Viewpoint: How Japan's car industry almost shut down

Renesas was a little-known Japanese chip-maker until 11 March, when the earthquake and tsunami in Japan disrupted its production.

For the first time ever, almost all the Japanese carmakers had to idle most of their plants, not only in Japan but also globally, and stay that way for months.

Even after restarting production, capacity utilisation has been staying - and will be staying - at less than 50% for more than six months, or until the end of 2011.

For some plants, it is less than 20%.

Chips downed

The motor industry is having to face this difficulty, not because of damage to their own plants after the quake, but because one of the main plants of a chip-maker has been destroyed.

The company is one of the largest custom-made microchip makers in the world, with an estimated market share of more than 40% worldwide.

A typical car is equipped with 50 to 100 micro chips, which control many parts ranging from the brakes, engines, steering, airbags, air conditioning equipment, navigation and audio systems, to a number of sensors inside the vehicles.

Some 20,000 to 30,000 different auto parts make up a car and even if one single auto part is missing, production has to be stopped until that particular part arrives at the assembly line.

Based on the extremely tight "just-in-time" production system, a typical Japanese carmaker has an inventory of certain parts for up to about six hours, and sometimes for just six minutes.

The system was developed by Toyota for assembling vehicles. It aims to minimise the level of inventories while maximising the level of efficiency.

As Renesas has the lion's share of some of the particular microchips and supplies which almost all carmakers in Japan need, there was a severe shortage when it had to shut down one of its main plants near Tohoku.

It resulted in a big bottleneck for the car industry.

Profit killer

Roughly 50% of each carmaker's production output will be lost in the first six months of this year, mostly because of the shortage of Renesas-made custom chips.

Car demand in the US, China and Asia continues to recover, and an increasing number of customers are stopping by at dealer showrooms only to find there are not enough Japanese cars.

Consequently, the Japanese car makers are losing market share to American, European and South Korean car companies.

Because of the lower production volume, disrupted logistics and the strong yen, the Japanese car industry could lose more than 1tn yen ($12.3; £7.6bn) during this quarter alone.

This would be the biggest loss the industry has suffered yet, surpassing those reported after 9/11 or the Lehman shocks.

The just-in-time production method will not be abandoned, as Japanese carmakers continue to seek more efficient ways of making cars in the future.

Nonetheless, they have realised that production failure by one single chip-maker could jeopardise the entire Japanese car industry, and kill their profitability - reducing margins to a level never heard of in the past.

Koji Endo is the managing director of Advanced Research Japan. He specialises in the Japanese automotive industry.

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