Earthquake Could Further Jolt Toyota and Other Japanese Automakers

Supply lines and port facilities being assessed, nuclear reactor meltdowns also looming

It was already a difficult year for Japan's largest carmaker Toyota, dealing with the wake of a year of recalls affecting more than ten million vehicles worldwide. In the aftermath of the the devastating Earthquake on March 11, Toyota and other Japanese automakers could be facing supply interruptions that could compromise business all over the world.

Worry over the extent of the damage to the companies facilities, as well as the Japanese economy, sent stocks reeling Monday morning in Tokyo after relatively calm after hours trading over the weekend. Mitsubishi Motors was down 11 percent in early trading, Nissan by 10 percent and Toyota by 7.9 percent.

On Friday, Toyota idled more than a dozen plants in Japan as a result of the catastrophic earthquake. It said it will be able to restart all except four, which were so close to the epicenter that workers were evacuated.

The company worked furiously through the weekend to check the safety of its facilities and well-being of its employees, as well as sorting out the logistics of its world-wide supply chain to see how its plants outside of Japan could make up for any interruptions in manufacturing of parts and automobiles. All of the company's Japanese plants will be idled again Monday.

The plants potentially most directly impacted by the earthquake manufacture Toyota's small cars -- the Yaris, Scion xB and Scion xD. But in the coming days, the company could find that production of every vehicle will be affected in some way.

Vehicles Built In North America Could Be Affected

Toyota, Nissan and Honda make the lion's share of the vehicles they sell in North America at U.S., Canadian, and Mexican plants. The Toyota Camry, for example, is built in Kentucky and Indiana. But many parts to these vehicles built in North America have a supply chain that may trace back to a Japanese plant.

Toyota is one of the world leaders in so-called "just-in-time" production, which means plants do not stock an abundance of parts. If just one part for a given car can't be delivered, it can idle an assembly line. Even parts plants based in North America or Europe may rely on parts sourced from a Japanese plant impacted by the earthquake.

When Toyota was faced with a recall last year of gas pedal mechanisms that were found to be sticky and potentially a cause of fatal crashes, it was able to dial up the supply from its Japanese parts supplier, while its U.S. supplier coped with the recall of the mechanism traced to its facility. The company may be able to employ a similar strategy to ensure that production isn't dramatically impacted.

Toyota will decide when to restart production after reassessing damage and the condition of its supply chain on Monday, spokesman Keisuke Kirimoto said over the weekend. "It's first things first. And that's safety."

Other Japanese automakers have taken similar measures. Mitsubishi Motors Corp. said Sunday it would also halt production at its three Japanese assembly plants through Tuesday, following similar moves by Honda Motor Co. and Nissan Motor Co.

While the companies sort out long-term supply issues, they already know that thousands of cars on the ground, already built, were destroyed or damaged to the point of having to be scrapped. At least 2,300 Nissan and Infiniti vehicles waiting to be shipped to the U.S. and Japanese showrooms were wrecked and many caught fire. The extent of damaged vehicles and ships that carry vehicles abroad was being sorted out over the weekend, with announcements forthcoming from the companies this week.

"When something like an earthquake, especially of this magnitude, happens, it presents an incredible logistic nightmare," says Hans Schmidt, a Munich, Germany based logistics consultant. "Auto companies especially almost always try to source parts from multiple suppliers in different parts of the world to maintain quality, competitive pricing, as well as a hedge against disaster, but we will have to see how many supply lines have been compromised."

There are a lot of issues still unknown that could impact Japanese industrial output and chief among them is the damage done to Japan's port operations. But potentially more devastating is the peril surrounding Japan's compromised nuclear reactors that have been in danger of meltdown. Radiation leakage from nuclear reactors could have a major impact on Japanese exports, as well as make consumers wary of buying Japanese sourced products of all kinds.

U.S. Carmakers Could Benefit From Disaster

If the Japanese automakers' supply of some of its vehicles is impacted for a few months, it could boost market share for U.S. automakers in the short term. No car industry executive wants to talk about who benefits from a disaster, but it is likely that GM, Ford, Chrysler and Hyundai could pick up business if Japanese cars aren't available when consumers are ready to buy.

Toyota's market share in the U.S. dropped from 14.3% in 2009 to 12.8% last year despite heavy incentive spending and it is anxious to rebuild the losses.

To do so, the automaker has been raising incentive spending and kicked off an ad campaign this month themed "#1 For a Reason" after the National Highway Safety Administration issued a decision clearing the automaker of suspected defects in its electronics that were thought to have led to cases of "sudden acceleration." The government agency concluded that the complaints and charges could all be traced to the sticky gas pedal, floor mats being caught up in the gas pedal assembly or simple driver error.

But if Toyota's Yaris and Scion cars are impacted long term, it could severely complicate the company's comeback. Given the rising demand for smaller, fuel-efficient cars, such a scenario would especially benefit companies like Ford, which has brand new Fiesta and Focus small cars in showrooms now that have been well received by the auto press. GM also has a brand new Cruze compact and will soon add an all new sub-compact, the Chevy Sonic. Hyundai has a brand new Elantra compact car. Though Toyota probably loses money on each small vehicle it sells in North America, it has long relied on its small cars to draw in young customers who have traditionally stayed more loyal to the brand than customers of other brands. Losing these customers could prove to be very detrimental in the long term.

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