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RR RUEHFK RUEHKSO RUEHNAG RUEHNH
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R 010735Z AUG 07
FM AMEMBASSY TOKYO
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INFO RUEHFK/AMCONSUL FUKUOKA 2334
RUEHNAG/AMCONSUL NAGOYA 1380
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RUEHOK/AMCONSUL OSAKA KOBE 5934
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RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 TOKYO 003507 
 
SIPDIS 
 
STATE PLEASE PASS TO USTR 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ECON ECOM JA
SUBJECT: Earthquake Dents Japan's Auto Industry 
 
¶1.  (SBU)  Summary.  The July 16 earthquake off Niigata affected 
the Japanese auto industry nationwide.  Production recovered 
relatively rapidly, however, and industry sources tell us that 
lost production will be made up by year end.  Companies' all- 
important bottom lines will only be minimally affected, if at all. 
 
The quake provoked some criticism of the industry's vaunted just-- 
in--time lean production system and anxieties over the 
vulnerability of manufacturing supply chains.  The auto industry 
and METI claim the system worked as designed:  maintaining low 
inventories and a flexible workforce, hallmarks of the lean 
production system, proved to be the most cost-effective way to 
manage risk.  In the future, the auto industry will be hedging 
its bets and looking to disperse production around Japan and 
abroad.  The dominant position of Japan in key manufacturing 
areas and the concentration of production in certain companies 
and plants create the lingering possibility that a major natural 
disaster in Japan could affect manufacturing globally.  End 
summary. 
 
The Effect of the Earthquake on Auto Production 
--------------------------------------------- -- 
 
¶2.  (U) The earthquake off Niigata on July 16 shook the auto 
industry all over Japan.  Riken Company's Kashiwazaki plants in 
Niigata prefecture produce fifty percent of the piston rings used 
by vehicle manufactures in Japan and seventy percent of seal 
rings used in hydraulic transmission systems on vehicles.  By 
July 18 auto companies began to announce plant shutdowns due to 
lack of these key components starting July 19.  The auto plants 
stayed shut until the Riken re-started some of its production 
lines on July 22, allowing the automakers to resume production as 
of July 25.  The effects of the earthquake on output, however, 
will be felt for another few weeks.  Fujio Cho, Chairman of 
Toyota and the Japanese Automobile Manufacturers Association 
(JAMA), told the press on July 25 that the assembly plants would 
not resume full operation until the end of the mid-August 
holidays.  Toyota President Katsuaki Watanabe announced his firm 
missed production of 60,000 vehicles, and depending on the source, 
nationwide production was delayed on 100,000-120,000 cars, buses 
and trucks, considerably more than the 40,000 units of lost 
production caused by the massive 1995 Kobe quake.  New-car sales 
in the domestic market will temporarily decline, Cho said, noting 
that popular cars are out of stock at some dealerships because of 
suspended production. 
 
¶3.  (SBU)  The shutdowns and production delays are not expected 
to have a major impact on the industry, automakers' overall 
production or bottom lines.  (Note:  Eight percent of the total 
Japanese work force -- 4.95 million people, of which 820,000 work 
in manufacturing -- are involved in the auto industry according 
to JAMA.  Endnote.)  The main shutdown period of July 19-24 
spanned a weekend and only three or four days of full production 
were lost:  At Nissan, a company official told us their plants 
were down for just three days.  Although the press reports some 
grumbling on the part of workers who may be working overtime or 
during holidays, a Honda official's remarks to us that that Honda 
can compensate by boosting production generally confirmed the 
press accounts of the industry's ability to make up lost 
production.  One of the big investment houses shared their 
"instant" analysis with us, estimating a loss of 20 billion yen 
per day for halted production collectively for the automakers. 
This could be made up by year end by increased production in the 
second and third quarters.  Toyota's President Watanabe 
independently confirmed the same in a statement to the press. 
The Big Three Japanese automakers -- Toyota, Honda and Nissan -- 
all told the media that the shutdowns would not affect exports. 
 
Debate Over the Just In Time -- Lean Production System 
--------------------------------------------- -------- 
 
¶4.  (SBU) The press has questioned Japanese automakers' just in 
time or lean production systems which focus on keeping minimal 
inventories.  Widely acknowledged to be an effective production 
method during normal times, its strength now seems to be a major 
weakness.  The industry and government, however, are disputing 
this criticism.  A  JAMA representative told us the cynicism 
displayed by the Japanese press toward the just in time-lean 
production system was unfounded.  It is a system that works and 
strikes the correct balance in managing risks and costs. 
 
¶5.  (SBU)  A METI official added that, in fact, the principles of 
the system were used to mitigate the consequences of the quake. 
 
