Japan’s manufacturers and suppliers have bounced back with vigour since being devastated by the tsunami earlier this year. William Ross looks at the implications of the disaster and the strength of the yen for the automotive logistics industry.

Rows of sparkling new Suzuki cars filled the lot of Iwao Kanno’s dealership, ready for a special sales event. The day was March 11th, just before 3pm; the ground lurched and rolled. Within an hour, the waterfront area was almost completely washed away by the worst tsunami in modern Japanese history.

“There were 19 of us on the second floor, hanging on to each other as the water rose up to our chests,” he says, some five months later, surveying the remains of his dealership and service centre in a scorched, bleak landscape (pictured above). “We saw a big oil tank float by, then a steel-frame building crashed into us. We still don’t know where it came from.”

Luckily, all 19 of the employees at Kanno Jidosha (Japanese for ‘motors’) survived; many, many others did not. The new cars were swept away, like tens of thousands of other vehicles, into the maelstrom, to emerge as the twisted hunks of metal that still litter a huge stretch of the coastline of northeastern Japan.

Although he lost everything–his showroom, his inventory, his computers, all his books and most of his customers (mainly seafood processors, many of whom may not return)–Kanno has not given up. “If we had lost any of our people, I don’t know if we could have gone on,” he says. “But I want to get back to serving my customers as soon as possible.” He proudly shows a new location, safely away from the waterfront, where he has already built a temporary service centre. “I didn’t know if we could do it,” the 73-year-old Kanno says, “but we’re back up a lot faster than we thought.”


Kanno-san’s experience serves very neatly as a metaphor for Japan’s auto industry in the trying year of 2011. After the earthquake, many thought the year would be a complete writeoff for the industry. Instead, production was largely back to pre-disaster levels in less than six months.

“We’re going to be busy in the second half of the year,” says Shigeru Tsuneda, head of Japan for Wallenius Wilhelmsen Logistics (WWL). “The January-to-June period was down 21% in the volume of cars carried compared to the previous year, but in the second half we see demand that will be 20% above 2010–the capability of the Japanese automakers to recover has been amazing.”

“At the time of the earthquake,” Tsuneda continues, “people thought that the earliest the Japanese carmakers would be back would be October or November. But by June, they had already returned to normal, or were nearly there. During July, August and September, they still faced some hardship because of the continuing lack of electric power.”

Tsuneda is referring to the electricity cutbacks, both mandatory and voluntary, which were needed to get urban Japan–largely in the low, hot and humid areas of greater Tokyo and Osaka–through the air-conditioned months of the year without blackouts. These were necessary because of the reduced electrical output in Japan following generator shutdowns– especially the now infamous and still radioactive Fukushima Dai-Ichi nuclear power plant. “By October, those restrictions will have been lifted, so there will be no limitations for them in production,” adds Tsuneda.

A shared experience

Tsuneda is in a good position to see trends in the industry; WWL is the common carrier with the broadest reach of any foreign ro-ro shipping line in the Japanese market, transporting vehicles from all domestic makers, apart from Daihatsu, to destinations in Europe, the US and Asia. That WWL is seeing things come back–and even grow–is a message echoed by the manufacturers themselves.

“We were completely back to normal from August,” says Kenichi Ohshima, spokesman for Suzuki. “We were lucky in that our factories are concentrated in the Shizuoka area [southwest of Tokyo, far from the stricken area].”

rebuild-1.2Mazda was also back to pre-quake levels as early as June, says Michiko Terashima of the company’s PR office. “We’re headquartered in Hiroshima, so we had no damage due to the quake,” she says. “Some of our suppliers are in Tohoku [the north-eastern area of Japan], so there was some impact on our production, but we were pretty lucky in that there was not as much impact as there was for others.”

Mitsubishi Motors, like the even larger Nissan and Toyota, were among “the others,” says Tomo Nishina, general manager, export operations department. “Our production dropped by 20,000 units, even though we have no factories in Tohoku,” he says. “We really thought, at first, that this would be it for the year. We were told that we couldn’t expect to get parts for at least three months, but the suppliers really put in a huge effort and came back on-line.”

He adds that, in a perhaps typical show of Japanese allegiance between supplier and customer, some of the major manufacturers actually sent their own staff to subcontractor factories to assist in their rebuilding.

It could honestly be called a noble effort because, despite the smaller brands’ claims that they weren’t unduly affected, all the Japanese manufacturers lost production quantity, as well as sales. So, too, did manufacturers around the world, as the cascade of stopped parts led to breaks in production around the globe.

Japanese auto parts manufacturers are particularly strong in areas such as car audio systems and their components, as well as sensors that do everything from checking fuel levels to initiating airbag inflation. The disruption of the flow of these components shut down or slowed production lines as far away as the US and Sweden–and with Goldman Sachs estimating that the early shutdowns cost Japanese carmakers more than $200m every day, the support of the Japanese majors to get suppliers back on their feet could also be considered more than just altruistic.

