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Ripples in Japanese supply chain will be felt here

Japan makes a lot of cars and electronics. That's well known.

It also produces 90 percent of the resin used on computer circuit boards. Seventy percent of a polymer used to make iPod batteries. About a fifth of the metal-cutting machine tools used by American manufacturers.

It's a major player in ball bearings, power turbines, plastics and rubber.

What does that mean for us in America? If you want a black Ford SUV you might not be able to find it. That's right; Japan also makes certain paint pigments.

More important, the supply train problems triggered by the Japanese earthquake and tsunami could seriously drag on this country's economic recovery, starting with the auto industry.

Barry Lynn, a researcher and author who wrote a book about global supply chain vulnerabilities in 2005, said the Japanese-sparked disruption of the auto pipeline has been hidden so far because components are shipped to the United States by sea. That means 14 to 21 days in transit, so U.S. factories have had enough inventory through these initial weeks.

"By the middle of April, there's a very good chance we're going to see many more disruptions in the United States and many more American workers out of work," he said. "At least in the automotive industry, it's very likely we're going to see things get much worse before they get much better."

Japan is a major provider of power train systems and electronic components that are increasingly incorporated into U.S.-built autos and trucks. One report predicted a third of worldwide auto production could be idled by the end of April because of Japan. "We're looking at the likelihood of a slow-motion, cascading shutdown," Lynn said.

In one sign of things to come, Toyota this week warned dealers to expect a shortage of at least 233 replacement auto parts, possibly more. Parts in short supply include steering wheel covers and shock absorbers.

Parts managers at some dealerships may have ordered additional parts made in Japan in anticipation of shortages, and those orders could alone cause Toyota to run short, said Earl Stewart, who owns a Toyota dealership in North Palm Beach.

"It's not necessarily being a bad guy. It's just doing your job," Stewart said. "If everybody decides to stock up in advance, it's kind of like hoarding and suddenly there's a shortage."

Potential problems go well beyond cars and car parts.

Japan dominates certain sectors of the electronics market, like computer software tapes, compact discs and capacitors. It holds a strong market share for industrial machinery and components that are vital to U.S. manufacturers, said a U.S. Business and Industry Council report released Wednesday.

Such a high degree of dependence on Japanese-made products "could greatly slow America's already sluggish economic recovery, as these industries generate an outsized share of the country's best-paying jobs and technological innovation," the report said.

The Japanese supply chain starts at the beginning with certain raw materials, which means the impact of shuttered production may take weeks or months to become evident. For instance, Japan reportedly provides about 90 percent of the world's supply of BT resin, which is used to make printed circuit boards.

St. Petersburg-based Jabil Circuit, a global electronics contract manufacturer with a plant in Japan that was not directly affected by the quake, told investors last week it's too early to assess supply chain disruptions.

Jabil gave rosy estimates for rising revenues, but cautioned that it did not incorporate the Japanese crisis into its calculations.

"Some suppliers are simply scrambling to get their employees back to work, determine if and what level of damage has been done to their operations and when they can resume supply," Jabil CEO Tim Main said.

Uncertainty remains over how long it will take Japan to get back on its feet.

"A lot depends on how long Japan's problems last. Unfortunately there seems to be a great number of reasons to think they're going to last a long time," said Alan Tonelson, a research fellow with the U.S. Business and Industry Council. The council represents nearly 2,000 mid-sized and small manufacturers.

One reason to expect a sluggish recovery: Recurring aftershocks from the earthquake could continue to hamper Japanese production, Tonelson said. He also suggested that radiation fallout from Japan's stricken Fukushima nuclear plant may show up not just on food but electronics, car parts and other products coming out of the country. "Even if we want to keep bringing these (products) into the country, they may face various delays from decontamination procedures, quarantines," he said. "You have to figure that time and cost will be added to the process."

What happens with the manufacturing void left by Japan?

The high costs associated with many parts of Japanese manufacturing will make it difficult for new companies to pick up the slack. Most likely, supply chain experts say, is existing competitors will boost production short-term. And possibly raise prices.

Tonelson said the crisis may spur companies to take a closer look at their just-in-time manufacturing process, the common practice of maintaining low inventory levels at sequential stages of the supply cycle in order to minimize costs and maximize efficiency.

"We're clearly in the age of lean," he said, "and we are probably still in the process of learning that there are prices for that."

Times wires contributed to this report. Jeff Harrington can be reached at harrington@sptimes.com or (727) 893-8242.

Supply chain ripples

GADGETS

• Apple Inc. is facing tight supplies for the batteries used in its popular iPods. The problem: Japanese company Kureha shut down a factory that manufactures 70 percent of a crucial polymer used in lithium-ion batteries.

• Toshiba suspended production at a factory making system LSI chips for microprocessors and image sensors.

• A tight supply of memory chips could affect supplies of Lenovo Group's new tablet computer.

AUTOS

• General Motors was the first U.S. automaker to close a domestic factory because of the crisis, idling a Louisiana plant that builds small pickups because of shortage of an unidentified Japanese-made part.

• Nissan Motor on Wednesday said it would cut car production by 55,000 units as of the end of March. A day earlier, the company said returning to full output would take "some time."

• Ford suspended orders for certain black and red vehicles because a supplier in Japan could no longer make a metallic paint pigment called Xirallic.

• Toyota halted most operations at 18 factories that assemble Toyota and Lexus vehicles in Japan. It has restarted production of three hybrid models: the Prius, Lexus HS250h and CT200h.

• Honda extended closings at two auto assembly plants in Japan until April 3. However, Honda gets more than 80 percent of its U.S. sales from vehicles made at North American plants, more than any other Japanese automaker.

ELECTRONICS

• Panasonic closed some plants in northeastern Japan, including one assembling cameras and audio equipment.

• Sony Corp. indicated it would suspend or reduce production at five plants making digital cameras, camera lenses, flat-screen televisions and other goods.

• Canon temporarily closed two camera plants on the southern island of Kyushu.

Sources: Times wires and staff

Ripples in Japanese supply chain will be felt here 03/30/11 [Last modified: Wednesday, March 30, 2011 11:27pm]
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