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By David Zeiler

Companies both in Japan and around the world have begun to feel the sting of supply chain disruptions resulting from the catastrophic March 11 earthquake and its aftermath.

In addition to the damage done to factories in northeastern Japan by the quake itself, companies must contend with ruined roads, fuel shortages, and rolling power blackouts. Many companies are not sure when some of their facilities will be able to resume production, creating uncertainty for companies further down the supply chain.

"This is serious and it's still difficult to evaluate," Nissan Motor Co. Ltd. (OTCPK:NSANY) Chief Executive OfficerCarlos Ghosn told Bloomberg News. "You have the earthquake, you have the tsunami, rolling blackouts, and fuel shortages hitting at the same time, and they aren't only hitting the car manufacturers, but also the suppliers and the dealers."
The sectors hardest hit are auto and electronics companies, both well-represented in Japan.

Ghosn said the crippling mix of problems has affected 40 of Nissan's Japanese component suppliers.

Most affected is the automaker's engine factory in Iwaki, which is in the same prefecture as the stricken Fukushima Daiichi nuclear power plant. The factory doesn't have enough water, electricity or gas. Nissan may need to ship engines from a plant in Tennessee depending on how long it takes to get the Iwaki facility back in production.

Each day of lost production costs Nissan $25 million in profit, according to Goldman Sachs Group Inc. (NYSE:GS).
However, Nissan did re-open six factories on March 21, with vehicle assembly to resume today (Thursday) and continue as long as part supplies last.

That put Nissan in better shape than Toyota Motor Corporation (NYSE:TM), which has shut down all 12 of its assembly plants in Japan at least through March 26. Toyota announced yesterday (Wednesday) that the disruptions would delay the introduction of two new Prius models, a wagon and a minivan, that had been planned for the end of April.

Toyota also said it would suspend production at all of its assembly plants in the United States through Saturday due to difficulties in getting parts shipped from Japan.

Honda Motor Co. Ltd. (NYSE:HMC) said it would extend the suspension of production at its domestic plants until at least March 27, the second such extension this week (Honda originally planned to restart plant operations March 20).

"We still don't know the full extent of what can be done to substitute the affected parts," Honda spokeswoman Natsuo Asanuma told Reuters.

Electronics Companies Zapped

The story for many electronics makers in Japan was mixed, though companies that have closed plants generally aren't sure when they will resume operations.

Typical is Sony Corporation (NYSE:SNE), which said on Tuesday that it would partially restart operations at a lithium ion battery plant while six other plants remain idle with no estimate of when they will come back online. Part shortages are a major issue.

"If the shortage of parts and materials supplied to these plants continues, we will consider necessary measures, including a temporary shift of production overseas," Sony said on Tuesday.

Panasonic Corporation (PC) also managed to get one factory back into production this week, while several others remain closed. Canon Inc. (NYSE:CAJ), citing problems with obtaining parts, has stopped production at all three of its plants in Japan and doesn't know when operations will resume.

Renesas Electronics (OTCPK:RNECY), the world's fifth largest chipmaker, has restarted four of its 22 facilities while operations remain suspended at three. The company said the rolling power outages were disrupting production at many of its plants, however.

Problems with semiconductors and other electronic parts could ripple out to many electronics manufacturers outside Japan. Shin-Etsu Chemical Co. Ltd. and MEMC Electronic Materials Inc. (WFR) - two of the largest makers of semiconductor wafers - have idled two plants responsible for a quarter of the wafer market.

"There are a huge number of little bits of the high-tech food chain which are done nowhere but in Japan," Sam Perry, senior investment manager of Pictet Japanese Equity Selection Fund told Reuters. "Nobody else has the quality or the consistency, and in some cases the technology, to do it."

Boeing Affected

Some U.S. companies that depend on Japanese suppliers are already feeling the impact.

The Boeing Company (NYSE:BA) may experience trouble getting parts from such companies as Jamco Corporation, Mitsubishi Heavy Industries (OTCPK:MHVYF), Kawasaki Heavy Industries (OTCPK:KWHIY) and Fuji Heavy Industries (OTCPK:FUJHY):

"Considering the fact that 35% of the 787 and 20% of the 777 are from Japan, Boeing faces considerable financial risk at the cost of uncertainty in its supply chain," research firm Frost & Sullivan said in a report yesterday.

"Right now, we can go into the factories," Boeing vice president of airplane programs Pat Shanahan told Flightglobal.com. "We can check the tools, we can check the bins, we can check the inventory, but how about getting stuff out of the ports, how about getting stuff here in country, so I think that has a little bit to play out. Everybody is doing a lot of evaluation."

Chemical and performance material company Cabot Corporation (NYSE:CBT) issued a warning yesterday of possible problems with operations at two of its plants in Japan.

"Both facilities are able to manufacture, however supply chain and infrastructure disruptions over the coming weeks are likely to impact their ability to operate in the near term," Cabot said in a statement.

Some industries will weather the disruptions better than others.

The electronics industry, for example, is more fortunate than the automotive industry in that there recently has been a buildup of excessive inventory that will now serve to bridge the gap until most Japanese plants can resume production. The auto industry, on the other hand, tends to use the "just-in-time" inventory model - so a disruption in the supply chain halts production almost immediately.

The wide-ranging impact of the crisis in Japan on global supply chains could even force many companies to think about diversifying their suppliers.

"We'll see greater attention paid to the finding of additional sources of supply, but those sources in other countries will face high hurdles because of the high quality of Japanese manufacturing and that's not going to be easy to do in other countries in Asia," Paul Kleindorfer of the Paul Dubrule Professor of Sustainable Development at the INSEAD business school in France told Reuters.

Disclosure: None

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Source: Japan Supply Chain Disruptions Hit Auto, Electronics Industries