Lessons and challenges in the aftermath

The recovery, then, has been remarkable–but what were the lessons learned, especially for supply chain management and logistics? Perhaps it is no surprise that the lessons for domestic logistics are relatively few, considering Japanese carmakers are the pioneers of so much of what is considered best practice in logistics today, but there are some, from IT to parts-sourcing patterns and, to some extent, outsourcing.

“With the earthquake came a new issue that the Japanese companies have to address: supply, logistics, shipping and all supplementary logistics communications,” says Mark Morley, industry marketing director at GXS. “In Japan, many companies are reluctant to outsource, so they have their data behind firewalls in regional data centres. What we see now is a rethinking of storage in a cloud situation, with access 24/7.”

Morley says that his customers, representing several of the major manufacturers, are now moving ahead with business continuity plans. “They are moving forward now and adapting their logistics and production. Some dramatic actions have been taken, such as moving manufacturing from the east coast to locations further inland or to the west coast. They are moving to a cloud-based solution–they liked being alone behind the firewall but now they’re at a turning point because they see that they need to get their IT back online right away.”

Another issue involved the quintessentially Japanese ‘justin- time’ production concept most closely associated with Toyota, but used to some degree–if by other names–by all the manufacturers. “Many companies were simply caught short,” Morley says. “Many may increase their buffer stocks to be ready for shortfalls.”

“I guess we’re less lean than some,” Mitsubishi’s Nishina says with a laugh. “We’re perhaps a little looser, in a good way. You really could say that, because our supply line is a little fatter, it helped us out a lot.”

At least one carmaker has even decided to take pre-emptive tsunami preparation action. Suzuki’s location around the city of Hamamatsu, for example, meant the company’s infrastructure was undamaged this time, but it is located in an area where a future tsunami is predicted as highly likely. “Our motorcycle R&D centre is located just 200 meters from the ocean,” Suzuki’s Ohshima says. “The Tohoku situation helped make the decision to relocate that facility further inland.”

Tough trading conditions

There is one problem, however, that is arguably bigger–and certainly longer-lasting–than the Tohoku disaster: a yen that has gained 38% against the US dollar over the past three years.

rebuild-2Nishina laughs again, asking this reporter: “Tell me, what do you think is keeping the yen so high? We don’t know why and it is really making things tough.”

“The Japanese automakers are now deciding what they are going to do for the future,” says WWL’s Tsuneda. “If this continues for one more year, there’s no choice for them but to diversify production overseas even more. Nissan has already decided to have only minimal production in Japan and to move the majority of its production to the US, China and Thailand.”

Shiori Hashimoto, a Toyota spokeswoman, explains the company’s philosophy. “Our basic concept is to build where there is demand,” she says. “that goes back for many years. So we have worked hard at localisation and local production in our major markets. At the same time though, our premium, high-tech vehicles such as the hybrids and the Lexus brand will continue to use Japanese product technology and exports from Japan. We develop our innovative technologies in Japan, then move them as mass-production technology to the local markets near the demand. Now hybrid technology is increasingly being transferred to the US and Australia; we’re also producing the Prius in Thailand. At the same time, the next generation of technology is being developed in Japan.

“Without a strong technical base, we can’t keep our development moving forward, so our goal really is to maintain Japanese monozukuri i [manufacturing, but with a definite Japanese flavour] strong, then export the technologies.”

But WWL’s Tsuneda thinks that might be difficult. “Toyota is trying to hold on to production in Japan,” he says, “but at 75 or 76 yen to the dollar, that is going to be very tight.”

“Like the others, we are trying to move our production and supply to be as close as possible to the place where our vehicles are to be used,” Mitsubishi’s Nishina says. “But setting up a factory can take billions of yen, so you can’t just set out to build a string of new factories.”

Nishina says that the company recently established Jump 2013, its three-year business plan that, among other things, focuses on what the company sees as its developing markets for the future: China, Thailand, Russia (including a new joint venture company) and Brazil. There are also plans for a new, locally-produced model for the US (which has been a difficult market for Mitsubishi in recent years, Nishina admits). “There has been a bit of a rush for the makers to get into the most important markets and the high yen just increases the pressure for us to act.”

While the other manufacturers may be a bit less open about their plans to move production out of Japan than Nishina (and Japanese companies in general can be pretty reserved about sharing information), WWL’s Tsuneda knows that, in the short term, his clients will be suffering as they try to maintain their position while battling the effects of the strong yen–many of those extra cars his ships will be carrying in the coming months won’t be doing much to help the bottom line.

“At the current rate, they will all lose money,” he says. “They don’t want to lose market share, so they will keep on shipping, even if they lose money by doing so. After that, nobody knows what will happen.”

Tsuneda, like many, also cites Japanese governmental inaction and with the administration of Naota Kan about to come to an end amidst coalition infighting, strong leadership seems unlikely. “The Japanese government simply must pay better attention to this,” he says. “With this yen rate, industry is simply going to die.”

