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October 28, 2007

The Great Hanshin Earthquake

Written by  Cole Emerson
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Much like the year prior, a major earthquake has changed the lives of tens of thousands of people and impacted literally hundreds of businesses within a heavily populated area. Unlike Northridge, the great Hanshin earthquake represents a disaster that has caused major long term disruption to a majority of the transportation corridors as well as shutting down hundreds of small, medium and large businesses. Over 5,300 people were killed, more than 28,000 injured, and well over three hundred thousand people were made homeless by the intensity of this trembler. As of the publication of this article, over one hundred thousand people are still in temporary quarters without privacy and barely enough room to lay down. Prognosis for speedy construction of sufficient temporary housing for the remaining displaced citizens is not good. Planners have indicated that it may take two to three years before sufficient housing is available for all victims. More than 55,000 buildings were so severely damaged that they will have to be demolished.

Much of the transportation facilities were severely damaged by the earthquake. The port of Kobe is still not functional and most likely will be out of commission for at least one year. The impact of losing one of the most important import and export resources in the country has raised the cost of moving goods to more than 300-400% of the original cost. Over 30% of all commerce passed through the port of Kobe. Kobe is the second largest port in Japan next to Yokohama and the sixth largest port in the world. While the other ports are gradually absorbing the displaced volume, the progress is slow and major delays are common.

A majority of workers in Japan commute to work using public transportation. Most of the railways that service Kobe are elevated railways. Like the portions of the Hanshin expressway that collapsed, the elevated railways failed in many areas disrupting a primary means of transportation for the work force. Additionally many roadways also suffered significant damage due to subsidence and liquefaction effects. The combination of all factors has created a transportation nightmare for both permanent and temporary workers trying to get to their jobsites. Trips that used to take 20 minutes now take up to four hours. Companies that were fortunate to escape serious damage in the earthquake are still handicapped by a workforce spending a majority of their day trying to commute to and from work. Coupled with the commuting problem, the lack of available living quarters in Kobe may force companies to operate at less than 25% of their normal efficiency until the transportation and housing problem is solved. Workers may find it difficult to work sixteen hour days for any extended period of time.

The long term impact of the earthquake will be discovered over the next 12 to 18 months. Many business’ while currently in recovery have not fully assessed their losses primarily due to the scope of the devastation. While this disaster is already the most costly natural disaster in history, the losses when fully assessed will be staggering.

To contrast Northridge and Kobe, the cost of goods/stock at risk in Northridge was approximately $330 million, while Kobe is more than three times that amount. It would not be surprising if the ultimate cost of this earthquake exceeds $500-$600 billion, a figure 20 to 30 times larger than Northridge. While the losses are extraordinary, the insurance carriers in Japan will avoid major losses, primarily due to the unique manner in which coverage is provided. A majority of the losses will be born by the property or business owners. Japan restricts the amount of earthquake coverage that the insurance companies may provide and place the burden on the insured. However, the overseas insurers are not subject to these regulations and often write policies that cover a much higher proportion of the exposed property value. As a result, it is believed that the overseas insurance markets will bear a greater proportion of the insured property loss from a Japan earthquake than will the domestic industry. Aggravating this situation, most industry experts agree that Japanese insurers reinsure more than 80% of their earthquake exposure to overseas insurance markets in continental Europe, theUK, and the U.S., according to Risk Management Solutions, Inc., a firm which has been monitoring earthquake activity in Japan since 1993. As stated earlier, the full consequences of the losses will be discovered in the near future.

The severity of this earthquake has caused many companies to reassess key operating philosophies. Those companies are now questioning major distribution, sourcing, and inventory management processes that prior to the earthquake had been so highly touted. While many of the sole sourcing, just in time, and efficient distribution processes provide immediate savings to the companies, they also create a major vulnerability that affected many of the companies in the Hanshin area. When a critical supplier of components or services is affected by the same disaster as the buyer, the buyer is vulnerable to a disruption of their own operations. Even if the company is functional they may still be out of business for the lack of a critical supplier. Even without a natural disaster, GM and other U.S. companies have experienced multiple shutdowns of critical operations as a result of critical parts not being available. Apple Computer and Boeing were both affected by the earthquake because a supplier of LCD displays shut down their operations near Kobe. Had the earthquake destroyed a major silicon foundry in Japan, many high tech companies worldwide would be in a panic because of the extraordinary limited alternate manufacturing capacity.

This disaster should be a wake up call for planners and businesses worldwide. Pay attention to this disaster! Experts within their respective fields of economics, structural and civil engineering, risk management, and geologists have for years been presenting scenarios that closely approximate what happened in Kobe. “Unfortunately, many decision makers have discounted pessimistic projections of disaster, citing significant advances in building practices, codes and emergency preparedness. While building technology and emergency preparedness techniques have improved dramatically, such advances have not kept pace with the rapid urbanization and increasing concentrations of population in high risk areas,” according to RMS, Inc.

Planners now have a semi-worse case incident that provides valuable insight into the impact of such an event on a densely populated and heavily industrialized area.

Never in the history of disaster preparedness has such an opportunity presented itself. It would be tragic for the world to ignore and not learn from an incident that has caused so much suffering and financial loss.
Could another earthquake exceed the above described catastrophe? Absolutely. If Japan suffered a recurrence of the Great Kanto Earthquake which destroyed Tokyo in 1923 and killed over 140,000 people, the potential losses would cause catastrophic long term implications for both Japan and the rest of the world.

Since Tokyo is one of the major international trade and financial centers of the world, a disruption similar to the 1923 earthquake would significantly impact commerce, banking, and trading operations worldwide. A study performed in 1994 by Risk Management Solutions in conjunction with researchers at Stanford University indicates that a recurrence of the Richter Magnitude 7.9 event would result in between $1,500 and $2,000 billion (U.S.) in economic losses. While the reconstruction costs following such an event are unprecedented, the RMS-Stanford study predicts that over 50% of the losses would stem from direct and indirect business interruption losses.

The assessment of the impact of this disaster will continue over the next year and as the sources are discovered, the specific affects on businesses identified, and operating strategies modified because of the earthquake, additional information will be published so that we can all truly understand what we as planners need to prepare for.


Cole Emerson is the founder and president of Cole Emerson and Associates.

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