Effects of the Great Tohoku Earthquake on Companies outside the Damaged Area
Business Network Ties with Companies in the Damaged Area
Yukiko Saito
Senior Associate
July 14, 2011 (Thursday)
Introduction
One month has passed since the once-in-a-millennium, unprecedented great earthquake which rocked Japan. Even now, the aftershocks continue and the country has yet to resolve many urgent and important problems, such as rescue missions in the damaged area, the nuclear power plant incident, and contamination by radioactive material.
Amidst such turmoil, those citizens who live in undamaged areas should think of rebuilding in the long term and of maintaining Japan’s vitality through continued economic activity. For this reason, it is important to have an accurate grasp of the earthquake’s effects outside of the damaged area.
Effects of the Great Tohoku Earthquake
Within the damaged area, there are many companies which are physically unable to continue production due to the destruction of their facilities. Tokyo Shoko Research Inc., a corporate credit inquiry company, defines the damaged area as 44 municipalities along the Pacific coastline of Aomori, Iwate, Miyagi, and Fukushima prefectures. It has analyzed the number of companies in that area as well as their numbers of employees and arrived at the following numbers: 32,341 companies, 363,796 employees. (1)
However, the effects of the damage due to the earthquake are not limited to those companies in the damaged area; even companies outside that area have been greatly affected. For example, if one’s supplier were in the damaged area and became unable to continue production, one would have to find another supplier. If one were unable to find an alternative supplier, for example because the product in question makes use of unique technology, then even companies outside the damaged area would become unable to continue production and would suffer critical losses. Furthermore, if one’s clients were located in the damaged area, one would be forced to develop new clients.
There are likely many companies outside of the damaged area which have been damaged because their business partners are located in those areas. Furthermore, there is the possibility of companies taking damage without realizing it, for example if their business partner’s business partner were located in the damaged area.
Importance of the Business Network Structure
It should be self-evident that a company’s business activities cross regional boundaries.(2) When analyzing the magnitude of the damage which extends across regions through business relationships, an important point to consider is the structures of business networks, because the percentage of damaged businesses may vary greatly due to differences in structure.
For example, if we assume that the “six degrees of separation” concept, i.e. the small world effect often talked about in sociology, were applicable to the business network among companies, this would suggest that there are myriad companies outside of the damaged area which are being affected by companies inside it through their business networks while remaining unaware.
Data Analysis
A large-scale dataset(3) relating to business relations was obtained from Tokyo Shoko Research and analyzed with respect to the effects of the damaged area on other areas through business connections. The results are described below.
First, taking the abovementioned 44 municipalities as the “damaged area”, we define companies in that area as 0th-order companies. Next we define the business partner of an nth-order company to be a company of order n+1, i.e. a 0th-order company’s business partner is a 1st-order company, and so on. Here we assume that no company can belong to more than a single order, and so an nth-order company cannot also be of order n+1 or greater. We then calculate the number of companies in each order.
In other words, we want to know the number of companies in the damaged area (0th-order), the number of their business partners (1st-order), the number of their business partners (2nd-order), and the number of their business partners (3rd-order).
Using this analysis, we can calculate the number of companies outside the damaged area which are connected to those inside it through business relationships and thereby the overall percentage of companies that have been damaged.
Table 1: Percentage of companies affected by the earthquake through business relationships between companies
| Total | Hokkaido | Tohoku | Kanto | Chubu | Chugoku/Shikoku | Kyushu | |
| Up to 0th order | 2% | 0% | 17% | 0% | 0% | 0% | 0% |
|---|---|---|---|---|---|---|---|
| Up to 1st order | 5% | 2% | 34% | 3% | 1% | 1% | 0% |
| Up to 2nd order | 57% | 60% | 82% | 58% | 53% | 47% | 43% |
| Up to 3rd order | 90% | 96% | 97% | 89% | 89% | 90% | 88% |
Effects on Companies Outside the Damaged Area
Table 1 shows the percentage of companies included up to the 0th order, 1st order, 2nd order, and 3rd order. In other words, groups composed of companies in the damaged area, those companies and their business partners, all those companies and their business partners, and all those companies and their business partners, respectively. The results of the analysis confirmed the following.
First, in the Tohoku region, 17% of companies are in the 0th order, i.e. they are in the damaged area. If we include their business partners as well (1st-order companies), we reach 34%, and adding their business partners as well (2nd-order companies) brings us to 82%. We see that many companies in the region are connected to those in the damaged area.
Next let us look at the Kanto region. Direct business partners of companies in the damaged area do not exceed 3%, but when we expand to partners of partners, we get 58%, i.e. more than half of the companies in Kanto are related in some way to those in the damaged area. Furthermore, even in regions which are far removed from the Tohoku region (i.e. Chubu/Shikoku, Chugoku, Kyushu), nearly half of the companies up to the 2nd order are related to those in the damaged area.
Moreover, when we expand to 3rd-order companies (i.e. business partners of business partners of business partners of companies in the damaged area), nearly 90% of companies in every region are included. There are almost no companies that do not have some ties to companies in the damaged area. Thus we have confirmed that the business network among companies is a surprisingly small world.
Indications from Analysis Results
Based on the above results, it is safe to say that it is possible that the majority of companies outside the damaged area are being affected through their business relations without realizing it. The extent of the effects on each company will depend on the strength of the connections between companies, e.g. if its supplier is irreplaceable or if it relies chiefly on one client for most of its sales.
In the past, it was thought that Japanese industry’s competitive power relied on strong ties with business partners. However, such competitive power is obviously fragile when confronted with a phenomenon which severs these ties, such as a natural disaster.
A Great Tokai Earthquake is predicted to rock Japan in the not too distant future. Japanese industry’s vulnerability to natural disasters lies in its “small world” business network structure and its strong ties between business partners. Japan must think of long-term countermeasures to distribute the risk and build a more stable business network, such as having multiple business partners in several different regions.
Notes
(1) For details, please see here.
(2) For inter-regional business transactions, please see FRI Research Report No. 306, p. 20.
(3) These data include approximately 800,000 companies and 4,000,000 business partnerships. The data are from 2005.