He also points to a corporate tax rate of 40% as another area that desperately needs attention from the government. “The taxation system also reduces Japan’s competitiveness,” he says. “It’s a major issue for business and the government, particularly with rates in Singapore that are less than 20% and Korea at 20%.”

Foreign part production

Neighbouring South Korea is an increasing source of competition, particularly with a weak won–that has mainly kept pace with the dollar against the yen–and with carmakers, particularly Hyundai and Kia, continuing to increase their quality. “After the earthquake, we estimated that Toyota production decreased by about 30,000 units,” says Nishina. “That gap was almost immediately filled by Korean cars. Korean cars are now on a quality level that’s close to what we can do. They’ve put a lot of effort into being competitive and really moved in when they saw their chance– we’re a little bit jealous of them.”


But Jane Cheng, marketing director, Asia Pacific for GXS, points out that the strong yen does bring some opportunities for Japanese carmakers. “It can also help the recovery of the auto industry after the earthquake to a certain extent, given the fact that many companies are moving their operations/production offshore or sourcing from other countries,” she says. “A strong yen can drive down the cost [of buying overseas].”

Because of the quality in South Korea, as well as the weak won, some analysts have suggested that Korean parts would be a good alternative for Japanese carmakers. However, with the traditional tensions between the two–and the fact that Japanese overseas manufacturing is located elsewhere in Asia–Korean parts do not seem likely to be helping cut costs soon.

“There is talk at the government level about increasing imports,” Nishina says, “but it’s tied up along with the liberalisation of agricultural products. With the strong opposition to the latter, nothing’s happening.”

Quoted in the Financial Times, a s nalyst Kurt Sanger of Deutsche Securities, in Tokyo, is sceptical for other reasons. “Connecting Korean parts imports with the earthquake is fallacious,” he said. “The quest to make Japan profitable in a strong yen environment began in earnest over a year ago. It’s all about costs, not diversification.”

Mitsubishi Motors, at least, is committed to increasing its share of foreign-produced parts. “Part of our Jump 2013 business plan–and one that’s not entirely related to the yen rise– is our goal of increasing our 18% rate of overseas procurement to 20% by 2013,” he says.

Japanese manufacturers are also increasingly outsourcing their overseas logistics. “The complexity of auto manufacturing drives the adoption of multiple and flexible supply chains,” says GXS’s Cheng. “For Japanese players, the trend is to set up the local supply chain management with multiple suppliers outside of Japan. Gaining visibility throughout their supply chains is also a key factor to driving efficiency.”

“Overseas, logistics from the factories to dealers is mainly outsourced,” says Toyota’s Hashimoto. “We distribute both by rail and truck; for rail, we use major companies like Union Pacific.”

However, Toyota, which has its own car carrier ships and domestic trucking operations in Japan (as has been traditional for the bigger Japanese makers), also uses its own affiliate, Toyota Transport, for logistics on the US west coast. Toyota Logistics Services, responsible for all outbound logistics in the US, also performs its own vehicle processing and post-production work at North American ports and factories. But most other carmakers, particularly the smaller OEMs such as Mitsubishi, outsource all of the handling, processing and transport of their exported vehicles.

“If it’s cheaper, we’ll use it,” Nishina claims. “Our president is always saying, ‘doing it ourselves is the most expensive way. Set up benchmarks and find out what’s cheapest.’ So we’re much freer now to try out new things.”

“We should be called on more often,” WWL’s Tsuneda says. “For some of the major companies, everything is still very much controlled from Japan. We do see, though, that companies like Nissan and Honda are beginning to change.”

At home, though, things will very likely remain unchanged, despite the brave new global world of the Japanese carmaker. Both Mazda’s Terashima and Ohshima at Suzuki noted that, while they do outsource logistics, they have no plans for any major changes in Japan; neither have Toyota, Nissan or Honda indicated any interest in alternative logistics solutions. And while the companies increasingly call on firms like WWL and GXS for a range of logistics skills that can stretch from the factory door to the dealer, that isn’t likely to change much within Japan.

rebuild-4“In the US, for example, a manufacturer might call on [WWL] to pick up the vehicle at the factory, transport it, inspect it and prepare it,” Tsuneda says. “In other markets we do vehicle inspection on arrival, PDI and delivery to the dealer. But we don’t do any vehicle processing when we bring cars to Japan. There is just too strong a connection between the automakers and the stevedore firms and trucking companies. The quality is very high, it’s true, and that makes it hard to compete, even if we are more cost-competitive. Relationships are important in Japan and some of these go way back.”

Moreover, Japanese consumers, despite their own struggles in a long-stagnant economy, topped off by the March disaster, have not really changed their preferences. There is demand for the budget kei or mini-car segment, with Nissan answering the call for value (and ensuring some profitability for itself as well) by shifting production of its Micra to Thailand.

“The Japanese domestic market still has so much competition between the makers that the customer remains king,” Nishina says. “They have the power to choose and that keeps all of us fighting to win them.”