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There has been a lot of articles and commentary of late addressing brewing conflicts among global economies concerning the valuation or volatility of certain currencies and the implication to manufacturing and supply chain outsourcing is already unfolding

The most significant movement concerns Japan, where a fifteen year high, on a nominal basis, on the value of yen, has led to more and more Japanese manufacturers moving to increasing outsourcing of manufacturing to other lower-cost regions.  In previous commentaries, we noted decisions by consumer electronics providers Panasonic and Sony Electronics to aggressively move previous home country manufacturing operations to contract manufacturers in other Asian regions. The latest significant tremor involves Toyota and Nissan.

In early November, Toyota, who already sources over 50% of production outside Japan, threatened to move significantly more production out of Japan.  A Financial Times article at the time noted that Akio Toyoda, Toyota’s President called the surge in the value of the yen a “big problem” that threatened all of Japanese industry. Toyota executives note that the company is quickly losing competitiveness, especially as sales in other emerging regions are diluted by home currency issues.  The FT article contrasted Toyota to Toshiba, who since 2009, moved more supply and final production outside of Japan, and was able to profit from the yen’s rise in the first half of September. Today’s Financial Times has a front page article (free preview account may be required) noting that Nissan is planning to shift the balance of its production and support functions towards dollar-linked economies, including China and the U.S., in order to protect itself against currency volatility. CEO Carlos Ghosn is also noted as indicating that Nissan wanted to correct a “big imbalance’ in costs and revenues caused by producing cars in Japan to sell in the U.S. and other dollar-linked economies.

The November 20-26 edition of The Economist also features an article, Leaving Home, indicating Japanese firms currently do 30% of their production overseas, twice as much as the early 1990’s, and that that figure is sure to rise with current trends. Three different factors are cited as accelerating this shift and include the rising nominal value of the yen, closer access to faster-growing economies, and the burden of corporate taxes and tariffs. The Economist article also astutely points out that as major production shifts from Japan or other countries, local suppliers atrophy from lack of skills and innovation.  Also noted was that a previous belief that keeping “mother factories’ in Japan to refine production processes and retain skills is also losing favor, since in 2008, three quarters of Japanese-owned were at the same technical level as Japanese domestic plants.

Manufacturing outsourcing continues to be a delicate balance of multiple factors. Access to growing consumer-based economies, shifting and volatile currencies, higher transportation and quality control costs, and concern for intellectual property protection all interplay in the dynamics of outsourcing.

From our perspective, two conclusions stand forth.  First, outsourcing decisions will continue to involve dynamic factors, and the degree of flexibility and agility of manufacturing and supply chain networks will continue to be a key consideration in supporting outsourcing needs.  That also implies the ability to analyze and assess all the various factors. Second, no country can claim to have an economic growth plan without consideration to the global competitiveness of its manufacturing and supply chain infrastructure, as Japan is unfortunately beginning to understand.  Other countries may follow, and none are immune.

Bob Ferrari