Quake Could Throw Auto Industry Into Disarray


The earthquake-induced paralysis in Japan has left the global auto industry riddled with questions as auto makers brace for potential parts and vehicle shortages amid supply-chain disruptions and production stoppages.

Toyota (NYSE:TM), the world’s largest auto maker, announced plans Wednesday to extend its production halt until at least March 22 and other Japanese auto companies may follow suit. If a production halt lingers much longer, the industry could suffer.

While some U.S. auto makers like Ford (NYSE:F) could gain from a shortage of Toyota vehicles -- especially the popular Prius -- they have to worry about their own supply chains that may be derailed if they need critical parts like electronics components from disaster-ridden Japan.

“One little part can wreak havoc on an assembly line,” said Michelle Krebs, senior analyst at Edmunds.com.

The situation in Japan has created a high level of uncertainty in the auto industry, which is left wondering when Toyota, Honda (NYSE:HMC), Nissan, Mitsubishi and other Japanese auto makers will get back on their feet and when crucial parts suppliers will resume production.

“There’s no such thing as a car that is just U.S. or North American or European. Parts today come from all over the world,” said David Cole, chairman of the nonprofit Center for Automotive Research.

Toyota said Wednesday it has yet to determine when it will resume full-scale production, though it did announce it will restart production of replacement parts for vehicles already on the market on Thursday.

“Not only is the struck region one of our production bases, those directly hit and vastly affected include our dealers, suppliers and numerous other partners,” Toyota President Akio Toyoda said in a statement released earlier this week.

Before Toyota announced plans to extend its production halt, IHS Global Insight estimated the original three-day shutdown would lead to a loss of 40,000 units of production.

There are questions about how much damage operations centers around Japan have sustained and when they will have enough electricity to resume production uninterrupted.

“They’re masterful at finding alternatives unless it’s a part that is so unique that they just can’t replace it,” said Cole. “It’s still too early to tell how much impact this is going to have.”

The disarray is the latest example of how Friday’s 9.0 quake in Japan has impacted the global economy and the financial markets, which have tumbled this week amid fears about the growing nuclear crisis at the Fukushima Daiichi nuclear facility.

In an updated statement released Wednesday afternoon, Toyota said the fact its North American-built cars are insulated from the production halt because they are built by parts supplied in North America. "Inventories are good with adequate levels of supply," the company said about its U.S. dealerships.

Yet there is some anecdotal evidence supplies of the popular and fuel-efficient Toyota Prius, which is built in Japan, may be getting low, especially given soaring crude oil prices.

“U.S. dealers are concerned about supply in Prius hybrid vehicles [due to an] uptick in demand. They’re running out of stock,” said Peter De Lorenzo, publisher of Autoextremist.com and author of United States of Toyota. “If it continues much longer, there will be some interruptions and part shortages.”

Toyota said only one of the three hybrid batter plants in Japan sustained "limited damage" from the quake and the other two, which are located in central Japan, were not affected. "The company is making every effort to minimize any long-term impact on Prius availability," Toyota said. Inventory levels at U.S. dealerships are "generally still adequate."

For consumers, the threat of a possible shortage of popular Toyota vehicles could spur them into action, especially amid impressive incentives like 0% financing.

“For a consumer, right now might be the best time to buy,” said Krebs.

One critical advantage Toyota has is the fact it has sharply increased its level of vehicle inventories. Cole said the auto maker has been running at an inventory of 70 to 80 days, well above its level of 15 to 20 days a few years ago.

“If there were at 20 days of inventory, this could be a ferocious hit,” said Cole.

It’s possible U.S. auto makers General Motors (NYSE:GM), Ford and Chrysler could stand to gain from a longer-term production halt at Toyota.

“I don’t think there’s any question” Detroit would see an increase in sales from a large disruption, said Cole.

Due to the costly and widespread recalls at Toyota last year, American consumers who would otherwise buy Japanese-made cars may be more willing to give U.S. models a closer look.

“It really tarnished the halo on Japanese auto makers in terms of quality,” said Cole. “There was a lingering perception of superior Japanese quality. That really disappeared with the Toyota problems.”

Any gains U.S. auto makers could receive from the Japanese situation could be mitigated by potential supply-chain issues, especially related to electronic components that are often manufactured in Asia.

“There may well be some winners and losers in this but it completely depends on where their partners come from,” said Krebs.