Goldman's Jim O'Neill On The Little-Known Japanese Company That's A Bellwether For The Entire World

At the start of this recent weakening cycle, we said that the last best hope for the economic optimists was Japan, by which we meant: Well, it’s possible that this bout of weakness was significantly impacted by the earthquake, and as such the rebuilding effort and replacement of that last output could revive the recovery.

Indeed, in the last several days it has become the hot meme: The weak GDP was due in large part to weak autos, and that is traceable to the collapse of Japanese production.

The jury is obvious out on that question.

That being said, it’s the lead story in the latest note from Goldman’s Jim O’Neill, who continues to trot around the globe, meeting investors, and sharing his observations at each stop. It’s been great stuff lately.

After stopping in Tokyo, he suggests a bellwether company for the global economy:

For those of you who may not be familiar, Renesas – based in Japan — is one of the world’s largest manufacturers of  semiconductor systems for mobile phones and automotive applications. It is also the world’s largest manufacturer of microcontrollers and the second largest manufacturer of application processors. Could the fortunes of this company’s production rebuild post-tsunami be a key for the world cycle in coming weeks? This question, and the likely developments surrounding Tepco, were two of my main takeaways from my trip to Japan. On the long flight back, I pondered about Renesas especially. Back in March, I was one of those that mistakenly believed that Japan’s tragedy would have little consequences beyond their shores, aside for any higher energy prices that might occur. It now seems as though I was wrong. In addition to the higher prices that the crisis did indeed help engineer and the evidence that this has tightened consumer pockets around the world, it seems as though the supply chain consequences of the disaster have been quite significant.
I had never heard of Renesas until my trip. On checking, Kathy Matsui, my colleague from GS research days, tells me that Renesas Technology was originally a joint venture between Hitachi and Mitsubishi Electric. In 2010, it merged with NEC Electronics to become Renesas Electronics. She also tells me that on June 10, Renesas confirmed that their Naka factory output had been hit hard.
At one of my meetings, someone suggested that their high tech chips fed into 40 pct of the world’s auto output, especially all the Japanese ones. Another joked that his brother-in-law worked for Renesas and, until recently, he believed that his family member had been demoted when he went to work there. He now realises how important he is. A policymaker told me that he would guess there would have been powerful fallout for the UK, followed by the US, China, Thailand and Indonesia, in that order, reflective of the importance of Japanese offshore auto facilities. Certainly, some of the weakness recently in the US can be accounted for by this sudden development as the latest Beige Book highlighted. As Renesas rebuilds and Japanese auto companies retool, this part of the recent world slowdown will turn back up. Toyota confirmed this week what I had heard before I went, that they will be back to normal by July.

So add this one to your radar screen.

As you can see from their stock, the company has rebounded from the worst of the initial panic days, but is nearly 30% down from pre-earthquake lows.


Photo: Bloomberg

At least per Jim O’Neill, if this company gets humming again, then that’ll be a very good sign.

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