"German economy affected"

Just about every car has Japanese vendor parts; 40 percent of the worldwide required technology components come from Japan. Consultant Gerd Kerkhoff explains how the German economy is affected by the disasters in Japan.

Mr. Kerkhoff, there is a shortage of essential vendor parts here in Germany because many Japanese industrial enterprises had to stop production after their country had been hit by earthquakes, a tsunami and the nuclear power plant disaster in Fukushima. Could you explain this to us?

Kerkhoff: Japan is economically very important for the world market. For example, the country supplies 40 percent of all technology components required worldwide. Globally the three largest manufacturers of glass for flat screens are located in Japan. Also, Japan is the largest processor of silicon required for photovoltaic systems and for the computer chip industry. Japanese vendor parts are found in just about every car – that's why the automotive industry is especially hard hit by supply shortages. Currently, another problem is logistics: Many of Japan's major ports are destroyed; air freight systems are also facing restrictions.

And what does that mean for German industrial companies?
Kerkhoff: Right now, it's rather impossible to tell exactly. It's extremely difficult to assess to what extent these very complex problems affect German companies or will affect them yet in the future. But one thing for sure: Germany's economy will definitely be affected.

Why is it that Japanese vendors have such a prominent position in terms of crucial key products?
Kerkhoff: Japan's industry has always been extremely technology-driven and export-oriented; insofar, Japanese manufacturers are established worldwide and enjoy an excellent reputation because of their high quality standards. Also, the country's high R & D investments resulted in global market leadership for many high-tech products. But the great number of key Japanese products is especially due to the fact that Japan's industry is highly specialized especially in the IT fields.

And that's why we are now facing the standstill of assembly lines?

Kerkhoff: Not immediately – there will be a delay yet before we really get to feel the full extent of our dependency: Many products from Japan have long lead times; bottlenecks will only be evident in a few months. All the more important for our domestic businesses to start looking for alternatives now already and to fall back on other suppliers wherever possible.

Where can they be found?
Kerkhoff: In South Korea for example. Its industry has a very similar product range to that in Japan.

Which sectors of the industry will be particularly affected in Germany and why?

Kerkhoff: It's still too early for any long-term assessments – but some companies already experience the aftermath of the disaster. In France, one car manufacturer announced short-time work already; one German manufacturer is discussing this measure at the moment. Currently, even the Japanese themselves don't really know yet the extent and severity of damages in their country. German businesses still have a lot to do before knowing in detail how much of Japan is in their products. But one thing for sure: Many industries are facing the challenge of having to substitute at very short notice any missing supplies from Japan.

What are the chances that companies will be successful in that?
Kerkhoff: Again, that's also generally difficult to say. In any event, companies having a risk management system for their purchasing departments and having already gone through scenarios of the complete loss and failure of certain suppliers are better off than those having been caught unawares by the events. But according to our experience, there are only few companies with efficient risk management systems. According to a study which we jointly conducted with the Institut für Demoskopie (Institute for Public Opinion Polls and Research) in Allensbach, merely 29 percent of German companies have a comprehensive risk management system for their purchasing. Even in the automotive industry, often considered a trailblazer, it's only 36 percent of the companies. In other words: Only about one third of the companies are at least halfway comprehensively prepared for crises like those at present.

Who for example?
Kerkhoff: We as consultants principally don't name any companies or provide any public comments about them. But I'll give you one example of our project business: Before the economic and financial crisis which partly caused similar problems due to impending insolvencies, we developed a concept for an Indian car manufacturer which enabled him to greatly expand the base of alternative suppliers. Before that, this manufacturer had purchased parts for its vehicle production almost exclusively in low-wage countries to obtain cost advantages. We were to examine whether vendors from Eastern European countries could be built up as alternative suppliers – with higher quality than in Asia but lower costs than in the West. We then reviewed hundreds of suppliers in Eastern Europe. The result: In many parts, there are excellent alternatives to suppliers from Asia. Our client integrated many of them in its vendor portfolio. Consequently, our client's supply risks are significantly reduced – its supply chain no longer depends unilaterally on one region.

What's your advice to companies currently affected?

Kerkhoff: Our recommendations are similar to those after the economic crisis: The companies must comb through the global market very fast in their search for alternative suppliers. But the problem is: Companies without any risk management system will rarely know about the alternatives. Since all depends on finding substitutes fast, the search can frequently not be set up as a strategic process. In order to maintain security of supply, contracts with new suppliers must be signed fast. It takes time to develop a long-term multi-vendor strategy which will then also cover different economic areas.

And if there are no alternative suppliers?
Kerkhoff: Basically, substitute suppliers can be found for each and every product. But it's a time-consuming process – without any preparation, the search will require great efforts and, as a rule, higher costs as well.

Why are there still companies at all which rely on only one supplier – after the economic crisis, and after the delivery problems due to the volcanic ash last year?
Kerkhoff: Most companies learnt their lesson from the financial crisis. However, there are still many having missed out on that completely – especially small and medium-sized companies. For a lot of them, multi sourcing...

... thus means distributing the purchase volume for specific parts to several suppliers ...
Kerkhoff: ... is still a foreign word. Those having relied on a single supplier, i.e. those using single sourcing, will now risk production bottlenecks. It's true that, for about five years now, we have been observing a trend toward supplier oligopolies in all sectors of the industry – but there are major differences. Only 59 percent of the companies with fewer than 250 employees entered into strategic partnerships with their most important suppliers. Large companies with a workforce of more than 1,000 are clearly ahead; already 74 percent thereof have such partnerships. Small and medium-sized companies still have a lot of catching up to do when it comes to their procurement strategy – as another result of one of our current studies shows: Just barely two thirds of the small and medium-sized businesses systematically control their suppliers.

What are the long-term consequences of the Japanese supplier breakdown on competitiveness?
Kerkhoff: It's certainly possible that Japanese suppliers will fall behind; I can definitely see that risk. Many companies have to look for alternative suppliers – if only as a precautionary measure because they've seen how fast problems could otherwise arise. And Japanese companies might lose market shares in the long run.

Hans-Jürgen Klesse conducted the interview

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