The earthquake and tsunami that killed thousands and devastated a swath of Japan is promising a deeper impact on the country’s economy and global supply chains, and triggering what experts say may be long-lasting changes in business as companies think hard about their suppliers, their suppliers’ suppliers and their suppliers’ suppliers’ suppliers.
“We no longer have supply chains. We have supply networks, and those networks are vast and clearly global,” said Jim Rice, deputy director of the Center for Transportation and Logistics at Massachusetts Institute of Technology. “You can be a small company in Des Moines, Iowa, that depends on a product that’s made from a component that comes from overseas somewhere.”
That was driven home by the catastrophe in Japan. It didn’t take long for the impact of the March 11 disaster and resulting power outages and transport disruptions to start rippling through global supply chains.
Within a week, General Motors announced the temporary idling of a pickup-truck plant in Shreveport, La., and curtailed production at two European plants because of parts shortages. Automakers idled Japan assembly plants immediately after the disaster, and Toyota and Subaru halted overtime production at U.S. plants to conserve parts. Renault, Opel, Volkswagen and Volvo said they felt the effects at their European plants.
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As Japan was still coping with the broader and potentially more devastating crisis at the Fukushima Daiichi nuclear plant, the impact on the country spread to the industrial south as electric power was restricted, factories reduced hours and shipping container lines scaled back some services in part because road and rail transport in the country was curtailed.
Automakers and parts manufacturers in Japan cautiously began to resume suspended operations, but warned supplies of some vehicles would remain tight for weeks. Auto analysts predicted retail prices would jump, especially for hybrid cars such as Toyota’s Prius and Honda’s Insight.
Toyota told its U.S. dealers that its production stoppages would reduce its U.S. deliveries by 17,400 vehicles in March, but that it expected to make up the shortfall in April. Toyota makes 43 percent of its vehicles in Japan.
Honda asked its U.S. dealers to postpone orders until full production resumes. The company said of its 110 suppliers in the northeast Japan region hit hardest by the earthquake, about a third said they would not be able to resume operations for more than a week.
“At this time, we have enough information concerning our suppliers to conclude that the flow of parts to our Japanese production facilities will be somewhat disrupted,” John Mendel, executive vice president at American Honda, said in a letter to dealers. “We cannot say with certainty when those production plants will return to their full capacity.”
Most Japanese auto assembly plants escaped damage but face shortages of parts from suppliers’ damaged plants, power outages caused by the shutdown of nuclear generators, and disruptions to road and rail transport. Automakers indicated “the situation is very much day-to-day, or at best, week-to-week,” Itay Michael, auto analyst at Citi Investment Research & Analysis, said in a research note.
Auto parts, tires, tires and tubes, and engines, motors and parts account for more than 40 percent of U.S. containerized imports from Japan. Last year, they totaled 230,463 20-foot equivalent units of the total of 575,371 TEUs from Japan, according to PIERS, a sister company of The Journal of Commerce and a division of UBM Global Trade. In addition, car carriers moved 1.4 million Japanese-made vehicles to the U.S., approximately 15 percent of U.S. sales.
As many as two-thirds of Japan’s 72 engine and transmission plants stopped production, IHS Automotive said. Japan exports 2 million transmissions a year to North America and another 6.5 million to other world markets, the forecasting firm said.
Goldman Sachs said in an investor report that it estimated plant shutdowns were costing Toyota $73.5 million a day and costing Nissan and Honda $25 million each.
“The issues with the Japanese auto industry are quite serious, and the situation is unlikely to return to normalcy any time soon,” IHS Automotive analyst Aaron Bragman said in a research note. “Many automakers in Japan are facing serious supply disruptions, not just to parts plants being damaged, but to rolling blackouts, infrastructure damage, port and shipping issues and more.”
Japan’s largest container ports escaped major damage from the earthquake and tsunami, but regional ports including Sendai, Hitachi, Onahama and Hachinohe sustained severe damage. Container lines said Tokyo, Yokohama and other major ports were operating normally, but with congestion aggravated by power and inland transport disruptions.
Several carriers took the precaution of routing ships around the northern Japan region where workers were trying to prevent nuclear fuel rods from overheating and releasing radiation.
The Japan disaster has caused some snap-back in supply chains across a wide range of industries, and supply chain directors were struggling to implement the resiliency and risk management contingency plans built for short-term disruptions.
Aircraft maker Boeing said it could have shortages of parts if delays last longer than several weeks, Aviation Week magazine reported. Thirty-five percent of the parts in a Boeing 787 and 20 percent of a 777 are from Japan.
