Global Supply Chain Repairs May Boost Investment Driving Growth

Repairing supply chains frayed by Japan’s earthquake and surging fuel prices may provide a further spur to business investment powering global economic growth.

Joseph Carson, director of global economic research at AllianceBernstein LP in New York, says companies exploiting new ways to ensure cost-effective delivery of raw materials and their own goods may help extend last year’s 5.4 percent surge in worldwide fixed investment. That may boost spending in the U.S. alone beyond the 8 percent he estimates for this year, double the pace of 2010 and more than three times the projected rate of consumer demand.

“Recent events raise questions over the global supply chain and reliance on single-source suppliers,” said Carson, a former analyst at General Motors Corp. A shift “could add fuel for a prolonged investment cycle that would have been impossible to predict a year ago.”

Executives may re-evaluate their supply chains after Japan’s March 11 earthquake and tsunami hurt operations at companies including Microsoft Corp. (MSFT) and Ford Motor Co. (F) CLSA Asia-Pacific Markets, a Hong Kong-based research group, estimates Japanese companies such as Toshiba Corp. (6502) produce a fifth of all technology products, making the world’s third- largest economy a linchpin of output.

Photographer: Tomohiro Ohsumi/Bloomberg

An employee inspects auto parts on the production line of Iwaki Diecast Co.'s plant in Yamamoto town, Miyagi prefecture, Japan. Close

An employee inspects auto parts on the production line of Iwaki Diecast Co.'s plant in... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

An employee inspects auto parts on the production line of Iwaki Diecast Co.'s plant in Yamamoto town, Miyagi prefecture, Japan.

‘Boardroom Agenda’

The Japanese disasters are just the latest shock to companies’ ability to obtain and redistribute goods after a volcanic eruption in Iceland last year sparked flight cancellations across Europe. Unrest in the Middle East and North Africa this year pushed crude oil prices above $100 a barrel, making deliveries costlier and raising concerns about western reliance on the region. Companies such as U.K. retailer Next Plc are also bemoaning higher labor costs in China.

Executives are realizing that “they need to completely review their supply chain and how to create value throughout it,” said Richard Wilding, chair of supply chain risk management at the Cranfield School of Management near London. “Recent events have pushed this on to the boardroom agenda.”

Just days after the earthquake, Stamford, Connecticut-based technology-research company Gartner Inc. told clients “the events in Japan could lead to a permanent change in the competitive landscape” and that suppliers elsewhere “should increase capacity to fill gaps and gain market share.”

Rising Yen

Stan Aronow, a research director in the supply chain research group at Gartner, which has some 60,000 clients, said companies which previously shifted production to low-cost countries may pull 30 percent back to their bases by 2015. Meantime, President Barack Obama last month called for incentives to spur oil and gas production in the U.S. to reduce the economy’s dependency on foreign fuel.

“You’ll probably see a global redistribution of the manufacturing footprint,” said Aronow, who used to work at Intel Corp. (INTC), the world’s largest chipmaker.

In the case of Japan, firms also may be encouraged to shift their production facilities elsewhere as a strengthening yen makes goods less competitive, according to Carson, a former U.S. Commerce Department economist. The yen traded at a postwar record of 76.25 per dollar last month.

The fallout from Japan exposes the flaws of companies’ just-in-time inventory management, meaning they may start boosting stockpiles to protect themselves against future shocks, said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. That may still end up generating inefficiencies which weigh on growth just as banks lose lending capacity when they hold more capital, he said.

‘Wake-Up Call’

Stephen King, chief economist at HSBC Holdings Plc in London, says refocusing supply chains would hurt growth by forcing companies to redeploy resources that could have been used more productively elsewhere.

“What you would be saying is you invested in the wrong thing,” said King. “You are changing your investment plans as things turned out bad.”

For his part, Carson is confident the overhaul of supply links may fuel even stronger business demand, adding to the world economy’s investment-led recovery. That could even act as an “unexpected catalyst” for expansion just as the technology and housing booms did in the last two decades, he said

“Companies have received a wake-up call,” Carson said.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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