TOKYO 00003507  002 OF 003 
 
 
He underscored, moreover, the response was in accordance with 
pre-planned procedures the auto companies have developed to 
confront past production stoppages.  Since an emergency and its 
effect on parts production cannot be predicted, the trick is to 
have a flexible workforce rather than a stockpile of "gadgets." 
For example, he recounted, a while ago, a Toyota seat-making 
plant in the Philippines was hit by a labor strike.  Observers 
had expected Toyota to stockpile seats as a precaution.  Toyota 
did not, and when the walkout occurred, Toyota instead sent 
middle-aged Japanese women with seat-sewing experience to 
continue production.  Similarly, the carmakers' quick dispatch of 
some 700 workers to the damaged Riken plant demonstrated the 
resiliency of a production system that emphasizes labor 
flexibility rather than inventory stockpiles when confronted by a 
disaster.  It was a very sophisticated response with logistics 
and support people being sent as well as engineers, the former 
arranging for housing and transport, freeing up the latter to do 
their primary work.  (An industry insider explained to us that 
much of the equipment used by the automakers to produce engines 
is similar to the machinery at Riken.  Thus, with the closure of 
the production lines, maintenance workers and engineers could be 
dispatched to Riken to repair the damage.) 
 
¶6.  (SBU)  Consulate Nagoya notes that Japanese automakers also 
may keep more inventory readily available than is generally 
understood, particularly for strategically important or single- 
sourced parts. On the plant floor, the just-in-time system may 
result in as little as two hours of inventory on hand, but 
depending on the part, nearby warehouses owned by the automakers 
can stock several days of supplies.  The JAMA representative 
added that there is already some seasonal variation in 
inventories to take into account the possibility of a heavy 
snowfall interrupting the delivery of components parts from a 
snow-bound parts supplier. 
 
Worries Over Manufacturing Supply Chain Vulnerabilities 
--------------------------------------------- ---------- 
 
¶7.  (SBU)  Although the industry may have dodged a bullet this 
time, the quake revealed an unexpected vulnerability -- at least 
to the general public and the press -- to Japanese manufacturing 
supply chains and has led to some fretting about other weak 
points, where one company has a large market share of a critical 
product.  In the auto sector, several manufacturers have dominant 
market shares for other critical parts, e.g.: Denso Corp. has 60 
percent of the car air conditioner market; Asmo Co. supplies 53 
percent of radiator fans; and Tokai Rika produces 49.4 percent of 
the electrical switches.  The quake also affected production at 
other companies such as Canon and additional electrical machinery 
and precision equipment manufacturers which rely on supplies from 
spring manufacturer Advanex, whose Kashiwazaki factory was also 
damaged.  A Sanyo Electric chip making subsidiary stopped 
production temporarily due to the quake; the facility had 
suffered major damage from an earlier earthquake, which at the 
time caused a decline in Sanyo's earnings. 
 
¶8.  (SBU)  The Japanese press highlighted other industries that 
are vulnerable to disruption, the effects of which would not only 
be felt in Japan, but globally.  The Yomiuri wrote that the 1995 
Kobe earthquake heavily damaged Kobe Steel's facilities, greatly 
disrupting the production of wire rods for valve springs on 
vehicle engines; with Kobe Steel's 50 percent of the global 
market share, the production of autos around the world was 
affected.  The Yomiuri warned that Kobe Steel's Moka plant in 
Moka and Furukawa Electric Co.'s Nikko plant, both in Tochigi 
Prefecture, are the sole world-wide manufactures of a substrate 
needed for the production of hard disks for personal computers 
and HD-DVD players, and Kuraray Co. has a share of about 80 
percent of the global market share in polyvinyl alcohol film 
which is used for a liquid crystal displays. 
 
¶9.  (SBU)  One Yomiuri editorial writer also used the quake as 
hook to expound on the dangers of foreign investment, noting on 
August 1 that, "If a foreign company succeeds in a hostile 
takeover bid against Riken, all Japanese automakers will have 
their lifeline controlled by the foreign firm."  Post has heard 
similar anti-FDI rhetoric before and does not think this opinion 
piece will have much impact -- the Yomiuri is the largest daily in 
Japan but is not the opinion leader on economic matters -- yet it 
is symbol of the depth of feeling here in some quarters about FDI 
and the lengths they will go to make their case. 
 
The Aftermath 
 
TOKYO 00003507  003 OF 003 
 
 
------------- 
 
¶10. (SBU)  Despite the relative success of the auto industry's 
response, producers are hedging their bets.  The JAMA 
representative emphasized that the quake provided a good 
opportunity to review supply chains and become more aware of 
problems resulting from concentration of production in one plant 
or area.  Also, METI is recommending checking supply chains using 
a U.S. methodology to assess risk.  Many big companies have 
already done this, but smaller companies have not.  JAMA has 
called on the parts and vehicle manufacturers to consider 
producing at multiple locations.  Toyota announced it would 
reexamine its supply network to see if dominant manufacturers' 
production can be dispersed.  Riken is looking to distribute its 
production in Japan and as well as to China, the United States 
and Europe. 
 
Comment 
------- 
 
¶11. (SBU)  The roll out of statistics in the Japanese press of 
the dominant market position enjoyed by certain component 
suppliers combined with the concentration of production in a few 
key plants is impressive for its implications were a major 
natural disaster to strike a central manufacturing area of Japan. 
As the Japanese auto-makers take stock of their manufacturing 
supply chain, identifying manufacturing vulnerabilities in Japan 
that could affect the global economy could be helpful preparation 
for the next big quake.  Post expects the quake to give further 
encouragement to ongoing contingency preparations and disaster 
planning on the part of Japanese industry.  Toyota, which is a 
proven learner as a company, will use the lessons of the quake to 
strengthen its operations and risk management practices. 
SCHIEFFER