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BREAKINGVIEWS-Japan quake reveals flaw in global supply chain

Wed, 23 Mar 2011 14:45 GMT

Source: reuters // Reuters

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Wayne Arnold

HONG KONG, March 23 (Reuters Breakingviews) - Japan's earthquake and tsunami have revealed that a leaner global supply chain may not be a stronger one. A string of major carmakers including Toyota <7203.T> and Honda <7267.T> has delayed production after damage, not to assembly lines, but to parts suppliers. Japan's automakers pioneered more efficient, low-cost supply chains. Their success means events in one place echo globally.

Hiccups in production have emerged only slowly, but have taken their toll on share prices. Toyota and Honda have fallen more than 9 percent since the quake, while Nissan has dropped almost 14 percent. That may seem strange considering that the prefectures at the centre of the damage account for less than 5 percent of Japanese manufacturing and that most cars are built in western Japan or overseas.

But a handful of materials and components factories have an outsized importance to global supply chains. Even where production lines haven't been destroyed, aftershocks mean suppliers have trouble recalibrating precision equipment. Power shortages will be a problem for months.

Thank Nissan <7201.T>. For decades, Japan's carmakers relied on legions of small, captive suppliers. Vertical integration made just-in-time delivery possible, paring inventories. When he took control in 2000, Carlos Ghosn broke Nissan's exclusive ties with suppliers and started sourcing globally. Competitors followed suit, forcing many parts makers to merge and look for additional customers.

That has forced consolidation in the supply chain. Yet as parts have become more sophisticated, including in many cases advanced microcomputers, Japan has retained control over production. The country still makes 72 percent of the world's silicon wafers, according to Credit Suisse. It makes 32 percent of the world's cars, but 74 percent of the navigation systems that go in them.

Flat supply chains are supposed to reduce a buyer's exposure to a single supplier or location. Instead, the opposite has happened, and some suppliers at the high end of the market have thrived and grown. Small suppliers once relied on by one big buyer have been supplanted by big suppliers that are relied on by companies all over the world. Even General Motors has complained of an as-yet unquantified hit to production. Japan's innovation may become everyone's problem.

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CONTEXT NEWS

-- Toyota has halted operations at its 12 main assembly plants in Japan until at least March 26, resulting in the delay of 140,000 new vehicles. It will also postpone the launch of the Prius wagon and minivan models in Japan from the original plan for the end of April. Toyota said it was having trouble with supplies of electronics, rubber and plastic components.

-- Honda extended its production halt in Japan to March 27. It said one-fifth of its closest Japan-based suppliers affected by the earthquake had told it they would need more than a week to recover.

-- Fuji Heavy Industries <7270.T>, which makes Subaru-brand cars, said all five of its car and parts-related plants north of Tokyo will be shut at least until Thursday, pushing back a previously planned restart on March 22. It expected to resume producing vehicle parts for overseas assembly on March 23 and of vehicle repair parts the following day.

-- Nissan resumed limited operations at five of its plants in Japan on March 21 with vehicle production set to start on March 24. Nissan said production of parts for overseas manufacturing restarted at five separate plants. Restoration of its Iwaki engine plant in northern Japan will take longer than the other plants, it said.

-- Mazda resumed limited operations at its Hiroshima and Yamaguchi plants on March 22 to produce vehicle repair parts, vehicle parts to be shipped to overseas plants and semi-finished goods.

-- Reuters story: Supply chain disruptions force more delays in Japan [ID:nL3E7EN0ND]

-- Reuters story: Japan parts paralysis spreads as firms cut output [ID:nL3E7EM0FP]

-- Reuters Factbox: Japan quake impact on auto and electronics makers [ID:nL3E7EM0B4]

-- For previous columns by the author, Reuters customers can click on [ARNOLD/]

(Editing by John Foley and David Evans)