March 23, 2011. Copyright 2011, Graphic News. All rights reserved

European car manufacturers face output disruption as Japan disaster threatens supply chain
By Neil Winton

LONDON, March 23, Graphic News:  European car manufacturers are being forced to cut back production, as crucial components from Japan go missing following the earthquake, tsunami and nuclear power station disasters.

Opel of Germany, owned by General Motors of the U.S., Renault and Peugeot-Citroen of France, and Germany’s Mercedes Benz have all been forced to halt some production because of a shortage of key components produced by Japan’s big three manufacturers Toyota, Nissan and Honda.

The question is, how severe will the disruption be, and how long will it last?

Experts also fear that smaller Japanese firms, which contribute to the important and delicate “just-in-time” supply system serving local and global automotive industry manufacturers, might be in trouble and disrupt European industry in the months ahead.

The modern automotive industry is global and interdependent, and depends on a smooth, uninterrupted delivery of components. Years ago, manufacturers stockpiled huge amounts of components at vast expense in massive warehouses. Now, when a car reaches a point on the production line and needs, say, the windscreen wipers fitted, a supply of necessary bits was probably delivered by truck about half an hour before. The slightest disruption will torpedo the whole process quickly.

“Even a missing $5 part can stop an assembly line,” said Morgan Stanley auto analyst Stuart Pearson, in a report “Japan Earthquake: Implications for E.U. Autos”.

Pearson said less than five percent of European car production is sold in Japan, so that’s no big worry.

“However, supply chain disruption is the main concern -- Peugeot-Citroen, Renault, Daimler (which owns Mercedes Benz) and Volvo are all now experiencing disruption to production. Most companies we speak to see little impact if normal supply is restored within 3-4 weeks, but anticipate greater difficulties should disruption continue longer,” Pearson said.

Opel stopped production at its plant in Zaragoza, Spain, because an electronic part failed to arrive from Japan.

London-based Citigroup Global Markets said any disruption from second and third tier Japanese companies which supply small amounts of important electronics is a worry because delays won’t become apparent to European based manufacturers for more than a month.

“Any relevant components dispatched before the earthquake are likely to be currently seaborne, so there is likely to be 5-6 weeks of logistics in the system. This means that any disruption to vehicle production outside of Japan is unlikely to occur until the second quarter and beyond,” a Citigroup report stated.

Citigroup said this problem, if it exists, could be overcome by using more expensive and faster air freight for a short time to make sure production runs smoothly.

Deutsche Bank said Japanese electronic parts production for European manufacturers might be hurt the most.

“One area of growing concern is the supply of automotive semiconductors. Electricity outages and seismic activity are both highly disruptive to semiconductor fabrication; even millisecond outages or small trembles can result in the scrapping of weeks of in-process production,” the bank said.
/ENDS