AFTERSHOCKS RATTLE THE AUTO INDUSTRY
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Published on Thu, Mar 17, 2011
By: The LACar Editorial Staff
EARTHQUAKE IN JAPAN COULD RAISE NEW-VEHICLE PRICES The earthquake and ensuing tsunami in Japan last week will leave a mark on the country that will not soon be forgotten. As Japan tries to rebuild, the world is only beginning to appreciate the significance of the financial implications of this disaster. Of particular interest is the effect on Japan’s auto industry. Japan has traditionally been viewed as a powerhouse when it comes to automobiles, producing some of the most fuel-efficient and sought-after vehicles in the world. With gas prices on the rise, any interruption to Japan’s production capacity could have far reaching consequences in the United States due to the country’s reliance on Japanese automobiles. Most notably, a drastic reduction in the supply of vehicles being imported from Japan could increase the price of vehicles from Honda, Toyota, Nissan, Subaru and all other Japanese manufacturers.
PRODUCTION HALTED AT MANY JAPANESE PRODUCTION FACILITIES With the power out in large parts of the country, many of Japan’s major auto manufacturers have had to shut down production of many of their most popular models. Toyota has confirmed that they will halt production of their plants until at least March 22, and so far it has been estimated that they have already lost production of 40,000 vehicles. Nissan and Mitsubishi have resumed operations while closely monitoring the situation, as they have concluded they have enough parts to work for a few days. They will have to reassess the situation once again if they are unable to obtain additional parts to keep production up and running. Honda has suspended production until at least March 20th. The length of time production will remain down for these brands will give the best indication of the long-term implications to the health of these companies. If production is resumed in a short period of time, the overall impact to the supply and ultimate price of Japanese vehicles should be relatively minor. Even a shutdown lasting two to three weeks could be overcome by adding shifts and increasing production once facilities are up and running. Currently, Japanese automakers are maintaining an average of 61 days-supply of inventory, so in the short run, it appears as though there are enough vehicles on dealer lots in the United States to withstand a short-term production cutback. The bigger concern is if production is shut down for an extended period of time, perhaps one month or longer. In this scenario, supplies of vehicles imported from Japan could start to dwindle and prices could rise dramatically. Perhaps most impacted will be the price of fuel-efficient hybrids and compacts, which already have seen an increase in demand as gas prices have been on the rise. In this case, prices would rise not only for Japanese imports, but for Hyundai, Ford, GM and other manufactures that would see increased sales as a result of the reduced supply of Japanese imports. Long-term power outages, damage to Japanese infrastructure, and the potential radiation resulting from a potential meltdown at Japan’s Fukushima nuclear plant are all factors that could potentially contribute to a long-term production cutback for these automakers.
WHAT SHOULD CONSUMERS DO? With so much uncertainty regarding the future of Japanese auto manufacturers, many Americans who are in the market for a new vehicle today are wondering what to do. In the short run, Kelley Blue Book expects incentives to remain attractive for many Japanese vehicles, so now might be a great time to try to get a deal on a Japanese vehicle while there still is sufficient inventory. However, as supply starts to dry up, consumers should expect to pay higher prices. If the production halts go on for a month or longer, Kelley Blue Book would expect Japanese manufacturers to begin to roll back incentives since there will be few vehicles available in the marketplace for consumers. In this case, Kelley Blue Book would advise consumers to either hold off on their purchase, or to seek an alternative from a competing manufacturer. Be warned though, with a lack of Japanese vehicles in the marketplace, prices for nearly all alternatives will be on the rise as well. Even in a prolonged production cutback scenario, Kelley Blue Book would expect prices to come back down in the long run, so consumers may be best served by holding off their purchase if prices begin to rise. Once production is resumed, whenever that may be, Japanese manufacturers will pump up production and increase incentives, driving prices back down. This also will satisfy any pent-up demand that may have built up among American car shoppers, and should balance out the annual sales figures for the auto industry as a whole. Juan Flores Director of Vehicle Valuation Kelley Blue Book