Japan is, after China, the world’s second largest car producer. In the first ten days after the March 11th earthquake and tsunami, the Japanese auto industry lost approximately 65 percent of its capacity. That is 338,000 units. Toyota alone has lost production of about 140,000 vehicles since March 14, says AP [via MSNBC]. What will happen next? Will it affect us, and how?
Amongst banks and brokers, staid Morgan Stanley is one of the respected ones. Morgan Stanley always had a presence in Asia and manages many Asian funds. Japan’s Mitsubishi bank owns 21 percent. Morgan Stanley has no interest in talking Japan down. However, in a 34 page research note, sent out today, titled “Japanese Earthquake: Global Supply Chain Implications”, Morgan Stanley paints a dark picture: “A prolonged disruption of Japanese component supply could have a significant impact on 2011 auto production and profitability.” Not just in Japan, the world over. It is likely to depress sales: “ The impact on US SAAR could be severe in May.”
Instead of editorializing, let’s just give you the salient parts. You may want to have a stiff drink first. And your broker’s phone number nearby.
“A disruption to all auto manufacturers: It may take several weeks for companies to quantify the impact. A prolonged disruption of Japanese component supply could have a significant impact on 2011 auto production and profitability.”
Morgan Stanley sees prices going up across the board, but especially for Japanese models:
“Even the threat of supply shortages can be positive for industry pricing throughout the chain. OEMs and dealers would be hesitant to exacerbate the dwindling of finished inventory. Consumers interested in scarce Japanese product may rush to buy desirable product ahead of a shortage.”
When there will be no car carriers from Japan, and when transplants sit idle due to missing engines and transmissions, the Detroit 3 will see increased market share. Then, or maybe even earlier, the D3 will be hit by the same problems. Morgan Stanley calls it zero sum-game:
“There is little doubt that the supply disruptions in Japan will result in at least a near-term market share increase for the D3 at the expense of Japanese manufacturers. However, lengthy supply disruptions could have an impact even on US domestic players. GM management has told us that finding the affected suppliers and alternative sources is a top priority.”
Believe it or not, the Sendai tsunami could whack the recovering U.S. car market:
“Impact on US SAAR could be noticeable in April and potentially severe starting in May. Production slowdowns would not have a material impact on March SAAR, which we expect to come in around 13 million units.”
Good for manufacturers, bad for bargain hunters, the looming price war will be averted:
“Pricing is likely supportive as the industry manages even the potential for disruption in the supply chain. The events in Japan would push out market concerns about a price war that have been building in recent weeks. Strong pricing could also have a negative impact on the US SAAR number, while supporting the value of the market.”
In Europe, Morgan Stanley sees little cause for worry, except for Renault. Japanese brands have a smallish market share in Europe, European makers have an even smaller share of the Japanese market.
“Amongst OEMs, we highlight Renault as most vulnerable to disruptions in the sales and production network of its partner Nissan which accounts for ~70% of Renault’s PBT and 80% of its EPS.”
In China, Morgan Stanley expects more bad news for Japanese makers:
“Japanese brands accounted for 24% of total China car sales in 2010, with over 95% of sales from local production and over 80% local content (the rest imported from Japan suppliers). Recovery and resumption of the Japanese supply chain is more important than the OEM side. We may see further share shift to European and US brands and stronger pricing, especially in the middle-to-high end segment, where Japanese brands dominate (Accord, Camry, CRV, RAV4).”
Lastly, Morgan Stanley points out two critical uncertainties:
“What part of the supply chain is affected, for how long, and can the parts be re-sourced?
How long will inventory of finished vehicles and safety stocks up the chain last?”
Those are exactly the questions carmakers around the world are grappling with. Nobody seems to have the answer.
(If you have a Morgan Stanley account, hit up your broker for “March 22, 2011 Japan Earthquake: Global Supply Chain Implications.” It covers all the big industries from steel to cell phones, from uranium to Gucci bags.)