Carmakers Plan For Disruptions In Parts Supply

Toyota and Honda, Japan's two largest carmakers, might modify their so-called just-in-time manufacturing system to avoid disruptions in production caused by possible supplier bankruptcies.

General Motors and Chrysler are battling to restructure after they were given $13.4 billion in emergency federal loans to keep them operating through March. Detroit's woes could lead to a "supplier shock," crippling U.S. production at Japanese and other foreign carmakers, according to the Center for Automotive Research.

"We continue contingency planning" even after the bailout, Mike Goss, a spokesman for Toyota's North American manufacturing unit in Erlanger, Ky., said in an e-mail. "We hope the loans provided to Detroit will also help to stabilize suppliers, but the very slow market remains a concern for all."

The Japanese company might work with more parts makers and increase inventories to mitigate the effects of a possible collapse among its U.S. suppliers, at least half of whom also work for Detroit automakers, Goss said. A plunge in U.S. vehicle sales, to a 26-year low, has pushed GM and Chrysler to seek government aid and left as many as a third of North American component makers at risk of bankruptcy, according to consulting firm Grant Thornton.

Falling demand in the United States, the world's biggest auto market, contributed to Toyota's forecast on Dec. 22 of its first operating loss since 1938. That was the same year the carmaker fully adopted the "just-in-time" model, according to its Web site. Under the system, companies avoid stocking inventories, preferring to take delivery of components as they are needed, to cut expenses.

Any emergency measure would be costly, analysts say. Increasing stockpiles would mean renting warehouse space to store parts and supplementing components from overseas would increase shipping costs.

"We're considering many scenarios for possible outcomes" from a U.S. automaker's collapse, said Yasuko Matsuura, a Tokyo-based spokeswoman at Honda, Japan's second-largest carmaker.

Measures may include increasing inventories and doubling sources to buy parts, Matsuura said. "We also have strength in having global models such as the Accord and Civic, so we can share parts from other regions for those models."

About 60 percent of Nissan's 350 suppliers in the United States also supply GM, Chrysler and Ford, said Fred Standish, a spokesman for Nissan's North American unit in Franklin, Tenn. He declined to comment on contingency measures the company is taking to prevent disruptions to production.

The main concern for the Japanese carmakers is "the smaller, second- or third-tier suppliers that make specialized parts," said economist Kim Hill, associate director of the Center for Automotive Research in Ann Arbor, Mich. "If one maker is supplying 85 percent of the particular widget, you have a problem," said Kurt Sanger, an auto analyst at Deutsche Securities in Tokyo.

Toyota's Goss said "there may be more risk" for models that are built only in the United States, such as the Tundra pickup truck and Sequoia sport-utility vehicle. Its other models such as the Camry also are built overseas, and parts could be shipped in from outside the United States, he said.

The strong yen, however, is pressuring the Japanese carmakers to reduce exports from Japan and increase sourcing of components from the United States for vehicles built there, said Ashvin Chotai, managing director of Intelligence Automotive Asia, an automotive consulting company in London. The yen gained 19 percent against the dollar in 2008, also eroding the value of overseas sales.

Changing manufacturing processes would add to companies' costs at a time when they are already cutting earnings forecasts.

Toyota last month lowered its estimate to a $1.66 billion operating loss in the year ending March, compared with a $6.63 billion profit, as a global recession and tighter credit cripples vehicle demand. Honda cut its profit forecast by 62 percent on Dec. 17. Nissan slashed its forecast by 53 percent in October.

While adopting a production system with greater inventories and reliance on imported parts would be costly and less efficient, the alternative would be worse, said Ed Kim, director of industry analysis for AutoPacific in Tustin, Calif.

"As messy as it may be from a logistical perspective, it's better than not having any cars to build," Kim said.