Auto business models tested by Japanese disaster

Dennis Morrison, Columnist

With the death toll from the March 11 earthquake and tsunami in Japan rising to over 14,000 people and an additional 13,000 still missing, the Japanese government continues to count the cost of this natural disaster.

Its estimate of the rebuilding costs now stands at US$350 billion, which would be the largest reconstruction programme since World War II.

The toll in human life is, however, far less than from the 1923 Great Kanto earthquake which killed an estimated 140,000 people. That earthquake also wiped out about 40 per cent of Japan's gross domestic product.

The most potent effect of the tsunami is the continuing crisis at the Fukushima Dai-ichi Nuclear Power Station, which has forced the evacuation of hundreds of thousands of people.

The resultant disabling of this power station has led to an energy shortfall of some 15 per cent, causing widespread disruption to Japanese industrial production. Two of the affected industries where the impact has been felt most significantly worldwide are automobile and electronics.

Worse hit among the automobile companies is Toyota which, of the Japanese companies, relies most heavily on plants in its home base to supply its overseas markets.

While the company's 17 plants in Japan escaped relatively unscathed, it has been forced to work at only half volume in these plants so far, and at 40 per cent in its overseas operations because of the disruption of its vital suppliers in the areas worse hit by the disaster. As a result, Toyota is not anticipating a return to full production in its global system until year-end.

limited supply

The company's North American production has been cut by 75 per cent due to the limited supply of parts made in Japan, and this will affect its Camry, Corolla and Rav 4 units. In the meantime, reports are that its popular Prius hybrid car is almost sold out in the United States, and supply of its Lexus luxury brand which, but for one model, is all imported from Japan, is drying up, exposing the drawbacks of Toyota's policy of producing in its Japanese plants half of the cars it sells globally.

The effects of the natural disaster on the company's operations have also been exaggerated by its 'just in time' production system that limits parts inventories to a minimum.

Honda and Nissan, two other main Japanese automakers, have had to scale back their North American operations as well, in the face of inadequate inventories of Japanese-made parts. They are only operating at approximately one-half of normal production levels in Japan, but their global systems are likely to be somewhat less affected because they are not as dependent on output from Japan.

main suppliers

The fact that Japanese producers are the main suppliers of electronic components to Nissan and Honda means that these companies are critically exposed to supply disruptions arising from the disaster.

The dislocation of Japanese car manufacturers' assembly lines in Japan, the US and Europe is expected to temporarily reduce demand for aluminium, as the automobile industry is a large consumer of the metal. This has had no noticeable impact on aluminium prices, which are largely being driven up by speculation in the commodity markets. The Japan reconstruction work will stimulate growth in aluminium demand later on.

Automakers globally have been enjoying improved profits after suffering plummeting sales in 2009 at the height of the recession.

Vehicle sales have rebounded in the US, Germany and France, and have been robust in the major emerging markets of Brazil, China and Russia. General Motors and Chrysler have repaid loans to the US government ahead of schedule, as have Peugeot and Renault to the French government. Though rising oil prices are squeezing consumer spending, and this could temporarily affect automobile sales, the US Federal Reserve and other policy-makers are projecting that the impact will be short-lived.

business@gleanerjm.com