When Kaoru Eguchi, deputy general manager of Nissan's Iwaki plant, saw the damage after the March earthquake, he thought the plant was finished.Junko Kimura for The Globe and Mail
As a resident of eastern Japan for much of his life, Hikaru Kawasumi has lived through more earthquakes than he can count.
So the 59-year-old Nissan Motor Co. Ltd. employee thought the March 11 tremors were routine – until the desk under which he had sought shelter slid away from him.
"I thought the building would collapse and come crashing down," Mr. Kawasumi recalled as he guided visitors on a tour of the engine plant in Iwaki, Japan, one of a handful of auto plants close to the epicentre.
The factory did not collapse. It did, however, suffer severe damage, and it would have been worse if not for three employees who rushed to put out a fire that had been started by spilled molten aluminum.
Today, a clock that crashed to the floor on that horrible day is on display in the lobby, stopped permanently at 2:46, the time that marked the start of a two-month shutdown in Iwaki and the beginning of an annus horribilis for Japan's auto makers.
Most of the industry followed the Nissan plant into a months-long period of shutdowns that spread to Japanese auto makers' factories around the globe. The quake caused Toyota's first quarterly loss in two years and profits fell at both Honda and Nissan; all told, the cost of the disaster ran into the billions of dollars.
The lost production, which led to shortages of popular models such as the Canadian-built Honda Civic and Toyota RAV4, accelerated an already disturbing erosion of market share that began in the trough of the recession at the end of 2008. The losses have sliced five percentage points from the Japanese share of global auto sales, cutting nearly 3.2 million vehicles from its manufacturers' annual sales – nearly the equivalent of Honda Motor Co. Ltd.'s entire global sales in a year.
The economic aftershocks from the quake rippled around the world; the disaster caused havoc in a wide variety of industries. The quake created shortages of electronics, cameras, and other consumer goods – along with the computer chips that control them – that find their way from Japan into almost every household in the world's richest nations. The quake's impact was so far-reaching that it contributed to a 0.5-per-cent decline in Canada's gross domestic product during the second quarter, and, for a time, snuffed out what little momentum remained in the tepid U.S. recovery from recession.
It has taken many months to recover the lost growth. No industry felt the pain like Japan Automotive Inc. – but perhaps no business has made as remarkable a comeback.
In the midst of its gravest crisis, the industry turned to the same principles that had turned it into an international powerhouse, one that has been widely examined as a case study of how to build a global champion. In the days and weeks after the quake, Japanese companies put into play the well-honed doctrines of problem-solving, continuous improvement, root cause analysis and teamwork – extending even to co-operation between rivals that battle each other mercilessly in the marketplace.
After months of silence, even the most badly damaged plants – such as Nissan's Iwaki factory – sprang back to life and began cranking out engines, transmissions, cars and trucks. And even long-time senior executives who grew up with the Japanese Way of doing things marvelled at the industry's ability to recover.
The Japan-based companies are back at full production again and dealers in Canada, the United States and elsewhere are stocking their lots with new vehicles.
But in the long run, recovering from the catastrophes of 2011 – the quake and the recent flooding in Thailand, which put a Honda plant under water and disrupted parts supplies for weeks to it and other Japan-based companies – may be the least of the challenges for the auto makers.
Now Japan's auto makers must fight a tougher battle – halting that decline in market share and winning back consumers who have flocked to the resurgent Detroit Three, insurgent South Koreans and ambitious Europeans, including one German manufacturer determined to be the world's largest auto maker by 2018.
And the attempt to recover runs up against not only the surging yen, which saps profits, but also the harsh reality that economies around the world are teetering and central bankers are berating consumers about adding to their already high debt burdens.
The comeback bid will be driven by a flood of new models and a focus on new technology, and will shape the competitive landscape for the global automotive sector in 2012 and beyond.
The earthquake
Karou Eguchi, deputy general manager of the Iwaki plant, was enjoying a day off 150 kilometres away when the earth shook that Friday afternoon in March.
