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Relax, People, the Quake in Japan Isn't Going to Kill the Car Business

In the aftermath of Japan's horrifying quake, tsunami, and nuclear radiation leak, there's been an enormous amount of debate and discussion about the short- and long-term impact on the global supply chain. It hasn't been focused just on cars, either. Japan supplies the world parts and components for all kinds of stuff. But trust me, it won't take long for the Japanese link in the chain to be repaired.

It won't happen overnight, of course, and this has generated a minor panic. Some commentators have also suggested that the currently highly globalized way we make things needs to change -- this Time Curious Capitalist blog post neatly summarizes both sides of the debate. For my perspective, the situation in Japan provides a good opportunity to assess whether so-called "just in time" (JIT) manufacturing has fully matured and now needs to be evaluated. JIT can endure a natural disaster -- but is it truly sustainable?

More than you ever wanted to know about the supply chain
Call me crazy, but I doubt that before the Japanese quake most people thought twice about the intricate manufacturing and logistics process that allows the worldwide supply chain to function smoothly. Despite decades of manufacturing process, a lot of folks still think of a factory -- especially an auto factory -- as a black box into which materials are input and good are output.

Not so. Many factories, and most of the plants operated by major automakers, are really assembly points. They're where all the various components of, say, a Toyota (TM) Prius come together and are turned into a car. Farther up the chain, similar assembly processes are replicated for parts such as transmissions or engines. It takes a while to work your way back to self-contained facilities where raw materials are processed.

Two big advantages to the current system
Obviously, outsourcing most of the fabrication to the supply chain enables a carmaker to bid down the price of components and realize higher profits. In theory, if one link in the chain breaks, that gap can quickly be filled through a workaround. Unless suppliers for certain components are geographically concentrated, as they evidently were in northern Japan. In this case, the supply chain can be damaged for longer periods of time.

Solving the problems associated with the supply chain really comes down to money. Let's say that some of the major Japanese automakers' supplier can't get back online for a year. That won't work for Honda, Toyota, Nissan and the rest, so you can envision a scenario in which they -- probably with assistance from the Japanese government -- will finance new supply chain partners.

A silver lining to this dark cloud
Amid all the tragedy an anxiety associated with the Japan quake, there may be a benefit for the auto industry. Supply chain disruptions may force carmakers both Japan, Europe, and the U.S. to idle some capacity. There is at the moment too much capacity in the global auto manufacturing system, so this shock may force some of it to be taken offline, perhaps permanently.

This will allow other plants to operate more efficiently, although it could entail some retooling efforts. But it should also provide the global car business with a good opportunity to study whether its current supply chain is truly sustainable. After all, JIT production can create products that damage the environment just as effectively as the old system.

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Photo: Wikimedia Commons/Toni Lozano
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