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Posted by Andrew Bartels on March 21, 2011
With Japan's triple hit of earthquake, tsunami, and nuclear power plant dominating newspaper headlines and TV news, I have gotten some questions from clients about the impact of the disaster on the overall tech market. In general, I think the effects of these disasters on the total 2011 outlook will be small -- at worst, they will hurt tech market growth in Q2 2011 while strengthening growth in Q3 and Q4. However, that outlook assumes that the problems at the Fukushima Dai-ichi nuclear complex improve or don't worsen. If that situation turns into a Chernobyl-type disaster that causes permanent evacuations from a multi-mile radius around the plant and possible shutdowns of other nuclear power plants, the impacts on the Japanese economy and on the Japanese tech industry -- not to mention for the people of Japan -- would be very negative, and cause a downward adjustment in our tech market forecast.
The potential impacts of the Japanese disasters show up on both the tech supply side and on the tech demand side, so let's look at both angles.
On the supply side, the disasters has had both direct and indirect impacts. In terms of direct impacts, companies like Toshiba, Hitachi, Sony, and Panasonic had factories and/or research operations in the Sendai area that were damaged or even destroyed by the earthquake or tsunami, with resulting loss of production. Other Japanese tech vendors who did not experience damage to their facilities still face disruption due to the destruction of ports, rail and road systems for moving parts and components in and finished products out. And even firms who did not face damage to or disruption of production due to the direct effects of the disasters are still having factory production hurt by rolling black outs and problems in employees getting to work as utilities and transportation systems react to the loss of the Fukushima Dai-ichi and other power stations. The combination of damaged factories, disrupted transportation, and production delays in Japan are sending shocks through global supply chains for computer equipment, communications equipment, and electronics, with likely shortages of key components leading to higher prices and product scarcity. I am not an expert on these supply chains, so I don't know how severe or long lasting this shortages will be. But based on past events such as the SARs epidemic or the Indian tsunami, they are likely to last for 1-3 months in most cases. The net effect on the tech market as measured in dollar (or local currency) value is therefore likely to be modest, with higher prices offsetting unit shortages in the near term, and purchases that would have occurred in Q2 shifting instead into Q3 or Q4.
On the demand side, Japan is the second largest tech market after the US. The earthquake, tsunami and nuclear plant disasters will hurt Japanese economic growth in the near term, leading to a reduction in the buying of tech equipment by Japanese firms and governments. Still, it is worth remembering that Japan only represents 8% of the global market for computer equipment, communications equipment, software, IT project services, and IT outsourcing. Also, Japan has been one of the slowest growing tech markets in recent years (in our January 10, 2011 report, "2o10 to 2012 Global Tech Industry Outlook," we projected the tech market in Japan would grow by just 1% in yen). Lastly, any drop in buying by Japanese businesses and governments of tech equipment, software and IT consulting and outsourcing services in Q2 and Q3 2011 will be followed by a surge of purchases to replace equipment and systems destroyed by the earthquake and tsunami. So, as with the supply side, a slowdown or decline in Japanese tech buying will be transitory, and offset by an expansion of purchases later in the year.
The biggest impact of the Japanese disasters may well be the most indirect -- higher oil prices. The crippling of a major nuclear power plant and the caution that the event will have on the operations of the rest of nuclear plants in Japan will lead to increased Japanese imports of crude oil and refined oil products. If crippling of Fukushima Dai-ichi escalates to a full meltdown, nuclear plants elsewhere in Japan and in other places around the world could be shut down for a long period of time as government re-assess the risks of nuclear power. The fastest way to replace the lost electric generation is oil-fired plants, and adding capacity there would also , add to the already strong upward pressure on oil prices. Oil prices had already been rising due to the economic recoveries in the Americas and Asia and concerns about the impacts of political upheavals in the Middle East oil production . The civil war in Libya added another source of upward price pressure. With Japan re-entering the oil market to replace lost nuclear electricity generation, the potential rises for an oil price shock that triggers both higher inflation and slower economic growth on a global basis. There are still too many other variables at play (e.g., will other countries like Germany or the UK trim their nuclear programs because of safety concerns? how much will the short-term slowdown in Japan and possibly other countries reduce energy demand? will the US and other countries open up their strategic oil reserves?) to make an oil price shock a certainty, or even good probability. But the economic risks have risen, and with those risks the potential for the tech market to grow more slowly than our forecasts have also risen.
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