The world’s biggest producer of micro-controllers, Renesas Electronics, which was hit by the Japanese earthquake in March, has said it will restore full output by the end of September, a month prior to its previous estimate. The announcement is welcome news for Japanese automakers and the wider automotive industry, which only realized the full extent of its reliance on automotive electronics from Japan in the wake of the catastrophe.
Apart from the direct impact on automotive plants in the country, including those of Honda, Toyota, Nissan and Fuji Heavy Industries, a total of eight Renesas facilities were damaged by the earthquake, including the company’s Naka plant 130km north of Tokyo, one of two dedicated to automotive microcontroller production. The facility makes electronic components used in everything from engine control units to onboard telematics and the impact on automotive parts production is continuing to affect global vehicle production because of sub-component shortages. (Read more here).
That shortage of microcontrollers used in those subcomponents has been felt throughout the global automotive supply chain and by carmakers that were single sourcing components. For instance, Hitachi’s delay in supplying sensors for the Opel Corsa and Vauxhall Meriva models halted GM’s production lines in US, Spain and Germany. In Japan, meanwhile, every automotive plant had supplies that it sourced from Renesas, whose production problems caused a major strain on domestic carmakers.
The new forecast on restored output at Renesas’ facilities will be welcome news to those carmakers that have reported significant declines in their profit forecasts for this year. Toyota Motor, Japan’s largest company by sales, estimated it would see a 31% drop in profit this year, citing production cuts because of quake damage and a stronger yen. Honda Motor forecast a worse-than-expected 65% drop in annual profit. The earthquake also hit the launch of the Civic model in the US market in April and it isn’t expected to resume full production until the after the summer.
According to Prana Tharthiharan Natarajan, Automotive & Transportation analyst at Frost & Sullivan: “In the best case scenario, the Japanese automotive industry is estimated to fall short of close to 1m vehicles, year on year, compared to 9m vehicles produced in 2010, assuming recovery signs are evident in July and pre-quake levels of output are reached before the end of Q3 2011."
More widely, according to IHS Automotive, global car production will be reduced by 3.6m units in 2011 and although 3.01m will be added in 2012, a net loss of 640,000 units over the two-year period is expected.
This is not helped by the fact that there are still other critical components, such as gaskets, sealants and film for LCD displays, have not yet reached the pre-quake levels of supply.
“This is the next area of focus for automakers, before they announce their revised forecasts of recovery to earlier plans of production output,” Natarajan told Automotive Logistics. “The inventory levels across the tiers in supply chains is still not very transparent, as OEMs know the inventory levels at tier 1 and in turn, tier 1s know only tier 2. Further down are smaller companies, which may not have a state-of-the-art ERP system, thus diminishing the visibility of stock levels and production schedules. OEMs are yet to confirm their plan to 100% recovery to pre-quake levels.”
One further response to the supply chain problems Japanese manufacturers have faced was announced this week by chairman of the Japan Automobile Manufacturers Association (JAMA), Toshiyuki Shiga. He told reporters that carmakers in Japan will move to use more common parts as a way of securing the supply chain, adding that components made by foreign firms will be more widely adopted.
JAMA has set up a committee in partnership with the parts and materials industries to study strategies including the use of common components.
However, according to Alan Braithwaite, a visiting professor of logistics at Britain’s Cranfield School of Management and the chairman of logistics consultancy LCP Consulting, they are simply too hard-wired into the thinking–and the cost structure–of the industry.
“The costs of dual-sourcing and enhanced resilience on the scale that people are talking about are simply likely to be unacceptable,” he says. “It’s the pursuit of economies of scale that has driven the industry to where it is, and you can’t throw away that concentration of output without sharply driving costs up.”
A detailed analysis of the impact of the Japan crisis on the automotive industry will be published in the forthcoming edition of Automotive Logistics magazine.
