Auto supply chain disruptions caused by delays in parts shipments from Japanese suppliers could cause the shutdown of many vehicle assembly lines in the U.S., Europe and Asia, wreaking havoc with automakers’ 2011 earnings targets.
Auto parts plants throughout Japan have shut down in the wake of the catastrophic earthquake and tsunami on March 11.
The ongoing crisis at Japan’s Fukushima I nuclear power plant, which is releasing high levels of radiation from four crippled nuclear reactors, has further exacerbated the problem. In published reports on Sunday, Koji Endo, managing director of Tokyo-based Advanced Research Japan, characterized the disaster as “the biggest impact ever in the history of the automobile industry”.
Since the quake, Toyota (NYSE:TM) shares have dropped more than 7%, while Honda (NYSE:HMC) shares have slid about 5%.
Although General Motors (NYSE:GM) and Ford (NYSE:F) have shown less volatility, those companies likely will feel the full effects of the parts shortage over the next two to three weeks as current parts inventories run low.
Any disruption to vehicle production comes at a bad time for auto industry, which had been bouncing back from the deep recession. Japanese parts shortages forced GM to briefly shut a plant in Louisiana, Ford has taken plants offline in Belgium and Honda is considering shutdowns in some North American plants. Prospective buyers of Toyota’s popular Prius, which is only made in Japan, can expect higher prices and fewer choices in the weeks to come.
The parts shortages have a greater impact on vehicle production because of tight supply chain integration between automakers and their suppliers. In the 1980s, the industry sought to reduce the cost of warehousing excess inventory though just-in-time manufacturing. That shift allowed automakers to acquire parts almost on an as-needed basis.
The strategy works fine when all the links in the supply chain are running smoothly. But when the grand dance between manufacturers and their suppliers is that tightly choreographed, you don’t need an earthquake, a tsunami and a nuclear crisis to cause significant problems. Case in point: When a fire broke out at an auto parts plant in Michigan earlier this month, GM and Mazda ran out of ceilings and dashboards for certain models and had to shut down production temporarily.
Bottom Line: With the nuclear disaster far from resolved – and the U.S. Homeland Security Department now screening passengers and cargo from Japan for radiation – don’t expect a quick return to normal for Japanese auto parts suppliers. Japan also accounts for some 13% of global auto production — much of it manufactured for the U.S. market — and that represents the sector’s most direct exposure.
The North American operations of Ford and GM have a little breathing room, since they likely have enough parts for most models through early-to-mid-April. But since most of the parts in question are tightly customized to the specific models, there is little room for substitution. While it’s far too soon to gauge the impact on auto production in general, there is a short-term risk to earnings — and share prices — if assembly lines shut down for more than a couple of weeks.
As of this writing, Susan J. Aluise did not hold an interest in any of the stocks mentioned here.
