Japanese Car Orders Delayed As Prices Begin to Climb in US

The 11 March earthquake and tsunami in Japan have shut down the Japanese auto industry, and the supply of Japanese vehicles in the United States is likely to diminish in the short term—and this is starting to drive up prices for certain imported vehicles in the US. Although the majority of Japanese-brand vehicles that are sold in the US are made in the latter country, certain highly fuel-efficient smaller models and hybrids are mostly made in Japan, and with the Japanese industry shut down until further notice owing to massive disruption to the supply chain and electrical power supply, production of new models has ceased. TrueCar.com has measured that prices of Japanese models in the US are rising already, with the Toyota Prius rising an average of USD169 per vehicle in just the past week owing to an anticipated supply crunch. "We are doing a wait and see", said Dianne Whitmire, fleet director for massive dealer Carson Toyota in Carson, California, as quoted by the LA Times. "They are still assessing the supply issues in Japan. I hope it doesn't go back to dealers marking up over sticker. But it looks like cars are heading back to MSRP [manufacturer's suggested retail price]." Although there remains a 60-day supply of vehicles such as the Prius, supplies of Subaru vehicles (which are almost entirely imported) are less than 30 days, leading some dealers to voice concerns about the cessation of production in Japan. "We are very concerned. We have no idea when we will see production start up again", said April Somers, general sales manager of Timmons Subaru in Long Beach (California), also quoted by the LA Times. "Subaru was getting them here as fast as they could and we were selling them real quick. Probably prices will rise."

As fears over supply of some models continue to grow, one automaker has asked dealers not to order vehicles until further notice. Honda has said that it is not accepting orders just yet for Honda- and Acura-brand vehicles made in Japan owing to the company's ongoing evaluation of its production situation. A couple of Honda facilities were damaged in the earthquake, but the bigger issue is supplier component flows and electrical power availability. Honda component plants that supply engines and transmissions have been damaged, and although the majority of the shuttered plants in Japan produce vehicles for the Japanese domestic market, certain vehicles—such as the US Honda Fit—are still manufactured there. Nearly one-third of Honda's 110 suppliers in northern Japan have been damaged and will not be able to resume production for some time, according to the automaker. "We think at least a little bit of May's production will be used to fill March and April orders", said Jeffrey Smith, a spokesman for American Honda Motor Company. "While we plan to resume automobile production in Japan as quickly as possible, we cannot say with certainty when those production plants will return to their full capacity", added John Mendel, executive vice-president of Honda's US sales operations, in a letter to dealers.

Outlook and Implications

The issues with the Japanese auto industry are quite serious, and the situation is unlikely to return to normalcy any time soon. Many automakers in Japan are facing serious supply disruptions, not just to parts plants being damaged, but to rolling blackouts, infrastructure damage, port and shipping issues, and more. With the nuclear catastrophe compounding the problems, a significant percentage of Japan's electrical generating capacity has been taken offline, and is unlikely to be restored soon. To make matters more complicated still, power cannot be shunted from one region of the country to another, owing to differing grids within the country operating at different power frequencies. Disruptions at Japanese suppliers have already shuttered one US plant, a GM facility that makes compact pick-ups in Louisiana, and Japanese automakers have cancelled overtime production around the world.

The initial estimates are that this could be a protracted shutdown of the Japanese industry as well, as it is not just simply a matter of repairing plants, but of repairing infrastructure, regional power-generation ability, and even replacing workers from communities that have lost thousands upon thousands of people to the disaster and resulting displacement. A more likely scenario would be for Japanese automakers and suppliers to try to relocate production of critical components, but in some cases this may still take considerable time. One of three plants that produce batteries for the Toyota Prius has been damaged, and given that this region of Japan also produces a significant percentage of the world's semiconductors and semiconductor components (such as silicon substrates), some of the more high-tech systems in vehicles may be affected regardless of production location.

From a US consumer standpoint, this presents some interesting scenarios. Fuel prices continue to climb (downward pressure from greatly reduced Japanese industrial and consumer demand is being offset by continued instability in the Middle East) and demand for smaller cars has increased, with fuel heading towards USD4.00/gallon, driving US consumers' buying habits. Many of the most fuel-efficient Japanese cars are likely to see incentives evaporate, given the constraints on supply, and this may provide an opportunity for competitors from South Korea and the US. Competition in the small-car market has never been tougher in the US, with many players now fielding legitimately competitive offerings, learning lessons from previous fuel price spikes. If the Japanese manufacturers start to experience shortages of key fuel-efficient products, other manufacturers could benefit if they can keep their own assembly lines running in the face of electronic part shortages, as consumers begin to consider their car-buying options.