The videos and images that came out of Japan showing the raw devastation of entire towns were riveting. …
The videos and images that came out of Japan showing the raw devastation of entire towns were riveting. The ongoing nuclear debacle carries disturbing ramifications on untold numbers of people and property. The consequences, while well documented, continue to this day and perhaps for tens or hundreds of years to come. Amidst all this tragedy, there are myriad lessons to learn, and ripples of ongoing effects on the entire world.
More than just lives and property were lost and damaged. Entire production methods, proprietary systems, inventories and intellectual capital were destroyed as well. Even while we shake our heads with resignation, we try to wrap our minds around what effects these tragic events have on us. Clearly that seems callous in the face of so much loss, but there is little we can do besides wringing our hands at the scale of this cataclysm.
While China's economic rise has displaced it, Japan is still the third largest economy in the world. Japan has been suffering economically for many years as deflation and an aging population have slowed growth to a crawl. Let us not underestimate the degree of industrial and technical expertise that the Japanese have perfected over the years. Thousands of products used in uncountable applications have been, or will be, impacted by shortages. Entire industries suffer as a result of the losses. We may never really know the extent of the intellectual capital, experience, and expertise that was destroyed. We are only beginning to see the ramifications.
Several major manufacturers have already reported constraints, from printer toner to electronic components and beyond. Indeed, entire production lines, skilled workers, and refined processes that were developed over decades have been lost or seriously curtailed. Will firms invest the massive sums necessary to re-create the high precision manufacturing base in other regions?
Two major companies in our market, Ricoh and Canon (HP), are both based in Japan. The degree to which their losses affect markets may be being downplayed, but already shortages are being reported worldwide. Even certain paint pigments, made nowhere else, are out of production. While these firms scramble to find and develop alternative sources, downstream production lines are crippled for the lack of one or more small component.
History has noted that great tragedies are often the impetus for great advancement. Japan earned world respect for their rebuilding after WWII. Perhaps Japan's rebuilding efforts will shake their economy out of its doldrums and reignite their economy. That it may have taken billions of dollars in losses, and 30,000 lives to do so is profound.
How will this effect you? Well, the pure demand for materials and capital required to rebuild the lives, homes, and businesses will undoubtedly cause inflation. The costs of rebuilding must be re-amortized, resulting on increased costs on outputs. Can any good come out of this? For Japan this may be the way out of their ongoing deflation. In an interconnected world, this will have effects on us, as demand for many products outstrips curtailed supplies. Many industries had already made significant contractions in inventory and production because of the Great Recession. The destruction caused by the earthquake, tsunami, and nuclear accident may crimp supplies far enough to spur the next round of global inflation.
I remember an accounting class in grad school: The professor showed a slide that demonstrated a phenomenon quite well. When you see a body of water in times of abundance, everything looks calm and flat. When times of cyclical declines occur, the lowering of the water level reveals all the peaks, crags, and junk that were always there below the surface, so we had not seen them. I've noted with some sadness that the pressures on many firms in our industry manifest in short-tempers, frustrations, delayed deliveries, increasing costs, and further contraction of marginal businesses. Receivable times are longer, users are more testy, and our colleagues are less flexible.
Conclusion:
As shortages in supply and higher demand begin to reveal themselves, those that hold inventory will benefit. Rising costs and rising prices make current inventories and products already in the pipeline more valuable. Let's hope that speculation and manipulation do not further pressure these trends.
davidmendelson 