Carmakers and tier suppliers looking to diversify their supply chain away from the high costs and on-going disruptions in Japan may find the next best option to be South Korea following the recent free trade agreement with Europe and one to follow with the US, according to analysis from Frost & Sullivan.
Japan’s automotive industry has been battered recently not only by on-going power cutbacks and disruptions following March’s earthquake, but long-term issues such as the strong yen, high corporate taxes, slow trade liberalisation and a stagnant domestic market. These issues have begun to push Japanese carmakers and tier suppliers to move some of their domestic manufacturing operations overseas. Nissan CEO Carlos Ghosn told reporters this week that he feared a shift away from Japan. “What I worry about is not just Nissan, but Japanese manufacturers losing motivation to maintain production in Japan,” Ghosn said today at the carmaker’s wharf in Yokohama. “The high yen is definitely a headwind.”
The disruption to order fulfilment has even led Toyota president Akio Toyoda to say recently that the company needed a stable supply of electricity that Japan could no longer guarantee. “I feel manufacturing in Japan may have already exceeded the limit," he told reporters.
Diversifying the supply base
An increasing number of global OEMs are looking to source components from more reliable and less-costly locations. Some suppliers have begun to react already. Renesas Electronics, the world’s biggest producer of micro-controllers, stated recently it is in talks to have microcontroller chips for cars, now all made in Japan, made at a Singapore plant owned by US-based chip maker Global­foundries Inc. Renesas fears losing its 40% market share among the world's top carmakers, who are scouring the globe for alternate supply sources.
According to Prana Tharthiharan Natarajan, automotive and transportation analyst at the consultancy Frost & Sullivan, OEMs from across the world are trying to identify supply partners outside the vulnerable regions of Japan–with South Korea an increasingly attractive option.
“While Japanese manufacturers have come back close to pre-quake levels–at both OEM plants and at supplier level–whether Japan will continue to retain its top-spot as a preferred location to source components is questionable,” he said.
This is backed up by recent comments by Nissan’s COO Toshiyuki Shiga who said that, in terms of domestic production, the company would look to its Tohoku suppliers to shift to other factories and then would look to other suppliers in Japan. Failing that Shiga said Nissan would start looking for overseas suppliers.
South Korea to avoid the pricey and dicey
According to Natarajan, the chances of a shift from Japan to elsewhere may be directed towards a good number of best-cost locations in BRIC nations, as long as it is only a manufacturing base shift. For companies in Europe, which has been a significant importer of Japanese parts, the recent signing of the EU-Korea FTA is felicitous. And it may be so for US-based companies.
“In order to identify suppliers who possess the capabilities of competing with Japan, the next best option for global OEMs is to look into South Korea,” he told Automotive Logistics. “With the EU-Korea FTA having come into effect on 1st July, the Korean mix of price and quality is expected to prove ideal for sourcing, as against a pricey Japan and a dicey China.”
Unlike other Asian locations, Korea has earned a reputation that includes innovation, which reassures OEMs that they can meet their respective targets in terms of carbon emission reductions and passenger safety concerns. Natarajan points to companies including Bosch, BorgWarner, Continental and ZF, which are amongst part suppliers who have already established plants in Korea.
“The import-duty waiver is expected to boost the trade between EU and South Korea, slowly shifting away from Japan,” he said. “With a KORUS FTA soon to come into effect [with the US], South Korea is expected to emerge as a trusted ally for various tier one suppliers who will experience the advantages of duty-free imports and consumers who will be able to purchase Korean cars as a cheaper alternative to traditional brands from the Triads.”
3PLs and consolidators also stand to benefit because parts shipped in volumes lower than one TEU will be consolidated en route to the ports of discharge. Consequently, feeder vessels will have to be operated at a higher frequency as the total exports from alternate destinations are expected to be on the rise.
“In a nutshell, European and American OEMs are expected to closely work with Korean suppliers to revamp their supply chain,” added Natarajan. Korea could be the R&D hub and locations such as India, China, Brazil and Thailand could become the corresponding manufacturing locations that help achieve better cost advantage.”
Japan dominance will not fade easily
However, Japan is expected to remain a preferred locations for certain quality-critical systems, where cost or delay in shipments may not hinder overall profitability in production, especially to the luxury market. And the pending trade agreements between the EU and US with Japan will improve the chances of strengthening the global ties that have been stressed by infrastructure problems and a poor trading environment.
And despite the rising yen and supply risks, Japanese manufacturers have maintained their commitment to manufacturing cars in Japan. Regarding the balance of production in Japan against other countries, Toyota–which produces nearly half its global output in Japan–has already said it would rely more on leaner manufacturing methods rather than producing more cars offshore, at the same time that it would pursue a policy of manufacturing products locally in the principal markets where they were in demand.
A Toyota spokesperson told Automotive Logistics. “This is, to be sure, a challenging time for manufacturing in Japan. We are keenly sensitive, however, of our responsibility to buttress the international competitiveness of Japanese manufacturing.”
And Nissan’s Ghosn also told reporters this week that it would not lower its target of producing 1m vehicles in Japan this year. "This goal is a choice Nissan has made, and has maintained through a collaborative effort with our suppliers,” Ghosn said.
 For more insight into the global impact of the Japan crisis on the automotive supply chain in the short-to-medium term see the article starting on page 56 in this month's edition of Automotive Logistics magazine