The quake caused such traffic chaos that it took him 13 hours to return to his home near the city of 350,000, about 200 kilometres south of Sendai, the port that featured in television news reports with footage of the tsunami pounding ashore.
When he arrived at the plant the next day, he figured it was finished. The floor in the crankshaft machining shop had buckled and cracked and part of it fell 15 centimetres. Parts of the ceiling had collapsed. Overhead conveyor belts had fallen. Equipment was toppled over.
"I first thought it would not be possible to resume production in this plant any more," Mr. Eguchi said. "I wanted to believe that it was just a dream instead of a reality."
More than 500 kilometres away in Toyota City, Atsushi Niimi felt such a strong and lengthy sway in the 14-storey glass and steel headquarters of Toyota Motor Corp., that he thought the epicentre was nearby. Once damage reports began arriving, the Toyota executive vice-president had the same grim thought as Mr. Eguchi.
"I just gave up coming back to a normal situation this year," Mr. Niimi said.
The damage from the strongest earthquake in Japanese history, which measured 9.0 on the Richter scale, was severe and widespread. More than 15,000 people were killed. The videos of the tsunami washing ashore and hurling fishing boats tens of kilometres inland near the port of Sendai were riveting.
The explosions at the Fukushima nuclear power plant caused power shortages that would last for months.
Millions of people were affected in less dramatic ways. Train and subway service was halted in the Tokyo area, for example, which led to some Nissan employees walking 20 kilometres or more from the company's head office in Yokohama to get home and check on their families.
The most severe damage sustained by Honda was at a research and development facility in Tochigi, about 100 kilometres inland from the coast and southwest of Sendai. One employee at the centre, which includes a design studio, wind tunnel and crash test operation, was killed when a wall collapsed.
Yoshiharu Yamamoto, president of Honda R&D Co. Ltd., was unable to reach anyone in the facility by telephone and wanted to drive up to Tochigi from Honda R&D's head office in Wako, northwest of Tokyo, but could not because of traffic chaos.
He managed to get his hands on a helicopter the next day. The flight revealed cars scattered haphazardly around the property.
"I always tell my people that they need to put things in order, keep them neatly," Mr. Yamamoto said. "So I thought maybe I should go down and tell them that things need to be in order, I should scold them."
When he landed, he realized the earthquake had strewn the cars about. The damage inside parts of the centre was so serious that he was not permitted to enter.
Burying the hatchet – temporarily
As damage assessments flowed in, it became clear to Mr. Yamamoto, Mr. Niimi and other senior executives among Japan's Big Three that while the effects on their own plants were less severe than they originally feared, they could not get critical information from suppliers.
Soon after the quake, Mr. Niimi told Toyota's chief executive officer, Akio Toyoda, that looming production shutdowns caused by the disaster would eliminate 2 million vehicles in 2011 or nearly one-quarter of the auto maker's global output.
By Monday, March 14, parts shortages were multiplying and assembly plants had to be closed. What made it worse was that communicating with suppliers by telephone was virtually impossible and all the auto makers were trying on their own to reach parts makers, said Toshiyuki Shiga, chief operating officer of Nissan, in an interview at the company's headquarters in Yokohama.
That's when the auto makers went back to a concept known as genchi genbutsu, which roughly translated means: Go and see what the cause of problems is. Don't rely on second-hand reports.
It's one of the key doctrines espoused by legendary Japanese manufacturing guru Taiichi Ohno, credited as the father of the Toyota production system that has become the gold standard for how to run assembly lines.
Putting that principle into practice, Toyota sent 150 people to 200 sites in the earthquake zone to find out what was happening, Mr. Niimi said.
Those people were designated as leaders and were given a great deal of authority.
"If the leader required a person do a job, we just dispatched those people," he said. "If we couldn't find a capable person located in Toyota, we just found a capable person outside Toyota and dispatched them. If the leader told us we needed material, we just purchased that material."
Japanese people are noted for their teamwork, Nissan's Mr. Shiga said, but in this case it extended across the industry. He called Mr. Toyoda, Honda president Takanobu Ito and others to convince them that it would be easier to find out what was happening at suppliers if the industry acted as one group through the Japan Automobile Manufacturers Association.
