Shaken to the Core

• Author: Stephan Danninger and Kenneth Kang
• Position: a Division Chief and Stephan Danninger is a Deputy Division Chief in the IMF's Asia and Pacific Department.

The economic impact of the disaster is being felt far beyond the immediate vicinity of the quake. Across the ocean at the DARCARS Toyota dealership in Silver Spring, Maryland, seven thousand miles from the source of the earthquake, sales manager Constantin Nicorescu is contemplating the possibility of running out of cars to sell.

“At the moment we are selling overflow inventory from last year, but [if things continue this way], we’ll run out of cars in 2 to 2½ months’ time,” said Nicorescu.

Shortages in integrated circuit systems and vehicle microcontrollers—the computers that control many of the car engines’ electronic functions—have forced production lines into an involuntary slowdown. Toyota has already announced that normal production is unlikely to resume before September 2011.

Typically, the DARCARS dealership receives 300 cars a month. In the next few months, it has been told to expect only 12 to 15 percent of normal inventory, or about 40 cars.

Japan and the global supply chain

The impact of the quake on vehicle production lines illustrates the highly integrated nature of the global supply chain, Japan’s role in that chain, and its importance in a few key industries—notably, vehicle manufacturing and electronics.

For example, Renesas Electronics Corporation is the world’s number one supplier of microcontrollers and produces 30 to 60 percent of car microcontrollers and integrated circuit systems. With factories located in one of the country’s manufacturing hubs in the Tohoku region—the northeastern part of the largest Japanese island—the company suffered a severe blow when the quake and tsunami temporarily knocked out several of its semiconductor plants.

So complex and specialized has vehicle assembly become—a modern-day car requires some 30,000 to 40,000 different parts—that under the kanban “just-in-time” lean inventory system, the absence of a single key component can shut down an entire production line.

The production network in Japan and around the world has become much more sophisticated and interlinked, and thus more vulnerable to a disruption in the supply chain, compared with 15 years ago. So the economic consequences of the quake and tsunami have had a ripple effect on the wider region.

Asian economies are also highly integrated through cross-border production networks with Japan, which is an important supplier of machinery equipment and electrical and semiconductor components. For...