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Japan Crisis Affects North America

By Daniel DesRosiers

I have been getting a lot of requests for comments on the impact of the crisis in Japan on the North American automotive sector so I pass on this short note although I'm not sure anyone REALLY knows what the true impact will be since we don't know the extent of the problem yet.

This crisis though will likely stunt the Japanese market for vehicles in Japan for quite some time although "years" may overstate the impact. Plants in Japan should be up and running again in a few weeks and I've heard of no negative impact on production in these plants beyond a few weeks of shut downs. Since there is normally about 60 to 90 days of inventory in the system a one month shut down could be managed without affecting vehicle supply other than isolated situations. The shut downs could stretch into 6 to 8 weeks or even longer if the stories we are hearing are correct but it is a bit early to speculate on the length of the shut downs. A shut down of more than a month would have an impact on availability of vehicles for North America including Canada and stunt sales in the short term. There is an age old issue in the auto sector in that OEMs can never get enough of the vehicles that are selling well and too many of the one's that are not. This crisis makes this issue even worse.

There is also a lot of speculation on the impact on prices of vehicles and I don't buy into many of these theories. I believe the crisis will unlikely affect prices since prices are usually locked in stone at the beginning of the model year and rarely change mid year. There is also just too much competition for any OEM to increase prices more than their competitors. It is more likely to have an impact on profitability rather than prices paid by consumers.

Some supplier plants in Japan also feed North American plants so we could see short term shut downs of plants in North America including Alliston, Cambridge and Woodstock but since the Japanese bring so little in from Japan ( Japanese content in a North American built vehicle is typically under 5 percent and closer to 3 percent with the odd exception ) I suspect these shut downs will be of shorter duration than the ones in Japan. And indeed even Detroit three plants could be affected since the supply chain has become very Global. Toyota and Honda in particular have an incredibly capable supply chain and may be able to manage their way through this entirely. It is hard to know exactly since it is component and vehicle specific. Even though components from Japan are very low in volume all it takes is one critical component to be affected and an assembly plants may need to be closed. Fortunately there is a lot of redundant capacity in the component sector and any shortage of components should be off set fairly quickly. And remember more than a thousand Japanese suppliers have followed the OEMs into North America so there is significant Japanese supplier capability inside North America.

There are also a number of potential positives for North America. Lack of home country demand will hurt the Japanese OEMs and it could actually increase the availability of product for the North American market as plants in Japan get back to running at full capacity. Not in the next few weeks but looking out a couple months there may be more vehicles available to ship to North America because of the lack of demand in Japan and this could actually put downward pressure on prices rather than upward pressure. And if Japanese plants are down for any length of time their NA plants may run above capacity to make up some of the short fall which would create jobs in NA.

The crisis will also likely push more suppliers to invest in North America to head off this happening in the future so supplier investments could increase which would be good for North America as well.

The real impact on the North American vehicle market will more likely be determined by the impact on the value of the Yen which is near impossible to determine. The Yen has been strong lately and this has hurt the Japanese OEMs in North America. I haven't seen any analysis yet on the long term impact on currencies as a result of the disaster. A weak Yen and increased availability of supply would actually help the Japanese OEMs in North America. A strong Yen the exact opposite. The immediate impact has been a stronger Yen but we do not know how long this will continue and currency traders have likely over reacted to the current issue.

Uncertainty abounds.

I'm also worried about "protectionist' sentiment coming out of the woodwork and spreading false rumors to try to under mine the Japanese OEMs. This was certainly the case with the Toyota recall issue last year and we already are seeing 'scare' tactics emerge with this latest issue.

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