“The problem is that there’s so much uncertainty,” Mr. Toprak said. “The supply-chain problem is a much more dramatic one than what the automakers are portraying. Even if they were able to come online in two weeks, which I think is wishful thinking, there’s a couple hundred thousand units to make up already, and nobody exactly knows how long this is going to last.”
from March 18th, 2011 New York Times article “Japan’s Automakers Expect More Delays” by Nick Bunkley
As I continue to read through the mountainous volume of information relating to the Japan disaster, I am at once amazed by the streams of diverse coverage that has been presented under the supply chain banner.
For example, and as referenced in the article above, the impact of the earthquake and subsequent tsunami on the Japanese automotive industry and adjunct supply network is truly a supply chain story in that it directly impacts production lines. The feared shortage as a result of plant shut downs has forced one major Honda dealer in California to buy as many used cars as possible to provide their customers with an option when the new car pipeline is exhausted. In another instance, Nissan is looking at shipping engines manufactured in it’s Tennessee plant to Japan to be put in cars in that country. Let’s of course not forget the potential impact on the workforce if the expected cut-back in workdays or outright layoffs become a reality. To me, this is truly a supply chain story.
On the other hand, and symbolic of the making money off the labor of others mindset that was exemplified in movies such as Wall Street, you have stories which report that the high tech industry generally has sufficient liquidity and debt capacity at existing ratings to withstand any near-term pricing and margin pressure as it relates to the credit profile of the debt-issuing entities within this US sector.
In the first instance, you have a story that focuses on the impact of the disaster on the supply chain itself including the subsequent consequences for both the consumer and workforce. This perspective focuses on subject matter that effects the majority of the populace directly through increased consumer pricing due to shortages, or lost wages due to shut downs.
In the second instance, the focus shifts to the challenges posed by a possible supply chain interruption on a company’s debt securities strategy. For the uninitiated, debt securities are investment instruments that companies use to raise capital. As a bond holder (which is the most common form of debt equity) you are in essence loaning the company money that will be paid back with interest at a future Maturity date. Needless to say, any significant change in the credit profile of the issuing company can be problematic for both the company and the investor, especially if it impacts the debt to equity ratios of the issuing company. If there is too great a reliance on debt financing through debt securities or stock, it may be a strong indicator that the business is in trouble.
Of course, and according to a February 6th, 2011 Financial Times article (Tax drives US tech groups to tap debt), US technology companies are changing their financial strategies in response to the problem of the extra tax that their large overseas cash holdings attract if they are brought back into the country. A recent development within the sector, companies such as Microsoft, Cisco and eBay, which have in certain instances as much as 90 percent of their cash and investments in overseas interests, use debt securities to access the cash without having to pay the current tax that would come due if they were to repatriate the money back into the US market.
Think about this for a moment . . . American-based companies who have become global powerhouses because of the tremendous opportunities afforded them by being based in America, invest up to 90% of their money outside of the country as a means of avoiding taxes. While the Financial Times article indicated that the high tech industry in the US is lobbying the government for a reduction in taxes so that they can bring the money back home to invest in our country, critics point out that when a similar break was granted in 2004 virtually all of the money went to the shareholders versus reinvestment in the country.
This of course is the entire point of today’s post in that the real supply chain stories are the ones that affect the majority of the people versus the interests of just a few. In the case of the automotive story, the impact is going to be felt more directly and immediately by a larger segment of the population. In terms of the coverage as it relates to the high tech industry’s debt issuers who use this as a vehicle for avoiding taxes I can only shake my head and wonder which audience this story serves. It is indeed a case of everyday need versus solipsistic greed.
Even in the face of a major catastrophe, the world doesn’t change much.