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FROM THE ECONOMIST INTELLIGENCE UNIT

Japanese carmakers and suppliers could lose sales all over the world after the earthquake and tsunami halted production at many factories.

Two and a half weeks on and the aftershocks from the Japanese earthquake are still causing havoc throughout the global automotive industry. Chronic raw material, fuel and power shortages at one end of the supply chain are leading to production stoppages at the other. The immediate effect of this is lost sales at home and abroad, both for component suppliers and vehicle manufacturers. Even if Japan avoids a nuclear catastrophe, there are longer-term industry concerns too. The mild recovery of the already fragile Japanese automotive manufacturing industry is once again in jeopardy, not least as the value of the yen continues to rise.

The short-term effects of the March 11th earthquake and爐sunami in Japan are all too clear. Around 500 automotive component suppliers are located within the north-eastern disaster zone. The supply of electronic components, which are among Japan抯 specialities, has been particularly badly disrupted, as have a number of other crucial components to the production of cars, including sensors, semi-conductors and chips, and plastics and rubber supplies.

A few suppliers have seen their plants disappear entirely, along with some of their workers, thanks to the force of the tsunami. But even those factories that are still standing and in theory capable of production are often suffering from?a href="http://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=227902007&country_id=&pubtypeid=1112462496&industry_id=&category_id=&fs=true">fuel shortages燼nd power blackouts. Other manufacturers, including several important electronics manufacturers, have agreed to rein in their operations anyway in order to save fuel oil that the country needs elsewhere. A lack of燽asic facilities such as water and sewerage are another problem, as are radiation levels. Shipment of parts has been interrupted too, thanks to the dire conditions at some ports, railway stations and on some roads.

For燼n auto industry that is爁amous for爄ts just-in-time manufacturing techniques, the knock-on effects have been instantaneous. Japan抯 largest car and truck makers are now into the third week of enforced shutdown at some of their factories, sometimes because their own sites have been damaged, but mostly because of a lack of components. Since the crisis, Toyota has said it will reduce its domestic output by 95,000 vehicles, while Honda will cut output by 65,000. Toyota is also delaying the launch of two new Prius variants and is intermittingly halting production at 14 of its US factories. Nissan has had to interrupt production of its just-launched LEAF electric car, supply of which was severely restricted as it was.

After-shocks

The Japanese manufacturers are not alone in struggling to maintain normal operations as the global automotive supply chain is thrown into disarray. These days, there are few major car companies that do not source components from Japanese suppliers. General Motors of the US has seen production interrupted in factories in the US, Germany and Spain while PSA Peugeot Citroen of France says it is being forced to scale back production at many of its plants, in some cases by as much as 75%.

Moreover, thanks to shipping times, the most serious disruptions to production may still be to come. Many components being used in production today will have been built and shipped six weeks ago, and many components for the next month will still be in transit. By mid-to-late April, global production may be disrupted again, possibly not returning to normal for 3-4 months. And even that depends on how long the current power blackouts and energy shortages last for, not to mention the outcome of the nuclear crisis.

Immediate production interruptions aside, there are wider consequences. Although Japan's economy爄s not expected to see an all-out crash -- most natural disasters actually have a net positive impact on GDP growth as the initial drop in output is offset by the reconstruction boom that follows -?the earthquake will weigh on the economy in the short term. The Economist Intelligence Unit has revised down its GDP growth forecast for 2011 to 1.4%, from 1.6% previously. One of the reasons that the immediate effect on GDP is so small is that the three worst-affected prefectures, Miyagi, Fukushima and Iwate, account for less than 4% of Japan's GDP.

By next year, reconstruction efforts will be boosting the economy again. We have therefore made a slight upward revision to our growth forecast for 2012, from 1.4% to 1.5%. But the enormous cost of the recent disaster, in financial as well as human terms,燿oes raise questions about the sustainability of Japan's gross public debt, which is rapidly approaching 200% of annual GDP, by far the highest level in the developed world.

As far as the auto爉arket is concerned, buying a new car is likely to be far from most Japanese consumers?minds right now. There will, however,燽e some replacement demand from those vehicles that were obliterated in the tragedy. Similarly, demand for commercial vehicles will surge as the relief efforts start and then as the reconstruction gets underway in earnest. The Japanese car and truck giants may have problems meeting any short-term demand, but these lost domestic sales will be more than made up in the longer term.

Stealing sales

Overseas, the situation is slightly different. The prices of some Japanese cars ?notably the Toyota Prius in the US ?have risen as customers anticipate restricted supply, because either the vehicles or the components are built in Japan. Rather than pushing up prices, however, this restricted supply is likely to erode sales of the Japanese brands abroad, as well-placed competitors like?a href="http://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=2007900385&country_id=&pubtypeid=1112462496&industry_id=&category_id=&fs=true">Ford爐ake the opportunity to steal some market share back.

Rival component suppliers could benefit too. Carmakers and Tier 1 suppliers will now be desperately searching for alternative sources of parts ?even from companies outside the auto industry that are in a position to adapt their tooling and logistics processes to take advantage of the opportunity. Moreover, desperate OEMs and suppliers may well be prepared to pay over the odds for their alternative parts. The Chinese parts industry could be particularly well-placed, given its relative proximity to Japan, the scale of its own supplier base, and its ability to replicate goods.

Rising yen, rising worries

Unfortunately for Japan, its export-driven vehicle production industry was already in a fragile state. Vehicle sales at home have been falling, thanks to weak economic growth and a shrinking population. Then came the global financial crisis and the ensuing short-term collapse in global new car demand, with the Japanese car market among the main victims. Toyota's troubles ?including its global recall ?didn't help either. As a result Japanese vehicle production has been declining for the last half-decade.

Just as the industry was pulling itself into a mild recovery, the latest blow hit. It is not yet clear how much the earthquake will cause domestic output to slump by. Japan's seven carmakers make around 50,000 cars a day between them, judging by 2010 numbers, and are likely to see stoppages of weeks if not months. Once they are back in operation, some of this output could be made up by overtime, but some estimates say that the worst-hit region will need five years to get back to normal.

A further appreciation of the Japanese currency is now compounding the industry抯 export problems. The automotive sector?span lang="EN-GB">had already been hit hard by the yen抯 rapid rise since the start of the financial crisis in late 2008, prompting Japan's carmakers to start cutting costs, reducing car exports from domestic facilities and increasing imports (see?a href="http://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=1117551896&pubtypeid=1112462496&channel_id=&company_id=&category_id=&country_id=1580000158&industry_id=750001075&page_title=">article). As long as the yen remains high,爄t will continue to hurt the competitiveness of the Japanese vehicle-manufacturing industry.

It is therefore extremely worrying news that the yen appreciated sharply in the week following the disaster, climbing from ?2.9: US$1 on March 10th to ?0.8: US$1 on March 18th, thanks to expectations that funds would be repatriated to Japan to pay for reconstruction. A stronger yen will aggravate the predicament of exporters that are already struggling to cope with damaged infrastructure and broken supply chains. The government may try to intervene to arrest the rise of the yen, but such measures are rarely effective. These are grim times for Japan, and for its auto industry.