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Tuesday, May 31, 2011

The Motor Vehicle Supply Chain: Effects of the Japanese Earthquake and Tsunami

Bill Canis
Specialist in Industrial Organization and Business

The March 2011 Great Tohoku Earthquake and Tsunami devastated the northeast coast of Japan with the most powerful natural disaster in Japan’s modern history. Compounding the challenge for Japanese government, businesses, and communities was the resulting destruction of several nuclear reactors in the region which supplied electricity for homes and industry. Not only was electricity unavailable, but a large area was temporarily evacuated, making rapid reopening of affected industries impossible.

Located in the disaster region and adversely affected by these forces are a number of manufacturing facilities which are integral to the global motor vehicle supply chain. They include plants that assemble automobiles and many suppliers which build parts and components for vehicles. Some of the Japanese factories that were forced to close provide parts and chemicals not easily available elsewhere. This is particularly true of automotive electronics, a major producer of which was located near the center of the destruction.

The effect of these disasters has been first and foremost borne by Japanese automakers, which closed many of their Japanese assembly plants for several weeks as they assessed their supply chain issues and impact on their Tier 1, 2, and 3 suppliers. Japanese motor vehicle plants in other parts of the world have also been affected, including facilities owned by Toyota, Nissan, Honda, and other manufacturers in the Midwest and South of the United States. Detroit 3 automakers, by contrast, are less affected, although they, too, have taken extraordinary steps to keep production moving, including visiting suppliers in Japan to help them rebuild, locating alternative sources for some parts and chemicals, and shifting plants’ summer vacations to accommodate the loss of parts.

IHS Global Insight, a global consulting firm, forecasts that over 4 million units of vehicle production will be lost because of the disasters in Japan, with 90% of them from Japanese automakers. It is possible that a shortage of some popular Japanese vehicles may develop over the summer in the United States. The Detroit 3 and South Korean automakers may be able to fill a portion of whatever demand Japanese producers are unable to meet.

Congress has shown an interest in the economic effects of these disasters, and at least one hearing has been planned to examine the effects. Not only is Japan one of the United States’ largest trading partners, but it is also an ally in Asia, and its rebuilding is an important step in global economic recovery. In addition, Congress may be interested in evaluating the resilience of global supply chains as a result of new information about the vulnerabilities of supply chains in the automotive sector.

Date of Report: May 23, 2011
Number of Pages: 19
Order Number: R41831
Price: $29.95

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