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Parts Shortages from Japan to Impact U.S. Auto Production, Analysts Say

Source: WSJ - Michael Ramsey

Posted on 23 Mar 2011

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Analysts are saying that the U.S. auto industry is likely to face sporadic production shut downs for several months because of shortages of microchips and other parts that had already been scarce before Japan's earthquake and tsunami on March 11.

Prior to the earthquake, tight supplies of microchips and other electronics, sensors, rubber and forged metal parts had already caused automakers to slow or even temporarily halt production lines.

"You are going to see a somewhat higher rate of plant shut downs, but I don't think it's going to be widespread," said Craig Fitzgerald, an automotive supplier analyst with accounting and consulting firm Plante & Moran LLP in Southfield, Mich. "It's going to be sporadic and moving around."

The plant shutdowns and supply shortages are unlikely to affect overall production volumes, but could hurt profit margins for the automakers and suppliers, Fitzgerald said.

The collapse of auto sales in 2008 and 2009 ravaged the parts industry, causing hundreds of smaller firms to close and forcing deep cuts to capacity and employment at larger suppliers.

As auto sales have begun to ramp back up, some parts makers have found it difficult to access bank credit required to build new parts and in the case of microchips, which can be used in other industries, have shifted their production to other customers.

The earthquake in Japan only makes access to some of these parts even more difficult, Mr. Fitzgerald said.

Ford Motor Co. has been battling pinches in its supply base in forged parts and electronic chips for months, said Todd Nissen, a company spokesman. A shortage of engine parts led to two temporary plant shutdowns since December on its Ford F-150 pickup.

"We did have some downtime here and there," he said. "This natural disaster in Japan doesn't help those pinch points."

Chrysler Group LLC also stopped production at its Windsor, Ont., minivan plant for a week earlier this year because of a shortage of electronic parts.

Chrysler doesn't forecast any further shut downs, but "it's very difficult to get visibility into" the companies that make part for its direct suppliers, said Katie Hepler, a Chrysler spokeswoman.

General Motors Co. has shut down production at a Shreveport, La., plant that makes small trucks in an effort to ensure there were enough parts available for other vehicle lines.

"You have to expect there will be increasing intermittent, unexpected production interruptions coming," said Lars Luedeman, director of Automotive Advisory Services at Grant Thornton LLP. The disruptions will likely begin in the next few weeks.

Mr. Luedeman said the auto industry isn't the top priority for microchip producers and that demands from consumer electronics companies would likely be met first if there was a choice.

In Japan, supply shortages of parts has led to the continued shut down of vehicle production by Toyota Motor Corp. and Honda Motor Co. On Tuesday, each said they will continue to idle their auto assembly production in Japan this week while seeking alternative suppliers.

Toyota, the world's biggest car maker by sales volume, extended a halt on its vehicle assembly operations in its home market until Saturday and Honda until Sunday, as their suppliers for some auto parts are still struggling to restore operations in the quake-hit region.

Some Japanese car makers, including Toyota, have restarted production of auto parts, but so far, only Nissan Motor Co. has announced plans to resume both auto parts and assembly production.