HOW A JAPANESE CHIPMAKER REFLECTS DIRECTION OF GROWTH / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

How a Japanese chipmaker reflects direction of growth

Jim O'Neill

June 21, 2011

In the past two months the world economy appears to have lost considerable momentum, reawakening similar fears to the early summer of 2010. Is the much feared yet anticipated “double dip” on its way?


Although not seen in all corners of the world, many economies have seen sudden softening including those that have not had much of a post-crisis recovery as well as some of the stronger ones. Similar culprits for this year’s slowing appear to be in force again; the impact of rising food and energy prices on disposable incomes and consumption, the European financial crisis, concerns about actual and future fiscal tightening and the ongoing difficulties for banks to lend capital when they are under pressure to hold more.


Two new factors are on the scene this year. First, some of the “growth economies” are slowing because their policymakers are deliberately trying to slow growth from above trend. This is especially true for China. Second, and the really intriguing one, the supply chain consequences of the Japanese earthquake and tsunami. In this regard, what happens to the fortunes of the Japanese chipmaker Renesas might be one of the more important things to watch in coming weeks.


Until a few weeks ago, I had never heard of this company. Renesas Electronics is a company established in 2010 and was a merger between NEC Electronics and Renesas Technology. It is a major supplier of microchips, especially to the world’s auto industry.


In the aftermath of Japan’s tragedy, I have to admit I was one of those that did not believe that the economic consequences would spread much beyond Japan’s borders unless it significantly contributed to higher global energy prices and supply shortages. Some sharper minded people realised immediately that in our globally connected world, the consequences would be broader and deeper.


On a recent trip to Tokyo I heard plenty about this company – and the broader topic. Some people I met told me that it is responsible for 40 per cent of the chips that go into the world’s auto industry, especially those produced by Japanese companies. On June 10 Renesas confirmed what some alert people had expected, that production at its Naka factory had suffered sharply in the aftermath of the crisis.


One policymaker I saw in Tokyo told me that he has a brother-in-law that works for the company and until recently always thought it was not much of a job. Now he suggested his information is one of the most valuable in the world. A different policymaker suggested that there were probably significant consequences for the world from its problems. He suggested that the UK, US, China, Thailand and Indonesia, in that order, would be the most likely to have suffered as these countries house most offshore Japanese car production.


While it is tough to explain the degree of weakness suddenly seen in both May and June in US economic data such as the Philadelphia Federal Reserve survey, for example, the most recent Fed Beige Book had quite a few liberal references to the issue of supply chains.


On my trip, luckily I heard that Renesas is now experiencing signs of a pick-up and expects to be back to pre-crisis levels of production sooner than it had a few weeks ago. Toyota also confirmed that it expected to be back to normal production by July. It will be fascinating to see if the world starts to bounce back around the same time even if many of the other challenges remain. If so, then Japan will need to be recognised as more relevant for the world cycle than many of us have become accustomed to in recent years.


The writer is chairman of the asset management division of Goldman Sachs and former chief economist at the investment bank.