Subject: How a Japanese chipmaker reflects direction of growth - FT A (worth the read)
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Chris Heinz" <[email-masked]>, "Devon Archer" <[email-masked]>
Date: Tue, 21 Jun 2011 10:56:28 -0400

How a Japanese chipmaker reflects direction of growth
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.