Japan’s automakers have announced the initial quantifications of the financial impact of the March 11th earthquake and tsunami, and the numbers appear to be significant.  While automaker Toyota continues to make extra efforts to be transparent, other OEM’s are bit more close to the vest in revealing the overall supply chain picture.

Toyota announced a 77 percent drop in profits for the most recent March quarter, and the financial media is declaring that Toyota will most likely lose its stature as the world’s largest automaker. The company pegged its initial direct losses as a result of the quake to be 110 billion yen  ($1,35 billion).

Toyota has had a series of misfortunes including the massive product recalls that occurred last year, and now the earthquake. In December, the company announced a massive corporate restructuring with the goal to eliminate management layers, and further declared a global production and sales forecast of 8.6 million vehicles, a level last achieved in 2008.

An article in the Wall Street Journal (paid subscription required) outlines the company’s current efforts to resolve and overcome supply chain issues.  While physical damage to Toyota’s main production facilities was spared, parts sourced with suppliers and sub-contractors were not. The good news is that Toyota expects to procure enough parts to lift global output to 70 percent by mid-June, which is a significant accomplishment. The number of critical parts in short supply has declined to 30 vs. around 500 in the days immediately after the quake. The article further outlines some rather interesting senior management dynamics as the company continues to rationalize a strong manufacturing presence in Japan. Akio Toyoda, Toyota’s president notes that the company will not resume full domestic and global production until November at the earliest, eight months after the quake.

Supply Chain Matters praises Toyota for its transparency and openness in outlining the supply chain picture for the company.  We believe that Toyota management is more sensitive to openness after last year’s drubbing.

Meanwhile, other Japanese automakers have also begun to quantify impacts. Honda, believed to be the hardest hit by the disaster, indicated in late April that its quarterly profit dropped 38 percent and attributed the effects of the earthquake and ongoing parts shortages as the biggest reason.  Honda was forced to shut down all production in Japan from March 14 to April 10, incurring a production loss of 58,500 cars. Honda further indicates that plants will run at 50 percent capacity until the end of June, when another assessment is made. Similar to Toyota, Honda does not believe it can return to full production levels until the end of the year. Honda’s North America plants produce 80 percent of domestic demand, with the vast majority of parts also sourced in the region.  However, Honda acknowledged in a March statement that some critical parts are sourced in Japan for global efficiency purposes, and that North America production could be impacted.

Nissan actually reported a profit in its March quarter, noted that overcoming supply chain issues is moving quicker than expected, but also indicated that global production would not return to pre-disaster levels until October.  Nissan quantified its direct quake related loses in the recent quarter to be 39.6 billion yen ($489 million).

Nissan had benefited from Toyota’s quality crisis last year, with U.S. sales rising 12.2 percent while Toyota’s U.S. sales increased by a mere 1 percent. That, along with robust sales in China, helped Nissan’s bottom line in the March quarter.  Results for the remainder of 2011 may be a different picture as the cumulative effects of reduced output, and competition from other global players, takes its toll. For its part, In a strategy directed at protecting market share erosion, Nissan plans to allocate limited parts supply to key market areas such as China and North America.

While it appears that Japanese automakers have risen to the crisis and our making some progress in overcoming continuous supply and parts shortages, other challenges remain, the most significant being additional shortages of electrical power. The government recently called for the shutdown of another nuclear power plant in central Japan, one that supplies considerable capacity to Toyota and other automakers. Plans are being made for back-up power generation along with staggered production shifts around the clock, but the electrical capacity situation remains rather challenging for the remainder of the year.

Bob Ferrari