29 December 1999

Y2K disruptions could hobble manufacturers

The following article is excerpted from "The Journal of Commerce" issue of 27 December 1999.

Leading manufacturers in Asia express confidence about their preparations for the Year 2000 computer problem. But when asked about their suppliers, they are far less certain.

Corporations otherwise amply prepared could be crippled by Y2K disruptions of their suppliers. It's an unsettling scenario for such technology-dependent nations as Japan, South Korea, Taiwan, Singapore -- and the United States.

For big industries like auto and consumer electronics makers, falling short by just one part could shut down entire assembly lines.

Especially susceptible are companies with so-called just-in-time manufacturing systems, a technique pioneered by the Japanese — and widely used by Detroi t — in which parts are obtained only as needed to keep inventories low and profit margins high.

Mindful of Y2K's potential for disruption, many big manufacturers have broken the mold for this one-time event, stockpiling anywhere from a few days to a few weeks' supplies prior to Dec. 31.

But many smaller manufacturers have not.

That means any Y2K problems upstream in the supply chain might not be felt for weeks — but could then cause assembly lines from Osaka to Detroit to grind to a halt.

Worldwide, only 26% of all companies have arranged alternate supply or distribution channels. Companies with more than 500 employees are doing somewhat better, with 45% having alternate suppliers, according to the Massachusetts-based technology research group International Data Corp.

The research group forecasts $22.8 billion in losses to businesses worldwide from Y2K-related failures and predicts a ripple effect: for every dollar lost by one company, business partners will suffer 70 cents in losses.

Reflecting a global trend, larger Japanese corporations are better prepared than smaller ones for Y2K....

At the end of October, only 75% of small- and medium-sized companies in Japan had completed Y2K repairs — far lower than the nearly 100% for banks and 92% for companies in general, government studies show.

Kazuo Sato, a Tokyo city official who counsels small and medium-sized companies on Y2K, says many smaller companies couldn't afford to invest in remedies even if they wanted to.

"I'm worried," Sato said. "Fixing a Y2K problem isn't an investment that a business sees as returning a profit any time soon."

Dennis Grabow, an investment banker with Millennium Investment Corp. in Chicago, believes supply-chain disruptions are likely -- and capable of setting off recessions in some nations.

Suppliers in industries like aviation or computers can't be replaced easily — and stocking up is unrealistic for industries that require thousands of parts, he said in a telephone interview.

The danger could hit practically anywhere.

A power failure could stymie a supplier, even if it had fixed its computers. Or a ship transporting parts could be disabled by Y2K troubles and prevented from making a delivery.

And some suppliers are in nations like Indonesia and China, where Y2K is expected to cause at least moderate though unpredictable disruptions....

Matsushita Electric Industrial Co., the Japanese maker of electronic goods under the Panasonic brand, says it is sure that at least 95% of its 18,000 suppliers — 6,000 of them overseas — are Y2K-compliant.

But Matsushita, which was increasing inventory on some parts, is worried about parts that are in tight demand, such as liquid crystal displays and computer chips.

"If the Y2K bug hits those areas, the operation will be down immediately," said Akira Kadota, a Matsushita spokesman.

Japanese government officials insist that plants will be humming along, more or less just-in-time, with no major trouble after New Year's.

Yet the government has not independently checked the private sector's Y2K readiness, and millennium bug analysts like Ed Yardeni, chief economist for Deutsche Bank Securitie