Asian Automakers Seeking Alternatives to Weak U.S. Supply Chain

Toyota is looking into possible alternative suppliers or ways to financially assist suppliers to keep them in business.

Asian automakers say they are reevaluating their U.S. supply chains out of concern for possibly disruption through bankruptcies in the wake of a sharp drop in auto sales and the financial problems at General Motors and Chrysler. "The supply base is a big concern," John Mendel, vice president of automotive operations for American Honda said Jan. 12.

But 2009 is expected to be an incredibly bad year, with U.S. auto sales forecast to fall by up to three million vehicles to between 10.5 and 12 million units.And that follows an 18% drop in 2008 sales in the sharpest decline in 29 years.

Suppliers are already heavily stressed following years of plant closures and restructuring at the Detroit Three. And those production cuts are only expected to accelerate as General Motors and Chrysler downsize in exchange for billions in government loans and Ford slashes costs in order to avoid needing government loans.

The loss of some suppliers is likely inevitable considering such a sudden drop off in demand, Mendel said on the sidelines of the Detroit auto show. "The bigger concern are not the small suppliers but the big ones - Visteon, Magna, Delphi, Lear - who do massive amounts of business with everyone," he told said. "An interruption in that base could be very difficult to come around."

An even bigger shock would come should one of the Detroit Three collapse. Because the supplier base is so integrated, the ripple effects of the loss of even one manufacturer could bring U.S. auto production to a halt, a recent study by the Center for Automotive Research found.

In interviews at the Detroit auto show, executives from GM and Chrysler insisted that they are on the path to long-term viability and will be able to repay the billions in loans they recently obtained from the U.S. government.But both admitted more money is needed if they are to survive the current slump. Ford, which is in a better cash position and did not receive loans, said it could be forced to ask for help from the government if sales worsen.

Bankruptcy is not completely out of the question, said Irv Miller, vice president of environmental and public affairs for Toyota Motor Sales USA. "If you listened to the federal hearings (on bailing out the domestic auto industry) there were a number of senators asking why not," Miller said."I think they're hoping to avoid that with the federal use of funds but I don't know if long-term that's a reasonable expectation or not."

Toyota is "working awfully hard to identify" suppliers which may be impacted by a failure at one of the Detroit Three, Miller said. "We're not standing still. We're trying to make sure we have as many bases covered as we can."

Importing vehicles from Japan is "not very possible" because of the current exchange rate between the yen and the dollar, Miller said. So Toyota has developed a number of scenarios in which it could keep U.S .production going in the wake of a major disruption of its supply base, including finding alternative suppliers or "seeking ways to financially assist suppliers and make sure they don't go out of business."

Hyundai has already looked into accessing a supply base outside of the United States, said Dave Zuchowski, vice president of sales for Hyundai USA. "We have some shared suppliers with the domestics and we have alternative suppliers we can investigate in Korea, but in the event of a failure it would definite have immediate implications for some key component parts for us."

Honda is relatively insulated from problems with suppliers linked to the Detroit Three because all of its key suppliers derive about 80% of their business from Honda, Mendel said. But there is always the concern that those suppliers could lose access to critical parts amid a deepening recession. And Honda has also been forced to slash production by 170,000 units due to the collapse in demand. "We have taken steps in the past to assist suppliers financially, with costs, with personnel and we would be willing to do that again if need be to protect our production system," Mendel said.

Copyright Agence France-Presse, 2009

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