It doesn’t take much to bring an automotive assembly line to a halt, according to John Mendel, CEO of Honda’s U.S. subsidiary, even “something as small as a speedometer needle.”
It’s a lesson the automaker has had driven home after the earthquake and tsunami that struck Japan on March 11, killing tens of thousands and all but shutting down the country’s auto industry for the better part of a month. Since then, shortages of various parts and components, some as small a speedometer needle, have forced a sharp cutback in production by Japanese automakers.
The disaster has led many companies, including Toyota, Nissan and many automotive parts makers, to consider whether they should reduce their dependence on factories built in quake-prone and increasingly high-cost Japan. The so-called “hollowing out” of the Japanese auto industry has been under way for a number of years, but the pace seems certain to accelerate in the wake of the March disaster.
More must-see stories
“I fully understand that we can’t go on with just a desire to protect manufacturing in Japan,” lamented Toyota’s CEO Akio Toyoda last month as he announced that the carmaker’s January-to-March profits had plunged by 77 percent.
Even though the disaster occurred during the final weeks of the quarter, it cost Toyota more than $1.25 billion in losses. That figure is expected to grow substantially in the months ahead. Just through the end of March the maker lost an estimated 170,000 units of production. The number will likely surge closer to the million mark before Toyota production is fully back to normal, which it doesn’t expect until November or December.
Toyota is by no means alone. Honda, Nissan, Mazda, Suzuki … there isn’t a Japanese carmaker that hasn’t felt the impact of the crisis. And the disaster has reached well beyond the confines of the home islands. Honda last week revealed production of the all-new 2012 Civic, produced at plants in Indiana and Ontario, won’t be back to normal until “sometime in the fall.”
But the biggest impact from the disaster has been in Japan, where it has been more difficult for carmakers to find alternative sources for parts in short supply, including onboard microprocessors, resin and rubber components.
Yet that is only one reason why automotive executives are rethinking where they need to put their factories. The 110 billion yen loss attributed to the earthquake was dwarfed by 290 billion yen in losses due to shifting exchange rates.
With the dollar approaching record lows compared to the yen it’s “increasingly looking like the only thing [automakers] could afford to build in Japan are luxury cars and products for the domestic market,” said John McElroy, a longtime automotive analyst and host of the television program "AutoLine Detroit."
With nearly half its production based in Japan, Toyota is clearly the most vulnerable to shake-ups, whether they rock the ground or financial markets. The carmaker says that one yen of appreciation for the Japanese currency translates into a 30 billion yen hit to its bottom line. Toyota expects little moderation in the months to come and is now forecasting the yen will reach 86 yen to the dollar, compared to an earlier projection of 85 to 1.
One of the most cautious and conservative of the Japanese automakers, Toyota has nonetheless been moving production offshore at a steadily growing pace. But it lags behind Honda and Nissan, the latter today producing barely a quarter of its total volume at home market plants.
Japanese auto and truck plants produced a grand total of 9.6 million vehicles in 2010, compared to 7.7 million vehicles assembled in the United States. Due to quake-related shortages, analysts say production volumes could come close to parity in 2011; while Japanese “transplant” lines have had to trim back, Detroit plants, and those run by Korean and European makers are largely picking up the slack.Story: Finding the best incentives in new car deals
Longer-term, most observers anticipate a continued hollowing out of Japan’s automotive production base. The U.S. continues to benefit. Once it became clear brands like Toyota and Honda could achieve comparable productivity and quality levels with U.S. workers, the carmakers saw numerous advantages to building vehicles in the same market where they’re sold. Shipping costs were lower, for one thing, and using a just-in-time production base allows a carmaker to better respond to sudden shifts in market demand.
There’s also a practical reality. In recent years carmakers like Toyota have had a more difficult time luring young workers to their plants, where many employees traditionally lived in Spartan corporate barracks, notes McElroy. The country’s rapidly declining population is worsening the challenge of keeping a trained and motivated workforce.
Japanese automakers aren’t the only ones rethinking their factory plans.
Among the suppliers impacted by the March 11 disaster was German chemical firm Merck, which operates a one-of-a-kind paint pigment plant in Japan’s quake-devastated northeast. Ford was one of a number of carmakers forced to curb orders for certain hues dependent on that plant’s products. The facility recently resumed operations, but Merck says it will now build another pigment plant outside Japan.
Other suppliers, such as Renesas, one of the world’s largest automotive microchip vendors, are feeling pressure to move at least some production. And many suppliers will shift operations to stay close by to customers like Toyota or Nissan.
The Japanese auto industry is likely to remain a potent force, but increasingly manufacturers will supply their brands from plants that are less vulnerable to earthquakes, exchange rates and other disadvantages that have been making the Land of the Rising Sun a difficult place to do business.
© 2013 msnbc.com. Reprints