Risk Management and Interdependence in Today’s Global Economy

Osaka – Sunday, October 3, 2010




Various Japanese media such as The Japan Times have been reporting since September 29 that Japanese companies started to rethink their risk management strategy and take measure for dispersion of risk of importing rare earth elements, since the China government reportedly banned exporting them to Japan as part of its diplomatic spat with Japan over the disputed Senkaku Islands. (The U.S. recently insisted clearly that the islands were returned to Japan from the U.S. in 1972 together with Okinawa mainland, and that Japan’s recent actions have been appropriate and sufficient). Report also includes the fact that the U.S. started to take measures in its own ways with similar concept.



1. How Japan has been rethinking rare earth sourcing and its risk management strategy?






1) Companies (sourcing)



Japanese companies, who had already been concerned about rare earth shortages as early as July, when China cut its export quotas to bolster prices and ensure domestic supplies, immediately started to take concrete actions such as sourcing rare earth metals from other countries such as Kazakhstan to disperse risk. China produces and supplies over 90% of the world’s rare earth metals but their reserves is only around 30% of the world total. This means remaining 70% are available in other countries.



As reported by The Japan Times and other media, Sumitomo Corp. signed a deal with Kazakhstan's national nuclear power company Kazatomprom to establish a joint venture and produce rare earth metals in the country, including neodymium and dysprosium, which are crucial to building motors for electric vehicles. And, Toshiba Corp. said it signed up with the same Kazakhstan firm in June to establish a joint venture to produce rare earth metals coming out of uranium mines in which Toshiba has a financial interest. The electronics maker said it hopes to set up the venture by the end of the year and start producing rare earth elements used in motor magnets.



2) Companies (R&D and others)



Research of technologies to reduce use of rare earth elements has been in progress as reported in a recent Japanese TV news programme. Honda Motor Co. has been conducting research and development to find alternatives for the rare earths. Toyota Motor Corp., the world's largest maker of hybrid cars, has set up a task force on rare earths metals earlier this year to explore new sources for rare earth elements and ways to recycle used parts, the Nikkan Kogyo newspaper reported Wednesday, according to The Japan Times..





3) Government



It was reported in a recent Japanese TV news programme that the Japanese government signed a memorandum with Kazakhstan of supporting Kazakhstan extraction of rare earth metals.



2. How about the U.S.?



With sense of crisis, the U.S. also started to take measures for risk diversification such as restarting mining of rare earth metals in California. The U.S. used to mine and supply approximately 50% of worldwide rare earth metals but with emergence of cheap products from China, the U.S. lost their global competitiveness and its worldwide market share dropped dramatically. As a result, the U.S. rely their rare earth sourcing from China. Rare earth metals are used in their nation’s “critical” equipments and systems such as military communication systems. For this reason, the U.S. also started to rethink their rare earth sourcing strategy and take measures in earnest.



3. What is the final thought of the author?



Being a marketing versatilist with management literacy and not an expert in politics and diplomacy, the author has nothing to say about politics. To the author, it seems that what China has executed (i.e. banning rare earth metal export to Japan as a part of diplomatic spat) triggered Japan and the U.S. (at least) to rethink rare earth sourcing and risk management strategy and take concrete measures, to be less dependent on China, although risk diversification does take time. This means decrease in China’s rare earth business in the long run.



Nikkei, Japan’s leading newspaper specialized in business and economy, reported today that in an APEC meeting held on October 2 in Gifu Prefecture in Japan, Japan’s Minister of the Ministry of Economy, Trade and Industry (METI) requested to his China counterpart to proceed smoothly to re-start rare earth export to Japan, to which China answered “would like to make effort to solve the problem. Economic interaction with Japan is important also for China”. This is a step forward because China simply has been insisting that “the Chinese government have never banned exporting rare earth metal to Japan”.



It seems that this incident delivers a strong message that an economic sanction by a country as a part of diplomatic spat is never effective in a global economic world in which countries are interdependent. It would lead to negative effect to the country executing the sanction in the long run. After all, countries need to diversify their risk while be cooperative for sustainability and co-prosperity.





References:-

Hiroko, Nakata (2010), Firms Rethink Rare Earth Sourcing

http://search.japantimes.co.jp/cgi-bin/nb20101002a1.html