So began an extraordinary collaboration by companies that normally fight each other for sales.
The executives soon found there were problems at plants that produced 500 separate parts. Semiconductors, rubber components and chemicals that served as raw materials for some parts were in critically short supply.
In Iwaki, the call went out to other Nissan plants and suppliers for help. About 200 people from the plant's own work force, another Nissan factory and a supplier showed up the Monday after the quake and began repairing wiring, plumbing, ceilings and floors.
The situation at Iwaki was complicated by the explosion at the Fukushima nuclear plant about 100 kilometres away. Iwaki municipal government officials ordered employees to remain in their homes.
Truckers refused to drive into the area to deliver food and fuel. So Daisuke Kinugasa, manager of the plant's administration section, and other managers decided to ration to employees the gasoline that is normally used to fuel five-minute idling tests on every engine the plant produces.
Teams worked to restore operations in separate departments such as machining, casting, cylinder heads and crankshafts and began competing with each other to restore their section of the plant more quickly, Mr. Eguchi recalled.
By April 11, the plant was ready for limited production when a 7.1-magnitude aftershock rattled the area, opening up cracks on the floor that had already been fixed and damaging other parts of the plant that had been repaired.
"We needed to start from scratch once again," Mr. Eguchi said.
The good news was that by mid-April at Nissan's headquarters, cross-functional teams from purchasing, engineering, research and development had made progress on shrinking the list of unavailable parts. More suppliers had come on stream, and Nissan officials were able to get better information from others.
To get a final determination of what parts might still be a problem, Mr. Shiga said they decided to start vehicle assembly again. That would mean suppliers would have to ship parts. If they weren't able to, Nissan would know exactly where to focus its attention.
It became clear that one commodity the auto makers were desperately short of was microcontrollers, the chips that send electronic signals from the accelerator to the carburetor and the brake pedal to the brakes. There are four chips that control just the functions in a car door.
The cheapest car has 100 chips and high-end vehicles such as those sold by Toyota's luxury Lexus division and by Mercedes-Benz and other luxury brands have 400 to 500 chips, said Shuichi Inoue, general manager of the process technology division of Renesas Electronics Corp.
As the largest supplier of microcontroller units to auto makers in Asia, including Japan, Renesas has about 35 per cent of the market. Its plant in Naka, about mid-way between Tokyo and Iwaki, was severely damaged.
Because of widespread rebuilding throughout Japan, Renesas was unable to get drywall to rebuild the "clean room" at its Naka plant, where microcontrollers are fabricated in a high-technology process and a sterile environment. It was also having trouble getting water pumps to replace those that were damaged during the quake.
So the auto makers collaborated again, using their size and muscle to get Renesas the drywall it needed to rebuild the clean room, Mr. Inoue said.
The co-operation between rivals extended into the summer when the Japanese government ordered a number of industries to stagger their production to cut down on electricity demand. The auto makers agreed to shut their plants and offices on Thursdays and Fridays through the summer and have them operate on Saturdays and Sundays instead.
The level of teamwork within Toyota impressed Jeffery Liker, a University of Michigan professor who has written several books on the company.
"It was remarkable how within one month they went from 500 parts missing to 100 parts that they couldn't account for," said Prof. Liker, who doubts that U.S. auto makers would have been able to recover as quickly from a similar disaster.
He ascribes it in large part to culture. "I'll give you an equation," he said. "It's culture, times technical knowhow, times absolute will."
Lessons learned, future challenges
Another guiding principle of Japanese auto makers is to learn from adversity, and they are already trying to implement some of the lessons of 2011.
The twin disasters of the earthquake and the Thailand flooding have given them a much more extensive and intricate knowledge of their supply base, an understanding that was previously confined to direct suppliers but now extends down to the third- and fourth-tiers. Executives hope this means that after the next earthquake, they won't have to spend weeks or months finding out what part comes from which plant located where.
They are requiring some suppliers to keep slightly more inventory on hand than they do now. They will also insist that suppliers have the capability to move tools and dies to another factory to produce parts if a plant producing those parts is damaged.
