Chaos in Japan underlies fragility of global supply chain
As I write this article, about one month after the 9.0 magnitude earthquake and subsequent tsunami hit the northeastern coast of Japan, the extent to which the Japa- nese, and indeed the entire automotive industy will be impacted remains rather murky.
Perhaps by the time this article is published, things will be clearer, but with rare exceptions, the seven Japanese light duty vehicle manu- facturers’ facilities remain at least partly down, and some operations in Europe and North America are also being adversely affected by the twin natural disasters.
How long automotive production remains disrupted is anyone’s guess, but IHS Auto- motive has suggested that if the disruptions last a month then between 14 percent and 21 percent of global automotive production could be impacted and the recovery of the lost production could take nine to ten months.
If the problems continue for two months it is estimated that between 20 percent and 40 percent of global automotive output would be impacted and the recovery time would increase to a full year.
It is also worth noting that the longer the downtime continues, the more IHS believes that Japanese and non- Japanese production outside of the Japan will be affected, even more so than the Japanese OEMs within Japan.
What the IHS analysis provides is a real lesson underscoring the fragility of the global supply chain. It is called a “supply chain” for a reason, because if one link in that chain falters then the whole chain effectively breaks.
Infrastructure problems add to the woes
Consider that even where vehicle assembly facilities have not been physically impacted by the quake or the tsunami, it is clear that many of the Tier one, two and three suppliers have
been negatively impacted. For some suppliers there may not be viable alternative sources of supply available to the OEM, or at least not any time soon. This becomes more of an issue especially for suppliers around the Fukushima nuclear power generation facility, which has had an official 20 km evacuation zone in place while efforts are undertaken to control the radiation emanating from the damaged nuclear power plants. It is unclear when facilities near or within the evacuation zone may be able to open again, especially in the face of power plant containment efforts that have grown increas- ingly more challenging since March 11th.
Nonetheless, even if an OEM’s vehicle assembly facilites were unaffected and its sup- plier base remained intact or supplemented by alternative suppliers, a challenge still exists owing to the fact that much of the rail and highway transportation infrastructure to ship parts and components to assembly facilities has been compromised as well.
Beyond the actual transportation infrastruc- ture, there are the larger infrastructure issues such as a stable electricity supply with which to run the assembly facility and then port facilities that need to be operational to export the vehicles that are able to be produced.
There is also the devastating human toll aris- ing from the events of March 11th. It is apparent that with so much loss of life and so many injuries that at least some vehicle assemblers and suppli- ers may not have the human resources available to undertake production even if the facilities themselves are capable of production.
While the human tragedy in Japan and the effect of the twin disasters on the automotive industry is at centre stage, it is worth considering other global events that also have the potential to threaten the supply chain. The revolutionary dem- ocratic uprisings in several middle eastern nations (which also happen to be oil producing nations)
has seen the price of Brent crude increase close to 24 percent over the last three months to about $115 per barrel, this despite the situation in Japan which, at least in the short term, should dampen the global demand for oil.
Should the unrest in the Middle East con- tinue it seems plausible that oil prices will continue to rise, especially if we add into the mix a Chinese economy that appears to be fairly resilient and which will continue to grow – along with its demand for oil. Further, if the U.S. economy starts to come out of its doldrums then, again, the demand for oil would also be stronger, putting further upward pres- sure on the price of a barrel of crude.
What the increasing price of oil could mean for global supply chains is that for certain parts, components and finished products; it may become increasingly cost prohibitive to ship such products from far flung global plants, necessitat- ing a re-think of the “global” supply chain.
The popular uprisings in Middle Eastern countries and tragic global disasters such as the earthquake and tsunami in north-eastern Japan remind us all of our connectedness as a global village, in that events elsewhere ulti- mately impacts each of us. The global supply chains of the automotive industry are a good metaphor for this connectedness.
