Toyota, Honda plan measures to avoid supplier bankruptcies4 min read . Updated: 30 Dec 2008, 10:04 PM IST
Toyota, Honda plan measures to avoid supplier bankruptcies
Toyota, Honda plan measures to avoid supplier bankruptcies
Tokyo: Japan’s two largest car makers, Toyota Motor Corp. and Honda Motor Co., may modify their so-called just-in-time manufacturing system to avoid possible supplier bankruptcies disrupting production.
General Motors Corp. and Chrysler Llc. are battling to restructure after winning $13.4 billion (Rs64,990 crore) in emergency federal loans to keep them operating through March. Detroit’s woes could lead to a supplier shock, crippling US production at Japanese and other foreign car makers, according to the Center for Automotive Research.
“We continue contingency planning even after the bailout," Mike Goss, a spokesman for Toyota’s North American manufacturing unit in Erlanger, Kentucky, said by email. “We hope the loans provided to Detroit will also help to stabilize suppliers, but the very slow market remains a concern for all."
The Japanese company may work with more parts makers and increase inventories to mitigate the effects of a collapse among its US suppliers, at least half of whom also work for Detroit auto makers, Goss said. US vehicle sales at a 26-year low have forced GM and Chrysler to seek government aid and left as many as a third of North American component makers at risk of bankruptcy, according to consulting company Grant Thornton Llp.
“Parts makers may have escaped bankruptcy filings for the next few months, but six months, a year from now, the risk is definitely still there," said Takeshi Miyao, a Tokyo-based supply chain analyst at automotive consulting company CSM Worldwide.
Toyota has fallen 52% this year.
Plunging demand in the US, the world’s biggest auto market, contributed to Toyota on 22 December forecasting its first operating loss since 1938. That was the same year the car maker fully adopted the just-in-time model, according to its website. Under the system, companies avoid stocking inventories, preferring to take delivery of components as they are needed, to cut expenses.
Any emergency measure would be costly, analysts say. Increasing stockpiles would mean renting warehouse space to store parts and supplementing components from overseas would increase shipping costs.
“We’re considering many scenarios for possible outcomes from a US auto maker’s collapse," said Yasuko Matsuura, a Tokyo based spokeswoman at Honda Motor, Japan’s second largest car maker. Measures may include increasing inventories and doubling sources to buy parts, Matsuura said. “We also have strength in having global models such as the Accord and Civic, so we can share partsfrom other regions for those models."
“We’re very concerned," said Fred Standish, a spokesman for Nissan Motor Co.’s North American unit in Franklin, Tennessee. If one company goes into severe economic distress, it affects many others up and across the supply chain, he said.
About 60% of Nissan’s 350 suppliers in the US also supply GM, Chrysler and Ford Motor, Standish said. He declined to comment on any contingency measures the company is taking to prevent disruptions to production.
GM, Chrysler and Ford plan to shutter about 59 factories over the next month. A small number of parts suppliers asked GM for payments in advance after the auto maker said it would run out of money by month’s end without US loans, according to people familiar with the matter.
The main concern for the Japanese car makers is the smaller, tier II or tier III suppliers who make specialized parts, said economist Kim Hill, associate director of the Center for Automotive Research in Ann Arbor, Michigan. It’s these smaller companies under the radar, he said.
The risk from a collapse at a specialized parts maker echoes the impact from a production halt at Riken Corp., Japan’s biggest piston ring maker, last July after suffering damage from an earthquake. Riken’s shutdown forced eight of Japan’s 12 car makers to temporarily suspend or cut manufacturing, leading to a total output reduction of at least 120,000 vehicles.
“If one maker is supplying 85% of the particular widget, you have a problem; if it’s 50-50, maybe not as much of a problem," said Kurt Sanger, a Tokyo-based auto analyst at Deutsche Securities, adding that a Riken-like situation is possible on a much broader scale.
Toyota’s Goss said there may be more risk for models that are only built in the US, such as the Tundra pickup truck and Sequoia sport-utility vehicle. Its other models, such as the Camry, are also built overseas, and parts could be shipped in from outside the US, he said.
The strong yen, however, is pressuring the Japanese car makers to reduce exports from Japan and increase sourcing of components from the US for vehicles built there, said Ashvin Chotai, managing director of Intelligence Automotive Asia Ltd, an automotive consulting company in London.
The yen has gained 23% against the dollar this year, also eroding the value of overseas sales. Changing manufacturing processes would add to companies’ costs, while they are already cutting earnings forecasts.
Toyota earlier this month lowered its estimate to a 150 billion yen operating loss in the year ending March, compared with a 600 billion yen profit, as a global recession and tighter credit cripples vehicle demand. Honda cut its profit forecast by 62% on 17 December. Nissan slashed its forecast by 53% in October.
While adopting a production system with greater inventories and reliance on imported parts will be costly and less efficient, the alternative would be worse, said Ed Kim, director of industry analysis for AutoPacific Inc. in Tustin, California.
As messy as it may be from a logistical perspective, it’s better than not having any cars to build, said Kim.