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Stalled Japanese Car Production Ripples Through Global Auto Industry

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As Japanese automakers recover from damages sustained in the earthquake and tsunami, effects of the stalls in production have already begun to spread across the global auto industry.

Toyota, Nissan, Honda, Subaru and others have temporarily shuttered factories into next week while Japan continues to grapple with the effects of massive infrastructural damage, compromised nuclear facilities, and thousands of injured, displaced, and missing people.

Automakers have already suffered losses due to stopped production. Even if Toyota facilities reopen next week as expected, the company will have lost close to 100,000 vehicles.

Even as Japanese automakers begin to reopen plants, their ability to recoup losses will be seriously hampered by the rising value of the yen, which hit a record-high on Thursday. Unfavorable exchange rates plague Japanese carmakers struggling to make profits off exported vehicles and, as the industry prepares to rebuild, some analysts say the cost of the rising yen may exceed the cost of stopped production.

But the effects of shutdown plants are not limited to Japanese companies. For global car companies reliant on Japanese parts in production, setbacks in the supply chain can slow or even shut down manufacturing.

"There are cases where even though a certain car is made in America, the engine, or the transmission might be shipping from Japan," said Ed Kim, Director of Industry Analysis at AutoPacific.

Swedish company Volvo, which buys around 10 percent of all parts from Japan, has warned that component shortages could lead to major disruptions in production. French company Renault has also announced production cuts in South Korea, just as GM's European Opel branch said it too plans to halt some manufacturing in Spain and Germany. In America, General Motors was the first domestic automaker to shut down a Louisiana plant due to a parts shortage.

While some factories have been physically damaged, more pressing is the major uncertainty over electricity supply that could continue to prevent Japanese factories from reopening. The government has mandated rolling blackouts in an effort to preserve electricity as the country deals with a nuclear power crisis. About 10 percent of electricity generation capacity may be offline for months, according to a report by IHS Automotive Insight.

"The thing about a plant is when you have a power outage, it's not as simple as 'Okay, we'll stop for three hours, then the power will come back on,'" said Kim. "For example, in steel smelting, when you turn the power back on, it takes a significant amount of time to get the machines warmed up, to get everything running. It's not as simple as putting a switch back on."

Power shortages are not the only infrastructural challenges preventing operations from restarting. As in the rest of Japan, many workers may not have transportation to get to work, or even working phones and computers, leading to blocks in communication.

"A lot of the cell towers became dysfunctional and Internet connection in a lot of places is nonexistent," said Jesse Toprak, VP of Industry Trends and Insights at TrueCar. "So when you can't get a hold of people, you won't know when you're getting new parts or even if the facility exists any longer."

The lack of information can make it even harder for those in the auto industry to set alternative plans in motion. Communication has been "an unexpected barrier," according to a report by IHS Automotive Insight.

"It creates a lot of uncertainty," said Toprak. "Even if there are issues with the plant, if you know what's going on, you can plan what to do, but people have no idea."

For US companies relying on parts made only in Japan -- from semiconductors, to engines and transmissions, to electronics -- setbacks in the supply chain could stall or stop domestic production. Japanese companies supply 60 percent of materials American automakers use in semiconductors, according to IHS.

It only takes one missing part to halt production, so even if most of the parts used in a vehicle are produced outside of Japan, the car cannot be built if a single component is unavailable. Earlier this week, GM stopped operations at a Louisiana plant due to a parts shortage.

"Manufacturers are trying to get a handle on what parts they're not going to have and how widespread it'll be," said Rebecca Lindland, analyst at IHS Automotive Insight. "The problem is that it can be a painfully small part. We have one plant that we know of is down because they're missing a switch. They're missing one piece. Every car is a 20,000-piece puzzle and if you're missing one piece, the puzzle's not complete."

The crisis may lead automakers to alter manufacturing practices in the future, according to experts. Just-in-time manufacturing, a process by which manufacturers keep lower levels of overstock and order parts as needed, has reduced costs and improved efficiency in the industry. But it also demands a highly responsive network of exchange in order to function smoothly. As these events show, it is highly vulnerable to any break or delay in the chain, especially when the relevant parts are only produced in a few factories.

"This whole event is going to cause a change in the supply chain and production in the auto industry," said Toprak. "You can't risk it, you can't rely on one supplier. Automakers will be better off diversifying the geographical locations they get the parts from."

Hybrid cars like the Toyota Prius are expected to be the hardest hit. As gas prices rise to $3.50 a gallon, analysts expect that demand for the gas-saving, part -electric vehicles will rise accordingly. The Prius, the top-selling hybrid in the country, recorded a sales increase close to 75 percent from February 2010 to February 2011. But most of the hybrids sold in the U.S. are made in Japan.

"Especially when we're back to four dollar a gallon gas, it's a time when people may be more interested in buying fuel efficient vehicles," said. "Most hybrid production does come from Japan -- there are no Japanese brand hybrids being built in the US yet."

And as overstocked inventory runs out in the next two months, experts believe that the increasing unavailability of certain models will lead to increased prices. The price of the Toyota Prius has already jumped in the days since the earthquake, and some expect it to climb all the way up to sticker price.

"When you have demand and you don't have a lot of cars, it's simple economics that prices will go up," said Toprak.

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