Power, Paint Industry's Latest Japan Recovery Concerns

By Bill Visnic March 28, 2011

Japan Quake fllw3 - AP Images.jpg

Although the notion of losing some unique automotive paint finishes seems a trivial concern in the context of the devastation and ever-present nuclear threat Japan faces in its struggle to recover from an enormous March 11 earthquake and tsunami, the inability to supply certain paint colors is symbolic of the extent and depth to which supply-chain interruptions are predicted to affect automakers everywhere.

Ford Motor Co. and Chrysler Group LLC both said early this week that certain automotive finishes that require a unique pigment called Xirallic and made by German chemical giant Merck at a plant near the partially destroyed Tokyo Electric Power Co. Fukushima Daiichi nuclear plant will mean limitations on U.S. orders for vehicles using certain colors. “It's hard enough to sell a $60,000 Navigator in this economy, Fortunes O'Neal, general manager at Park Cities Ford in Dallas, TX, told the Associated Press. Now, “We don't want to have to tell customers, 'You've got to pick another color.’”

The larger problem is the now-growing concern about the Fukushima Daiichi nuclear plant’s stability and reports of airborne radiation now reaching as far as the eastern U.S. Causing direct unease for Japan’s automakers is the real possibility that electricity will be in short supply for months to come. Tokyo Electric said today it expects a 15 percent shortage in electricity capacity this summer – but the nation’s powerful Ministry of Economy, Trade and Industry cautioned the shortage could be on the order of 25 percent.

Kilowatts And Microchips At Risk
The auto industry, always a vociferous user of electricity, now reportedly is facing months of uncertainty about the consistency of the power supply in Japan. The sporadic scheduled blackouts currently in effect may be untenable as an ongoing strategy, many automakers suggest, because electric downtime typically is multiplied by the need to suspend and restart many production processes in a controlled fashion. A 3-hour black might result in production downtime of twice that many hours or more.

The auto industry is likely to favor an agreement that could see scheduled blackouts revolved among the various makers, or better still, a system that would allow for steady supply at a controlled, reduced capacity.

Automakers also must tussle with Japan’s equally important electronics sector, itself a critical supplier to the auto industry, for microchip allotments. Factories that produce the microchips and other sophisticated electronic components also are dependent on a stable and consistent supply of electricity; stoppages – planned or unplanned – at such facilities often require even lengthier restart sequences than do auto factories.

A key report from Japan today indicated Renesas Electronics Corp., said to be the leading producer of microcontrollers for automotive applications, confirmed production is halted until July at one of its two Japan facilities producing chips for the auto industry. 

Economic Fallout
With increasingly more-realistic appraisals of the disaster’s near-term impact on Japan’s auto industry, speculation will begin about the projecting the economic consequences. Already today, a report from Japan indicates Honda might delay its fourth-quarter earnings report – typically presented near the end of April – as the company continues to assess its position. Other Japanese makers also may begin to issue disaster-impact financial guidance.

In the likely circumstance of auto production being significantly curtailed into the Spring, industry analysts project an industry that produces upwards of 300,000 units daily could see as much as a one-third reduction in total output. Honda reportedly expects to lose 46,000 units of production in Japan through April 3 and U.S. production may also be reduced.

The AP reports Goldman Sachs as saying current shutdowns are costing Japanese automakers $200 million a day, or $1.4 billion per week. These are numbers that can cripple makers that, in a good year, record annual profits in the mid single-digit billions.

Another widely overlooked factor has been the impact on auto sales in Japan. Reports say sales in the disaster affected northeast region have plunged 40 percent and even sales in western Japan have fallen a meaningful 20 percent. For now, however, markedly lower demand may be an ironic blessing for an industry that doesn’t know how or when it may normalize supply to dealer showrooms.

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