Establishing Reliable Supply Chains ： Lessons from Disasters in Japan and Thailand

1. Establishing Reliable Supply Chains：Lessons from Disasters in Japan and Thailand May 26-27, 2012, ASCC2012 Daisuke Hiratsuka Executive Vice President Japan External Trade Organization (JETRO) In charge of Institute of Developing Economies (IDE) daisuke_hiratsuka@ide.go.jp

2. In 2011, two disasters of the Great East Japan Earthquake and the flood in Thailand had collapsed supply chained, which brought about the shortage of necessary parts beyond the two countries. • The two disasters has raised the importance of establishing reliable supply chains that will not be affected by any disasters in future. • My study aims to investigate what happened in supply chains in the Asia-Pacific region in the case of the Great East Japan earthquake and flood in Thailand, and considers how the reliable supply chains can be established in the region.

3. The lack of just one part made a big trouble • The problem for the automakers is that the lack of just one of the 30,000 plus components needed to make a car can stop a production line. • A long list of other components are in short supply. Toyota's Executive Vice President Shinichi Sasaki said efforts to source parts from multiple suppliers had been hamstrung by the interconnectedness of the industry. Many contractors rely on the same quake-hit makers for materials and electronics components. • Toyota executives told journalists that they were reexamining their component procurement policies. In the future, the company will press its suppliers to manufacture more of their parts near its assembly plants and will urge Japanese suppliers to expand their operations overseas. Seisaku Yamamoto and Masaaki Shoji , “Toyota expects quake hangover to last for months”, The Asahi Shinbun, http://ajw.asahi.com/article/0311disaster/quake_tsunami/AJ201104234294 (May 9, 2012)

4. Collapsed supply chains in automobile assemblers Not supervised by assemblers 4th - tier Supervised by assemblers suppliers 3rd - tier 2nd - tier suppliers suppliers 1st - tier suppliers ... ... ... Automobiles • Microchip Controller • units (MCUs), ... ... ... ...

5. Private sector’s response: dispersion of production • Toyota was taking three steps to create a buffer against supply chain risks Source: Toyota: working on robust supply, the Economic Times, 6 Sep, 2011http://economictimes.indiatimes.com/news/international-business/toyota-working-on-robust-supply-chain-after-quake/articleshow/9884536.cms (April 16, 2012) • The first is to further standardizeparts across Japanese automakers to use more common components so that when one factory is hit, the same parts could be manufactured elsewhere. • The second step is to ask suppliers further down the chain to hold enough inventory -- perhaps a few months' worth -- for specialised components that cannot be built in more than one location, or take anti-quake measures that guarantee safety against any tremor. • The third step to becoming more resilient was to make each region independent in its parts procurement so that a disaster in Japan does not affect production overseas. • Toyox could not operated a single production plant of pressure hose in Japan several months. To avoid such situation, it is considering to build a new plant in the Southeast Asia.

6. Responses to the Flood in Thailand • Some companies moved to other place in Thailand. • Customers provided its own factories space to the damaged factories. • Some companies moved temporally to other countries such as Indonesia, the Philippines, Vietnam and so on. • The Japanese government approved the preferential measure that Thai factory workers were employed temporally in Japan. • Some companies introduced their customers to other competitors.

7. Japanese automobile assemblers in ASEAN used to procure key parts mainly from Japan, but now they procure them from neighboring countries by utilizing AFTA scheme. Source: Hiratsuka, Daisuke (2010). “Characteristics and determinants of East Asia’s Trade Patterns,” in Hiratsuka, D. and Uchida Y. eds., Input trade and Production Networks in East Asia, Chapter 4, Northampton: Edward Elgar.

8. Is each region independent in its parts procurement possible? • Automobile industry will be able to establish its regional production and procurement system with the collaboration in production. • Upstream industry that requires huge investment hard disc drive industry will continue single plant for to achieve economies of scale.

9. A hard disc assembler procure some key parts from the U.S while most of parts from neighboring ASEAN countries,because of its low transportation costs (material characteristics (light and compact) and Information Technology Agreement). Source: Hiratsuka, Daisuke (2006). “Vertical Intra-Regional Production Networks in East Asia: Case of the Hard Disc Drive Industry in East Asia,” in Hiratsuka, D. ed., East Asia’s De Facto Economic Integration, Chapter 6, London: Palgrave Macmillan.

10. Can public sector contribute to establish reliable supply chains? • Private sector has asked to improve connectivity (costs to transport between countries). • Road networks • Regulation on weight and height limitation of truck differ by country • Facilitation measures (simple and quick custom procedures )

11. Road Transportation Networks Hanoi Vientiane Bangkok Phnom Pen Ho Chi Minh

12. Source: Hiratsuka, Keola and Suzuki (2008) “Industrialization Through Vertical Production Networks” in Hiratsuka and Kimura eds., East Asia’s Economic Integration: Progress and Benefit”, Edward Elgar.

13. Transportation costs are very high due to the limited number of flights under aviation agreement between Laos and Thailand Source: Hiratsuka, Keola and Suzuki (2008) “Industrialization Through Vertical Production Networks” in Hiratsuka and Kimura eds., East Asia’s Economic Integration: Progress and Benefit”, Edward Elgar.

14. Geographical Simulation Model To catch the effects of the improvement of transportation networks and custom procedures t the borders on the location of industries by province/ Economic Impacts of MIEC, compared with the baseline, 2030 • 13 Countries • 1,699regions • 3,109 nodes • 5,099routes • Road: 4,114 • Sea: 535 • Air: 332 • Rail: 118 More than 23,000 simultaneous equations Road network Source: Kumagai et al. (2012), “Issues and possible new scenarios in IDE/ERIA Geographical Simulation Model (IDE/ERIA-GSM).

15. International development requires additional efforts • Other things being equal, it is easier to extract the potential benefit fully from intra-national transport infrastructure development compared with international transport infrastructure development. This is because the latter contains many obstacles besides insufficient physical infrastructure to be removed in order to facilitate transactions along the routes developed. Tariffs, NTBs and time and money costs at borders are the examples. • Thus, international transport infrastructure development projects should be carefully planned and implemented. Simply building highways on both sides of the national border is inadequate. Various trade and transport facilitation measures should be combined with the physical infrastructure development.