Mr. Shiga of Nissan acknowledged that building in such redundancies goes against one of the key strengths of the Japanese production system – lean production and low inventory. "But this is also not good for disasters," he said. "It was proven."
Arguably, there is more pressure than ever on Japanese auto makers to be efficient and low-cost. Their North American rivals are stronger now – thanks in part to the Chapter 11 bankruptcy restructuring that enabled two of the Detroit Three to flush tens of billions of dollars of debt from their balance sheets.
The Detroit companies and virtually every other global auto maker, from Hyundai Motor Co. of South Korea to Volkswagen AG of Germany, have also vastly improved the quality of the vehicles they offer, reducing what was once an overwhelming Japanese advantage.
"That's why they have to do something else," veteran Japanese analyst Koji Endo, managing director of Tokyo-based investment firm Advanced Research, said of the Japanese companies. The challenge for Japan is finding that "something else" – that new competitive edge.
Winning back the market share they have lost over the past three years is critical to restoring profitability, and is one reason why there was so much urgency to getting the factories running quickly again after the earthquake. Without a steady stream of profits, Japan's auto sector won't be able to finance the innovations it needs, to compete today and to cope with the big threats that loom on the horizon.
The short-term response is a deluge of new and redesigned models. That includes some vehicles whose arrival in the key North American market was delayed because of the quake, notably the redesigned version of Honda's CR-V crossover, which is its second-best selling vehicle in Canada and No. 3 in the United States.
Looking further out, the Japanese companies will attempt to regain the technological edge that enabled Honda to become the global leader in engine technology and Toyota to capture the hearts of green drivers with the hybrid Prius.
Nissan has introduced the electric Leaf, making a big bet that battery-powered vehicles are the future.
Toyota is pushing its hybrid technology forward with plug-in hybrids. Honda and Mazda Motor Corp. are pressing forward with new innovations to increase fuel efficiency and cut emissions. And in a major acknowledgment of how the world has changed, Toyota has abandoned its resistance to diesel-powered vehicles and signed a deal with rival BMW AG of Germany to jointly develop diesels for Toyota.
But even with all that, a new threat is emerging for Japan Auto Inc. – China.
Mr. Endo recounts a telling conversation he had with Chinese government officials.
He was told that Beijing wants three of its auto makers to be listed among the top 10 global car manufacturers by 2030, but the officials did not believe China can catch the Japanese, Americans or Europeans in conventional gasoline engines.
That means the world's most-populous country will focus on battery-powered or plug-in hybrid vehicles and is able to do so without the constraint of investors demanding an immediate return.
"In order to do that, the Chinese government is ready to spend as much money as possible," Mr. Endo said. "So Toyota has to compete against the Chinese government – not just Toyota, but Nissan, everyone. That's a tough thing." The rebuilding of Japan Automotive Inc. has only just begun.
______________________
THE LUXURY FACTOR
Japanese companies held 31.5 per cent of the global auto market when the recession sent the industry reeling at the end of 2008.
By Sept. 30, 2011, that share had fallen to 26.4 per cent amid the recall crisis that battered Toyota for most of 2010, which was followed by the production cuts caused by the Japanese earthquake and tsunami and Thailand floods, and then the soaring yen.
Not all companies have been hurt. Nissan, for example, now holds 5.4 per cent of the global market compared with 4.9 per cent in 2008.
By another measure, however, the quality of Nissan's share has deteriorated – as has that of Toyota.
That measure is luxury sales. Sales by Nissan and Toyota's luxury brands – Infiniti and Lexus, respectively – represent a smaller percentage of those companies' total sales in the U.S. market than they did a year ago.
After leading the U.S. luxury rankings for the past several years, Lexus now trails BMW and Mercedes-Benz in one of the largest and most lucrative markets.
Acura, Honda's luxury division, is being pressed hard by Audi for the No. 4 spot among offshore brands in the U.S. luxury race.
Those brands are also laggards in some growing markets. Lexus, for example, badly trails Audi and other Germany-based luxury auto makers in China.
Greg Keenan