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Monday, March 28, 2011

Japan Auto Crisis Growing, Factories in U.S. will see effects by the middle of April

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As Japan shutdowns drag on, auto crisis worsens

By SHARON SILKE CARTY and ELAINE KURTENBACH | AP Business Writers 
Monday, March 28, 2011 

TOKYO -- The auto industry disruptions triggered by Japan's earthquake and tsunami are about to get worse.
In the weeks ahead, car buyers will have difficulty finding the model they want in certain colors, thousands of auto plant workers will likely be told to stay home, and companies such as Toyota, Honda and others will lose billions of dollars in revenue. More than two weeks since the natural disaster, inventories of crucial car supplies - from computer chips to paint pigments - are dwindling fast as Japanese factories that make them struggle to restart.
Because parts and supplies are shipped by slow-moving boats, the real drop-off has yet to be felt by factories in the U.S., Europe and Asia. That will come by the middle of April.
"This is the biggest impact ever in the history of the automobile industry," said Koji Endo, managing director at Advanced Research Japan in Tokyo.
Much of Japan's auto industry - the second largest supplier of cars in the world - remains idle. Few plants were seriously damaged by the quake, but with supplies of water and electricity fleeting, no one can say when factories will crank up. Some auto analysts said it could be as late as this summer.
Hitachi Automotive Systems, which makes parts such as airflow sensors and drive control systems, is waiting for its suppliers to restart while dealing with its own problems. Its plants are without water and gas, and have rolling electricity blackouts. Workers are repairing crumpled ceilings, fallen walls and cleaning up shattered glass. A spokesman said he doesn't know when its plants will reopen.
The uncertainly has suppliers, automakers and dealers scrambling. And it exposes the vulnerability of the world's most complex supply chain, where 3,000 parts go into single car or truck. Each one of those parts is made up of hundreds of other pieces supplied by multiple companies. All it takes is for one part to go missing or arrive late, and a vehicle can't be built.
When General Motors briefly shut a pickup plant in Shreveport, Louisiana, due to a lack of parts, it caused the partial closing of a New York factory that supplies engines for those trucks. Sweden's Volvo has warned that its production could be disrupted because it is down to a week's worth of some parts.
Car buyers will soon see higher prices and fewer choices. Some car colors will be harder to get because a paint pigment factory in Japan was damaged and shut production. As a result, Ford is telling dealers to stop ordering "tuxedo black" models of its F-150 pickup and Expedition and Navigator SUVs. It's also shifting away from some reds. The moves are precautionary, Ford said. Chrysler told dealers it was temporarily restricting orders of vehicles in 10 colors.
That worries some dealers, especially when popular colors like black could be in short supply
"It's hard enough to sell a $60,000 Navigator in this economy," said Fortunes O'Neal, general manager at Park Cities Ford in Dallas. "We don't want to have to tell customers, ‘You've got to pick another color.'"
Customers also face rising prices for models like Toyota's Prius, which is made only in Japan. Fears of falling supply have some dealers driving a hard bargain with customers who want the fuel-efficient hybrid as gasoline prices rise. Recent discounts of 5 to 10 percent on that car are disappearing.
Japanese carmakers, who have shut most of their domestic plants, are warning that some of their overseas factories will stop running, too, in an effort to conserve supplies. Toyota and Honda expect shutdowns at North American plants. Honda said production could be interrupted after April 1. Even though most of its parts are sourced in the region, a few critical ones still come from Japan.
Goldman Sachs estimates the shutdowns are costing the Japan automakers $200 million a day, which adds up to $2.8 billion for just the past two weeks. Each week of continued shutdowns costs $1.4 billion. By comparison, Toyota made $2.3 billion in all of 2010, and its sudden acceleration recalls cost $2 billion. The cost of damage from Japan's natural disaster could dwarf that recall, which was considered Toyota's biggest crisis ever.
Much depends on how many spare components automakers have in stock - which is probably very few. Japan's automakers spearheaded lean manufacturing, under which parts are delivered to plants the same day they are used. Automakers are still receiving parts that were put on ships weeks ago, but those supplies will dwindle.
After the earthquake hit, car companies began the long process of figuring out which parts are in danger of running out. That means figuring out where every piece in every part comes from.
"Everyone is putting on the brakes a little bit and taking a look to see where they are affected," said Paul Newton, an analyst with IHS Automotive.
Companies will shut down plants as soon as some parts start running out, which could start happening in the next four to six weeks, he said. "You will see it happen almost daily."
IHS Automotive predicts that one-third of daily global automotive production will be cut because of supply chain disruptions. That means about 5 million vehicles worldwide won't be built, out of the 72 million vehicles planned for production in 2011.
To get a feel for the supply chain, consider a car radio. It's made up of hundreds of pieces from all over the world. The display may come from a supplier in Japan, while the wiring and circuitry originate in Korea. The plastic knobs could come from a company in China, and the metal structure that holds it all together is shipped from India.
All those parts come together at different times: The wiring and electronic components are installed into the metal frame. Then that piece is shipped to another supplier, who snaps on the plastic face and knobs. The radio could pass through three or four suppliers before being put on a ship, where it will spend weeks at sea heading to its final destination: The assembly plant.
"This isn't just as straightforward as assembling the iPad 2," said Brian Johnson, an autos analyst with Barclays Capital.
An example of Japan's importance in auto parts: its suppliers make many of the electronic components that control music systems and the sensors that monitor fuel levels and airbags.
Although most Japanese auto parts makers are not located in the areas that were inundated by the tsunami, between quake damage, electricity outages and water cutoffs, many factories in the region have remained paralyzed ever since.
Suppliers could be up and running again in April, but it could take until May or June for the entire supply base to be back.
Some car manufacturers, meanwhile, are considering shifting operations to deal with the crisis. Nissan, for example, is thinking of moving some of its engine production to Tennessee from Japan.
But those shifts won't be easy. First, lean inventories make it hard for automakers to suddenly change sources of supply. And plants that build car electronics, for example, have stringent safety requirements and exacting high-tech specifications that limit a company's flexibility, said Christopher Richter, an industry analyst at CLSA Asia Capital Markets. A supplier for the computer chip that triggers an air bag, for example, can't be switched quickly.
But car executives can keep this from becoming a total disaster: They can allocate scarce parts to their more popular or profitable vehicles, keeping those assembly lines running while slowing down the less profitable ones.
That's what many people believe GM did when it decided to close the Shreveport plant, because dealers have ample inventory of both trucks made there, more than two months' worth.
Newton said car companies will do their best to keep producing the cars people want.
"It's quite a lot to prioritize, but they'll do it," he said.
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Kurtenbach reported from Tokyo and Carty reported from Detroit. David Koenig in Dallas and Malcolm Foster in Tokyo contributed to this report.


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