due to logistics disruptions and 54% are of the opinion that it is due to underperformance of the supply chain partners. On the whole a significant proportion of surveyed companies (45%) believed that natural catastrophes negatively affected performance, and an almost equal number of companies (42%) reported that physical asset failures at companiesA¿A½ facilities were the cause of negative performance. The effect on India Auto: Maruti Suzuki * Supply constraints of components and currency risk can cause impact. * Since Suzuki is a partner and it is based in Japan the impacts will be more on both grounds as compared to other players in the sector. * Credit Risk is a big factor for Maruti Suzuki. 1% change in Japanese Yen (JPY) will impacts the MarutiA¿A½s Fiscal Year A¿A½12 EBIDTA and EPS by 2.7% and 2.6% respectively. Also the company could face tighter margins as itA¿A½s JPY currency risk is not hedged. * Maruti Suzuki imports steel and other components like injectors, sensors etc from Japan (directly or indirectly via vendors). Thus shortage of supplies can lead to negative performance and temporary halt of production line. * Steel imports can have an alternative by importing it from other locations but problem will be created at the current juncture because of disruptions in the supply chain and negotiating with alternative suppliers. IT: Wipro and Infosys * Wipro and Infosys which are among the tier 1 companies in the IT sector derive approximately 1-1.5% of their revenues from Japan whereas the share of revenues of TCS is less than 1%. * The clientele of these companies in Japan consists of global players majorly located in and around Tokyo. * Nucleus Software which is among the small or mid-tier segment accumulates Similarly, amongst small/mid-tier companies, Nucleus Software derives approximately 33-34% of revenues from Japan.

Nucleus gets services revenue from clients such as Shinshei bank and revenue from selling od IT software products like FinnOne and [email protected]/* */ Co Name Metals and Mining: * The recent earthquake and tsunami that devastated a portion of North Eastern Japan is likely to have negligible impact on the Indian metals industry. * Global steel industry however, can see some positive impact due to production cuts, estimated to the tune of 10- 15 million tonnes by major Japanese steel mills. * Price of iron ore and coking coal on the other hand, may see some weakness due to lower demand in the near term, as Japan contributes ~25% and ~13% to the global seaborne trade of coking coal and iron ore respectively. Imports of iron and coking coal by Japan million tonnes * The raw material imports of Japan from India constitute of iron ore only. * Sesa Goa and NMDC export just approximately 5% of their total produce to Japan. IndiaA¿A½s iron ore exports to Japan Oil & Gas: Reliance Industries, the prime beneficiary * Japan imports approximately 4.4mnbpd crude oil which makes it the third largest consumer of crude oil having 5.1% share of the total world consumption. * Middle East countries are the major exporters of crude oil. * Because of the earthquake and the tsunami Japan had to shut down five refineries which had a capacity of producing 1.2 million barrel per day (mnbpd) which is approximately equal to 27% of JapanA¿A½s daily requirement. * The prime beneficiary of this situation is Reliance Industries as it exports to many Asian countries.S * The shutdown of JapanA¿A½s refineries has led to a large demand for petroleum products. * Product categories in the light and middle distillate segment will lead to higher Gross Refining Margin (GRM) for Reliance Industries. Conclusion: Beyond the saddening loss of human lives, Japanese earthquake and tsunami have brought forward the fact that how complex the global supply chain is and the companies are interdependent on complicated linkages in the production systems which make the organizations efficient and their process highly optimized incurring low costs. The raw materials and input components are procured from manufacturers based in different countries that span across borders. Such catastrophes are a test challenging the robustness of their supply chain. The ripples of Japan earthquake and tsunami are being felt right from Apple Inc’s new iPad to Chevrolet pick-ups and several of the world’s airplane kitchens because of the devastating negative impact on the global manufacturing supply chain. The supplies of everything from semiconductors to car components have been threatened because of the earthquake, tsunami and the nuclear crisis and manufacturers all over the globe are now feeling the pinch.

Some areas where the impact of the earthquake wasnA¿A½t large have factories in operational mode but shortfall in supplies of fuel and raw material, power outages, ruptured logistics are causing delay in production and hence adversely affecting the delivery of products to respective customers. Honda Motor Co had to extend the halt of its production facility in Japan, where one-fifth of its total production is produced. There were even reports in the US markets that Honda wonA¿A½t be able to resume production of vehicles until May; such devastating was the impact. The role played by Japan in the global electronics supply chain is so crucial that major concern of trade and economics is aligned to this sector. Japan’s electronic partsA¿A½ exports were about 7.2 trillion yen last year. If the crisis in Japan prolongs, the second quarter is going to see a shortage of components for all electronics manufacturing companies over the globe.

Japan caters to 57 % of the world’s semiconductor wafers. The much awaited Apple iPad 2 was announced with a lot of fanfare but now is a victim of the shortage of semiconductor parts.

Toshiba caters to 35% of the production of flash memory in the world. Its clientele include brands like Apple’s iPad and other smartphone manufacturers. As a result of this other chip makers of DRAM memory in Korea like Samsung and Hynix, Taiwanese company Powerchip etc. have stopped quoting of prices. Analysts at Goldman Sachs are warning of potential bottlenecks in the silicon wafers supply chain. Major deficits are also expected in the conductive film supplies used in LCD circuits and resin used to connect chips to boards. Taking the case of Shin-Etsu Handotai, which is the world leader in production of silicon wafers and ingots.

These are used in the manufacturing of semiconductors. Its Shirakawa plant is very close to the epicentre of the earthquake in Fukushima and also close to the some nuclear power plants. The nuclear crisis is hovering and the plant contributes about 22% of the worldA¿A½s supply of silicon wafers. Power outages have taken a toll on the production affecting its global supply. Japan is responsible for 70% of the worldA¿A½s supply of anisotropic conductive film. It is a vital component used for the manufacturing of LCD flat panel displays, smartphones, notebook computers and tablets. According to reports dated March 16th, booking orders has been stopped by suppliers.

Although a majority of the world supply of LCD panels comes from Korea, China and Taiwan. SonyA¿A½s plants manufacturing lithium ion battery are around the disaster affected area of Fukushima as well as some of its suppliers. This as a result will cause a halt in the production of notebook computers. Automobile manufacturers in Japan also have some of their units in the disaster affected area. Even facilities which are located away from the epicentre and the disaster affected area are facing problems due to power outages. Damages to the suppliers and subcontractors of parts and components have thus led to halt in the operations of major manufacturers not only in Japan but all around the world.

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