Toyota's Quake Troubles May Be Just Beginning

In my New England neighborhood, we call it a "French toast emergency": Every time a heavy snowfall or tropical storm is predicted, the local grocery stores are jammed with folks frantically buying lots of bread, milk, and eggs. If there's any chance that supplies might be disrupted, even if only for a few days, people run to stock up.

So I wasn't surprised by a recent USA Today report suggesting that buyers have been rushing to Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) dealers in search of Priuses and Fits. Unlike many of the Hondas and Toyotas sold in the U.S., Toyota's Prius and Honda's Fit aren't made here -- they're imported from Japan.

And Japan, as you may have heard, is having some trouble at the moment.

How big a deal is this?
Although some Japanese auto factories have managed to restart production, supplies of many cars are expected to be limited for a while. Toyota resumed limited production of three hybrid models, including the Prius, on Monday, but most of the giant automaker's 18 Japanese factories are expected to be idle until at least mid-April.

Only one of those plants, a factory in Miyagi that produces the small Yaris, was significantly damaged by the earthquake, and that plant could be idle for another month or more. But parts shortages and utility disruptions are expected to be a major problem for a while, even for plants far from the disaster.

  • Honda is expected to cut production at its U.S. plants by as much as 50% starting this week, due to shortages of parts from Japan. Meanwhile, two critical Japanese factories are shuttered until (at least) next week, and damage to a technology center in the quake zone may affect the company's product-development efforts.
  • Nissan has some of its Japanese plants operating (for the moment, at least) with parts on hand, but a critical engine plant was damaged. The company is exploring the possibility of producing the engines in one of its Tennessee plants and shipping them to Japan to replace lost production. The all-electric Leaf is back in production, though its plants continue to face rolling power blackouts. The company's four U.S. plants are expected to keep running at least until next week.
  • Toyota has been hit very hard. According to Automotive News, the company said on Tuesday that it was still assessing its parts supplies and inventories, and said darkly that "there may be a significant impact on our production capabilities." And while Priuses are being built in Japan, batteries for the U.S. version of the car may be in short supply for a while. In addition, the company has asked its U.S. dealers to restrict orders of more than 200 critical parts to preserve supplies as long as possible. But for the moment, the company's 13 U.S. vehicle and engine plants are up and running.

It's not just a Japanese problem: Because of the interconnected nature of the global auto business, even factories thousands of miles away from the disaster are feeling its effects.

  • Ford (NYSE: F  ) and Chrysler have run short on certain Japanese-made paints, and have told their dealers that certain colors are on indefinite hold. (Want a black F-150? Too bad.) The company plans to idle a factory in Belgium for several days next week in an effort to conserve parts.
  • General Motors (NYSE: GM  ) had to halt production of some trucks because of a parts shortage; this in turn led to some layoffs last week at a plant that makes engines for those trucks. Those workers returned on Monday, and production is restarting -- for the moment. Shifts have been cut at two plants in Europe and one in Korea because of parts shortages, but as of Wednesday those plants are open and running at partial capacity.

Those last two may sound relatively trivial. But things may be about to get a lot worse.

How bad? This bad.
According to a report from economy watchers IHS Global Insight, supply disruptions related to the Japanese disaster have already shut down 13% of global auto production. So far, 320,000 vehicles that should have been produced haven't been, resulting in millions in lost revenues for the (mostly Japanese) affected automakers.

But here's the thing: Many plants that rely on Japanese-made parts are up and running today, but they're drawing down existing inventories of those parts. If supplies continue to be disrupted, those inventories will run dry over the next few weeks. IHS predicts that as much as 30% of global auto production could be shut down by mid-May. That's 100,000 vehicles a day, and nearly all of the major global automakers could be affected.

Getting more specific than that is tricky, because for the most part, the automakers aren't talking about this problem -- nobody wants to let their rivals (or shareholders, or customers) know they might be vulnerable. One exception is Volvo, which according to Edmunds, said that as of March 21 it had only a 10-day supply of its Japanese-made climate-control and navigation components. Ten percent of Volvo's parts come from Japan.

Beyond that, the effect is still hard to predict. But if you own shares in any automaker, this is a story to watch carefully over the next few weeks. You can also click HERE to add the companies mentioned in this article to My Watchlist.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter at @jrosevear. General Motors is a Motley Fool Inside Value recommendation. Ford is a Motley Fool Stock Advisor pick. The Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2011, at 9:06 PM, baldheadeddork wrote:

    Good to see you again, John. I was afraid you didn't survive winter with the CTS-V.

    Let me put on my old work hat and explain a little about the supplier structure. Most of what goes into a new car (based on the dollar value) isn't produced by the manufacturer who designs and sells it. Practically everything but the body panels and the powertrain castings is made by someone else.

    Suppliers are classified by their proximity to the final assembly line. Tier 1 suppliers ship to final assembly. Tier 2 build components that go to Tier 1. That supplier might buy pieces from a Tier 3 supplier, who might get components from a Tier 4 vendor.

    I used to work for a plant that made fuel tanks for several manufacturers. We created the tanks, but then we installed fuel pumps and hoses from Tier 2 suppliers, and the pumps had components stretching back to Tier 4 and beyond. All of the sub components have to be approved by the auto maker.

    The reason everyone sweating bullets is there has been a huge amount of consolidation among lower tier suppliers. There might be two or three plants worldwide that make all of the pressure relief valves in a fuel pump, for a simple example. If one of those plants goes down, it will bring the rest of the supply chain to a halt.

    There are Tier 2-4 plants in this region of Japan that have this kind of impact, which is what IHS Global Insight is using to get their numbers. But I'm not convinced that's going to be the big problem. Production for low tier components can be moved with relative ease because the nature of the business requires having a lot of flexibility. It will cost money and take a few weeks, but I expect the supply chain to be restored within two months of the tsunami at the latest.

    You're not going to be able to say that about five nuclear reactors, however. Power shortages are going to be a much larger issue, and this will take years to resolve. Japanese auto makers are going to have to move production out of Japan because they won't have enough power to run plants at capacity. This will work down to foundries and other major component manufactures that need a lot of power to do their work.

  • Report this Comment On March 30, 2011, at 9:34 PM, Jokers4 wrote:

    How can they guarantee the public that every part or vehicle does not contain any radioactive particle which may end up in the back seat with the kids?

  • Report this Comment On March 31, 2011, at 6:01 AM, TMFMarlowe wrote:

    @baldheadeddork, thanks as always for stopping by. I'm definitely not thinking of the parts disruptions as a long-term issue, but it could be a rough few months for several automakers -- and other than 'probably Toyota', it's not yet clear who will be hit hard.

    As an aside, gotta like GM's chances of regaining the "global sales leader" crown in 2011 right now, not that that's actually worth much. But that's an article for another day.

    The V actually did just fine in the snow for the most part (much better than the BMW it replaced). I've been focused on some other stuff in recent weeks but should be back to more-or-less daily articles going forward.

    Thanks for reading.

    John Rosevear

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