By Chang-Ran Kim, Asia autos correspondent
TOYOTA CITY, Japan (Reuters) - For Fumihiro Shimizu and his family-owned auto parts plant in this company town, being a second-tier supplier for Japan's top car makers has never been easy.
Even in the boom years, margins were squeezed as Toyota Motor Corp <7203.T> and others extracted maximum value from suppliers to fight off competition from overseas rivals and keep prices down.
Now, with the magnitude-9.0 earthquake off Japan's eastern coast halting virtually all car assembly in the country since March 11, Shimizu says his company is facing its toughest test yet.
"It's never been this bad," he said. "The areas hit by the tsunami are a mess, but here the auto industry is being strangled. The buildings are standing but inside, we're economically starving to death," he said.
Shimizu Kogyo is one of hundreds of parts suppliers in Toyota City that have become victims of the earthquake and subsequent radiation leak at a power plant that have disrupted production and distribution in Japan's northeast.
With a full-scale recovery expected to be months away, the cost to Japan's $700 billion auto industry will be significant.
And without a clear exit in sight, many say the upshot will be the liquidation of smaller and weaker suppliers that will be unable to meet their payments.
"Many of these companies worked only nine days out of the 23 working days in March," said Yusuke Yamakawa, senior manager at Tokyo Shoko Research's Nagoya branch, near Toyota City.
"Some financially weak subcontractors will inevitably go under starting in April."
While times are tough and some bankruptcies are expected, few in Japan's Motor City see the risk of a Detroit-style decline.
Detroit's unemployment rate is among the highest in the United States after General Motors <GM.N>, Ford Motor Co <F.N> and Chyrsler <FIA.MI> shuttered dozens of factories in recent decades as sales fell with increased competition against Asian brands.
Bigger, stronger parts companies in Toyota City could buy up smaller struggling rivals. But without the suppliers at the bottom of the food chain that have long endured low-margin components, Toyota could gradually lose its cozy supply chain that has kept much of its production in Japan.
Although hundreds of kilometers away from the worst-hit regions of the earthquake, tsunami, and radiation, Toyota already appears a changed city.
A shortage of electronics and resin-based components from the region has forced automakers including Toyota and Fuji Heavy Industries Ltd <7270.T> to suspend a majority of their factory lines, resulting in a production loss of at least half-a-million vehicles so far.
The roads are free of the 10-tonne trucks that usually carry parts to Toyota's five assembly plants here. Instead, business at pachinko parlors - Japan's most popular form of gambling - is booming. Restaurants are busy with families at lunchtime as factory workers are told to take time off.
Parts makers in the city of 420,000 say they have never stopped work for as long as a month. The record so far was two weeks, when Toyota suspended production to work down bloated inventory after the economic crisis blew up in 2008.
About a fifth of Toyota City works in the auto manufacturing sector.
Analysts say many small and medium-sized companies still have outstanding loans from financial crisis, meaning banks will be reluctant to lend further to the companies that need it most.
An official at Toyota City's unemployment office said that over the past few days, his office had fielded 40 to 50 calls from companies asking about government support to keep paying wages in the event they had to fully suspend their operations.
Already workers are looking for ways to fill in the time they would usually be at the assembly lines.
"Since the earthquake, I'd say we've seen a 20 to 30 percent rise in traffic," said the store's deputy manager, who asked that he and his store not be identified.
"Because of everything that's going on up north, a business like ours tends to get criticized by people who think it's socially inappropriate to be running an amusement business at a time like this. But with the factories closed, some of those workers need something to pass the time," he said.
While the supply disruption has affected all Japanese automakers and even many overseas, the current debacle was a particularly cruel blow for Toyota.
To spread out its geographic risk, the world's biggest automaker has in recent years begun to establish a third production cluster in Japan in the northeast Tohoku region, which bore the full force of the earthquake and tsunami.
Toyota builds more than two-thirds of its vehicles in Japan in and around its namesake city, and the rest was meant to be spread into the southern Kyushu region and Tohoku.
Toyota Chairman Fujio Cho last month celebrated the opening of subsidiary Central Motor's new, 120,000-units-a-year factory near the badly hit city of Sendai. The plant suffered some damage to its facilities and equipment from the quake.
Toyota is scrambling to get whatever production it can back. So far, it has resumed limited production of the Prius and two other hybrid models at two factories, including the Tsutsumi plant in Toyota City. It is also producing replacement parts and parts for overseas production.
That has helped Okuda Industry, a second-tier supplier, bring its production of engine and transmission parts back up to 70 percent of pre-quake levels in the past two weeks. While his peers in Toyota City say he's lucky, President Kiyohito Okuda said that was far from enough to make money.
"We'll be in the red this month," he said, referring to March. "So if you're operating at 0-20 percent, as I think many suppliers here are, you're past the point of worrying about losing money - it's far, far worse."
The disaster hit just as Toyota's suppliers, like the automaker itself, were recovering from a recall crisis-driven sales drop and the global recession before that.
With a strong yen crippling its domestic operations, Toyota had reduced its daily vehicle production in Japan to around 12,000-13,000 units, or about 70 percent of its peak years. Parts makers say they were just beginning to get by at those reduced levels.
FAMILY BUSINESSES TO FADE
Kosei Aluminum President Shunkichi Kamiya said his company needs to be producing at about fourth-fifths of capacity to break even - a far cry from around 10-20 percent since the quake. He is assuming a worst-case scenario that a full recovery of car production would take six months - too long for many of the city's debilitated subcontractors further down the supply chain to stay afloat.
"We have an overseas business that's healthy, so we will be able to withstand some pain," Kamiya said.
His company, which makes aluminum wheels and other parts, plans to extend financial support to one of its subcontractors so as not to disrupt production, he said.
Kosei has switched off the man-made waterfall on the company grounds, even though the power source in Toyota City is different from the blackout-affected northeast.
As the pain lasts, Shimizu Kogyo's Shimizu said the end-game for many family-owned suppliers might be to give up and hand over the business to any willing takers.
"Nowadays, you don't find too many families that want to hand down the business to the next generation," said Shimizu, who has no children of his own.
"The one good thing about this business was that it was fairly stable. Now even that's gone. If we reach the end of our rope, I guess we'll just sell the business. I think many people like us have the same thought - how best to end the business."
(Editing by Lincoln Feast)