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Fear Recedes Japanese Quake Might Disrupt Europe Output

Alternative Supplies Found, Production Tweaked To Minimise Impact

Worries that automotive production in Europe and the U.S. might be disrupted because of supply chain disruptions following the Japanese earthquake, tsunami and nuclear power disruption won’t turn out to amount to much, according to a report from Moody’s Investors Service.

Japanese automakers have not been so lucky though.

“Companies outside of Japan have largely adapted to supply-chain disruptions arising from the March 11 earthquake and tsunami in Japan. Despite significant uncertainty in the days after the disaster, companies have been able to locate alternative supply sources or scale back production. Although the disaster disrupted the flow of semiconductors, auto parts and a range of other goods from Japan, we expect the financial impact to be limited in most cases to the second and third quarters of 2011,” Moody’s said.

After the triple whammy struck Japan, some investors worried that manufacturers of certain crucial components – controllers, chips and some chemicals used in resins and glues – might be affected, and that shortages may cripple final production of automobiles in Europe before the end of the second quarter.

At the time, European manufacturers reacted calmly to the possible crisis as initial evidence pointed to disruption. But some analysts reckoned the worst case scenario would mean four weeks of output being lost by Europeans, and the best, two weeks. The best case would have meant second quarter EBIT profit cuts of between 27 per cent at Daimler and 50 per cent for Fiat Auto, with year shortfalls of seven per cent for the German company and 16 per cent at Fiat. The worst case would have meant near breakeven in the second quarter for the premium brands, or losses for most mass market manufacturers.

In the event, disruption seemed negligible.

“For most automakers and parts suppliers, there will be modest declines in production, but minimal impact on 2011 operating performance. The Japanese automakers are having a much tougher time because of their higher exposure to the Japanese supply base. We expect the Detroit Big Three and Korean automakers to gain some market share (in the U.S.) at the expense of Japanese rivals,” Moody’s said.

Less severe than worst fears
The report said European semiconductor companies tend to rely on suppliers from China, Taiwan or Korea rather than Japan for resins and other parts.

“While it is too soon to count the full cost of the disaster, nine weeks later it seems clear that the supply chain disruptions were less severe than the worst fears suggested,” the report said.

“In Europe, there have been very few production slowdowns because there has been sufficient inventory in the supply pipeline. It remains to be seen if production will have to be adjusted after May due to a shortage of certain parts. Currently we expect that these slowdowns will be limited and that European automakers should be able to make up for most of the lost production over the course of 2011,” Moody’s said.

Neil Winton – May 28, 2011

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