There are two significant threats to the auto sector supply chain globally: foreign currency fluctuations and natural disasters.

Earthquakes and tsunamis have caused major disruptions with Japan in particular being one of the most vulnerable nations. It is a hotbed for seismic activity and no stranger to the devastating impact of these twin catastrophes.

Since 2000, Japan has often experienced tremors, minor earthquakes and dozens of major ones. It is these bigger quakes that pose the biggest threat to the auto industry in addition to the devastation they can leave behind on human lives and property. The recent earthquakes from 2000 to date have occurred in different regions right from Chugoku, Hokkaido and Chubu to Tohoku, Kanto and Kyushu.

Major player Japan has long served as a manufacturing hub for the global automotive supply chain (roughly 30 thousand parts). While the absence of even one small component can stop an assembly line, the disruption of entire modes of transportation and logistics for extended periods of time can be debilitating for automakers.

The most recent earthquake in Kyushu started at 6.2 on the Richter scale on April 14 followed by a stronger aftershock two days later at 7.3. Its impact was felt as far away as Busan in South Korea.

The global automotive industry also experienced the aftershocks of this incident with four North American plants shutting down due to part shortages from Japan. While some Japanese manufacturers had to briefly halt operations, others underwent complete plant closures for several weeks. At present, the total impact estimated is limited to about 80 thousand units but it could take months to fully recover and compensate for this loss.

In the face of a changing global footprint and increased pressure on supply chain rationalisation, automakers within the market have diversified their final assembly locations throughout Japan over the last two decades. These shifts have helped avoid complete stoppages in the face of natural emergencies while also taking advantage of lower manufacturing costs.

Assembly volumes in Kyushu only accounted for 2.8 per cent (337,000 units) of the total assembly in Japan in 1991, but increased to 13.7 per cent (1.2 million units) in 2015 across six new plants. While Tohoku had no final assembly plant in 1991, it is now home to two plants that are equivalent to 5.4 per cent of Japan’s total light vehicle production, or 460,000 units in 2015. Needless to add, suppliers are helping these assembly plants in expanding the overall footprint within the market.

Playing it safe This diversification spawns strategic benefits as well, allowing both automakers and suppliers to access neighbouring countries like South Korea, which is closer to the Kyushu region than the Chubu or Kanto regions.

Japan is well prepared given its past experience with natural disasters but such events serve as a reminder to other participants along the automotive value chain to assess their business continuity plans (BCPs) in case of emergencies.

According to a 2015 survey conducted by the Cabinet Office within the Government of Japan, though 60 per cent of large companies surveyed had established BCPs, only 30 per cent of medium-sized ones had made such provisions. Within the manufacturing sector, 48.1 per cent of the companies have BCPs in 2015. As natural disasters continue to underscore the need for business continuity planning, automakers would be served well by not only establishing but maintaining such plans on an ongoing basis. These would apply to their operations in Japan as well as to suppliers and logistical movements globally.

Japanese automakers have gradually shifted assembly operations either to important markets such as the United States or regions nearby such as Mexico in order to mitigate the risks of natural disasters or foreign currency fluctuations. In addition, these also help in reducing the cost of building vehicles thanks to lower wages, lower shipping costs and free trade agreements.

In 1998, around 11 million vehicles were assembled in Japan, which has since fallen to around eight million. Local vehicle sales over the last 10 years have been in the range of five to 5.5 million units. At present, over 70 per cent of Japanese OEM vehicles sold in the US are built in North America. The volume of exports from Japan to Europe has fallen by about 25 per cent over the last decade due to more assembly by Japanese OEMs (in Europe).

So, are there any takeaways from the Japanese experience for India? At one level, there is possibly no reason to feel as paranoid about natural calamities as Japan probably would but the recent Chennai floods did impact the supply chain and affected auto production in the country.

Mumbai, likewise, saw a cloudburst wreak havoc in 2005 though the Maharashtra auto cluster in Chakan and Ranjangaon was spared.

India is one of the fastest growing automobile regions globally and it is, therefore, essential for automakers and component suppliers to assess the impact of natural disasters on the supply chain while putting in place a mitigation plan.

The writer is Partner, Price Waterhouse