The recent earthquake and tsunami in Japan that killed thousands and left many people homeless has become one of the additional factors that leads to economic disruptions besides the rising oil prices, inflationary pressure as well as repercussions from the global economic crisis in late 2008 and its slow recovery. The companies are shutting down plants due to their indeterminate damage, power shortages and inaccessible roads and ports.
The global automotive industry is bound to be affected by the natural disaster as it highly depends on the country for imports of both vehicles and their spare parts. Japan accounts for about 13% of the worldwide automobile production with U.S. being its largest market.
However, global auto sales may not drop right away until March-end or April. This is because U.S. dealer networks hold at least a 30-day supply for most of the cars.
Impact on U.S. and Europe
The automakers in Japan have less market penetration in Europe than in North America, as revealed by Jeff Schuster, the global forecasting director of J.D. Power and Associates. As a result, the automotive market in Europe would be much more affected by the production shutdowns compared with North America as the former has fewer manufacturing bases than the latter, implying large number of vehicle imports from Japan.
Meanwhile, surging gasoline prices raised demand for fuel efficient and smaller vehicles in the U.S. Last week, gasoline prices reached $3.57 per gallon, up 75 cents from the average price in 2010.
However, most of the sought-after fuel-efficient vehicles in the U.S. are produced entirely in Japan; even though Japanese automakers such as Toyota Motor Corp. (TM), Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY) have their manufacturing bases in the U.S. As a result, supply of popular lineups including Toyota Prius hybrid, Toyota Yaris and Honda Fit would be endangered in the near term, leading to price hike.
The Three Major Automakers
Let us begin with the ill-fated Toyota. No sooner did the automaker chalk out plans to recover from its safety recall crisis and strong yen than the earthquake struck in. The automaker manufactures about 45% of its global output in its home country, more than half of which is exported.
Due to the earthquake, Toyota decided to suspend production at its 12 wholly-owned as well as its other partly-owned plants till Wednesday. This will cost the automaker a production loss of 40,000 vehicles.
Among these closures, Toyota is worried about 2 plants that are located in Miyagi Prefecture, north of Tokyo that is worst hit by the earthquake and tsunami. These two plants produce two popular small hatchbacks, Scion xB and xD, as well as a subcompact, Toyota Yaris.
However, Toyota remained silent about Prius. Toyota had once planned to start manufacturing Prius in the U.S. itself, from 2010. But the automaker backed out due to the worldwide economic crisis.
Honda’s 80% vehicles that are sold in the U.S. are built in North America. However, the automaker exclusively manufactures its fuel-efficient lineups, Fit, Insight hybrid, Civic hybrid, CR-Z hybrid and Acura RL and TSX in Japan.
Honda announced to cease production at six plants in Japan through the end of the week. This apart, the company would shutter a research and development center in Tochigi on the death of one of its employees. The shutdowns would affect production of 16,600 automobiles and 2,000 motorcycles.
Nissan produces 70% of its vehicles in North America that are sold in the U.S. However, the company manufactures its popular Leaf electric cars, Infiniti luxury models as well as GTR and 370Z models entirely in Japan.
Nissan informed that it lost 1,300 U.S.-bound vehicles at the port of Hitachi in Ibaraki prefecture and 1,000 vehicles that were stored at a service center in Miyagi. However, it managed to ship 600 Leafs to the U.S. before the earthquake on March 10, which will arrive at the U.S. port on schedule. Out of its 6 affected plants, Nissan decided to suspend production at 4 plants until Wednesday and 2 plants until Friday.
Conclusion
In the wake of the disaster, The Bank of Japan has pumped ¥15 trillion ($183 billion) into the financial system in order to meet the liquidity demand for crisis management. In addition, the central bank offered to buy ¥3 trillion in government bonds from lenders under repurchase agreements later this week while banks policy board also raised its asset-buying program by ¥5 trillion.
However, the government policies may not prove helpful in handling the aftermath of some of the catastrophes in a short span of time. Destruction of some of the facilities that supply crucial parts is one of these catastrophes.
Every vehicle is built with a number of parts that are unbelievably complex and are custom made, as a result, they are nearly impossible to replace. Although, Japan has excess auto parts supplying capacities in the unaffected areas, it is extremely difficult to shift the production of these parts to those areas.
According to IHS Automotive, the global automotive industry could face interruptions in supply of critical components such as transmissions, electric vehicle battery packs and electronic semiconductors for an indefinite period. This definitely indicates a possible market share loss for the Japanese automakers in the global market.
HONDA MOTOR (HMC): Free Stock Analysis Report
NISSAN ADR (NSANY): Free Stock Analysis Report
TOYOTA MOTOR CP (TM): Free Stock Analysis Report
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