Caterpillar, the world’s largest manufacturer of earthmoving equipment, said its factories around the world could be “sporadically impacted,” but that it had located alternative sources for components produced by Japanese manufacturers.
Technology manufacturers are struggling with interruptions to the flow of parts and with rolling blackouts of power to Japanese factories outside the earthquake zone. Japan supplies 20 percent of all semiconductors and is an important supplier of other high-tech components.
Sony said five plants in central and southern Japan that were not affected by the earthquake would be closed through the end of March because of parts shortages and power interruptions. A sixth plant reopened but was working around rolling blackouts. Sony has halted production at six plants in northern Japan.
“If the shortage of parts and materials supplied to the plants continues, we will consider necessary measures, including the temporary shift of production overseas,” the company said.
Mobile phone manufacturer Nokia said it was seeking alternatives for the 12 percent of its components that are sourced from Japan, and expected “some disruption to the ability … to supply a number of components due to the currently … industrywide shortage of relevant comments and raw materials ... from Japan.”
Deeper in the electronics supply chain, IHS iSuppli said in a report that about 25 percent of the world’s production of silicon wafers, the foundation for semiconductors, was shut down last week.
The research firm said a plant run by Shin-Etsu in the Fukushima prefecture, the same region as the damaged nuclear plant, “is responsible for 20 percent of global silicon semiconductor wafer supply.” The plant was damaged, IHS iSuppli said, and although the company is shifting production to other sites, “the company warned it was unclear how long it would take to restore the damaged facilities and equipment.”
Semiconductors are at the heart of the countless electronic devices that are ubiquitious in modern life. The suspension of plant production in Japan “could have wide-ranging implications beyond the Japanese electronics industry,” IHS iSuppli said.
Two Japanese companies, Mitsubishi Gas Chemical and Hitachi Kasei Polymer, suspended production at plants that produce 70 percent of the world’s raw materials for making printed circuit boards, which IHS iSuppli noted are used in goods from PCs to smartphones.
Ironically, automakers and technology companies are renowned for their supply chain contingency planning. These industries have little choice — they know that a problem in an upstream parts supplier can stop a production line cold.
The Japan disaster has focused attention on Tier 2, 3 and 4 suppliers that feed parts and components to Tier 1 suppliers that sell directly to end-users such as automakers and electronics manufacturers.
The success or failure of these companies’ post-disaster contingency plans won’t be fully apparent for weeks. Many companies are still feeding off inventories, but that can’t continue forever. “Their supply chain may be OK now,” Rice said, “but in four weeks when the inventory is consumed all along the Tier 1, Tier 2, Tier 3 and Tier 4 suppliers, they’re going to be out of luck unless their supply source has been reconstituted.”
Joel Sutherland, managing director of Lehigh University’s Center for Value Chain Research, is a former vice president of operations at Toyota’s Denso Corp. parts subsidiary. He expects in the wake of the disaster Japanese automakers will develop more backup sources for parts — something they’ve done for years in their U.S. operations.
Adding secondary suppliers can provide insurance against supply chain disruptions, but it also can add costs and complexity. “It’s very difficult to control quality if you diversify your suppliers too much,” Sutherland said. “My guess is they’re not going to diversify too much, but they’re certainly going to have to do some supply chain disruption planning.”
Sutherland said his experience with Japan convinces him the nation will recover more quickly than many expect.
“I can guarantee you they’re going to get their infrastructure in shape as quickly as they can, and implement contingency plans to reopen their plants and get their people back and production up and running,” he said. “Then we’ll all be amazed at how fast they did it — and they’ll do it right.”
Since the September 11 terrorist attacks a decade ago, supply chain resiliency planning has become a growth industry that’s been extensively discussed in studies, speeches and reports. The Japan disaster is certain to provide new fodder for case studies that advance industry thinking.
“In the area of supply chain disruptions, we’re finding that every time something like this happens, the rest of the industrialized world learns from that and takes some actions,” Sutherland said.
Rice said that if past disasters and disruptions are any guide, some companies will implement changes that increase their resiliency, while others decide the potential doesn’t justify the cost. He said that can be a rational decision, but one based at least on factual analysis.
An event such as the Japan earthquake and tsunami, he said, can “change the nature of relationships among parties in supply chains. I think it’s unrealistic to expect a manufacturer to have intimate knowledge of its Tier 4 or 5 suppliers. But the manufacturer can make the Tier 1 and Tier 5 suppliers work more closely and do more planning so that they’re better prepared next time.”
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Contact Joseph Bonney at firstname.lastname@example.org.