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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.