Uncertainties in Japan Threaten U.S. SalesBy Lacey Plache April 15, 2011
Although Edmunds.com in January forecast U.S. auto sales to be 12.9 million in 2011, consistent strengthening in the nation's economy for much of the first quarter made it appear that estimate might be proven conservative. That was before the March 11 earthquake and subsequent tsunami in northeast Japan that exacted an enormous toll on the region's people, infrastructure and commerce. The ramifications of the disaster are only beginning to be accurately evaluated, but it now seems clear Japan's crisis will impact global auto production in a significant fashion.
For perhaps the first time in the post-World War II era, a singular supply-side event, one that did not even occur on this continent, is of sufficient magnitude to potentially cause a substantial negative impact on U.S. auto sales. This despite the many positive demand factors that spurred first-quarter U.S. sales to a Seasonally Adjusted Annual Rate of 13 million, slightly in excess of forecast, with indications these dynamics would continue to positively influence sales for the entire year.
However, the Japan disaster and resulting decreased production from domestic Japanese automakers and suppliers is demonstrating an impact on global automotive manufacturing with few, if any, historical analogues. At this point, we are optimistic that the effects of the earthquake outside of Japan will remain limited while the bulk of the impact in Japan will mostly be remedied after June, meaning our initial forecast of U.S. sales of 12.9 million units is unchanged.
There remains considerable uncertainty, however, surrounding parts availability and Japanese domestic manufacturing capacity in the coming months, particularly when considering which automakers, models and manufacturing operations will be most affected. Considering the still-limited availability of detailed information about the extent of damage in the region and more directly, to its auto suppliers, Edmunds.coms analysis determined the effect on U.S. auto sales could range as low as 12.2 million at the most extreme end of a three-scenario outlook developed in an attempt to account for the fluidity of this virtually unprecedented situation.
The Limited-Impact View
Our most benign view of the impact of the Japan disaster is one in which there are limited effects outside of Japan and auto manufacturing in Japan itself largely is resumed at normalized levels after June. In this better setting, U.S. sales can reach 12.95 million for 2011, in line with our beginning-of-the-year forecast:
- This outlook projects Japanese domestic assembly plants running at approximately 50-percent capability in May but returning to 75 percent of capacity in June and 90 percent in July, with the majority of suppliers making comparable recoveries. While some parts and processes remain affected due to the nuclear crisis, automakers are able to alternatively source or otherwise substitute for these parts, returning to full production by September.
- Japanese transplant operations in North America remain at run rates of approximately 75 percent in April-May but recover to 90 percent in June and 100 percent by July, due to their generally higher proportion of domestically-sourced parts and components, probable preference-sourcing of parts for production earmarked for the North American market and the continent's fully functional infrastructure.
- Non-Japanese automaking operations in North America experience limited, if any, effects. Production declines to 95 percent for April-May but is back to 100% by June.
However, even a relatively moderate impact from the disaster could markedly affect cross-continental auto production and reduce U.S. auto sales to 12.6 million units in 2011. Edmunds.coms moderate-impact assessment of the probable recovery trajectory for Japanese auto and supplier manufacturing and its resulting impact on U.S. vehicle supply is based on these expectations:
- Japanese domestic auto production runs broadly at 50 percent of pre-earthquake capacity through June, largely due to infrastructure issues such as limited or sporadic power and parts shortages as Japan-based supplier operations face similar issues. While production increases to 75 percent of normal run rate in July and 90 percent in August, we do not anticipate the ability to produce at greater than 100 percent production until November.
- Most Japanese automaking operations in the U.S. slow to approximately half time in May but recover more quickly to 75 percent in June and 90 percent in July due to the reasons listed above coming into play sooner. We project the transplant operations can increase to 110-percent production in the September-October timeframe to rebuild inventory.
- Some North American Big Three and Korean transplant auto assembly operations evidence the impact of parts shortages based on current parts-production deficits in their May manufacturing schedules, falling to 75-percent time. However, their greater ability to use alternative suppliers or shift production to models with adequate parts availability means they recover to 90 percent in June and full production by July while potentially increasing to 110-percent capacity in August-September to rebuild inventory and possibly capture share from the Japanese.
The Extended-Impact Analysis
Meanwhile, we also developed a more aggressive projection of the impact on Japanese production for suppliers and automakers if the Japanese industrys recovery encounters unforeseen difficulties. Under the construct of this less-optimistic scenario, U.S. sales for 2011 may fall as low as 12.2 million and we expect the following:
- Most automaking operations in Japan run at half time through July due to more-serious infrastructure issues such as limited or sporadic power, with poor parts availability as suppliers face the same difficulties. While production increases to 75 percent of normal run rate by August and 90 percent in September, we do not anticipate production in excess of 100 percent capacity until December or later. This assumes the need for more than the full six months of recovery required after Japans 1995 earthquake (epicentered near Kobe that measured 6.8 magnitude), in large part due to the new dimension of the damaged Fukushima Daiichi nuclear powerplant.
- Japanese North American transplant operations slow to 50-percent production in May and June but recover more quickly to 75 percent in July and 90 percent in August, increasing to 110 percent during the fourth quarter to rebuild inventory.
- Some Big Three and Koreans assembly operations feel the impact of parts shortages based on March parts-production deficits in their May and June production schedules, reducing to 75 percent run times. While some parts remain more difficult to resource than others, their greater ability to alternatively source or transfer production to models with adequate parts availability means they recover to 90 percent in July and 100 percent by Aug, increasing to 110 percent for September-October to rebuild inventory and possibly capture share from the Japanese.
Limited Impact Most Likely
Based on current information, we believe our limited-impact scenario to be the most likely. But prior to the Japan disaster, U.S.-market demand factors appeared ready to push sales beyond our initial forecast of 12.9 million. So despite our belief the disasters effects on U.S. vehicle supplies will be comparatively modest, disaster-related supply constraints nonetheless will exert sufficient downward pressure such that even in an overall environment of increasing demand, our initial forecast of 12.9 million is retained.