At the 27th ASEAN Economic Ministers' (AEM) - METI Consultations (AEM - METI) held online on 15 September, Japan’s Minister of Economy, Trade and Industry Hiroshi Kajiyama expressed concern that supply chain disruptions are becoming a reality. Operating restrictions on the manufacturing industry imposed by some ASEAN member governments in response to the Covid-19 Delta variant raging in Southeast Asia led to supply shortages of certain auto parts, forcing the shutdown of assembly plants worldwide throughout supply chains.
Suspension of operations due to shortages of auto parts spread beyond ordinary automobile manufacturers to light motor vehicle, truck, and bus manufacturers.
The greatest impact will be on Toyota Motor, the world’s best-selling automaker in 2020 with 9.53 million vehicles sold. In mid-July, Toyota announced that it would suspend the operation of one line at one plant in Japan due to a shortage of parts from Southeast Asia. Shortly afterwards, the company announced that it would extend the shutdown to 27 of the 28 production lines at its 14 domestic assembly plants in August and September. As a result, production is expected to decrease by approximately 400,000 vehicles (180,000 in Japan and 220,000 overseas) between September and October. In light of this, the company revised its production forecast for FY2021 down from 9.3 million vehicles to 9 million vehicles worldwide.
Like Toyota, virtually all Japanese automobile manufacturers have been forced to suspend operations one after another since spring 2021. Honda suspended production at its Sayama plant in Saitama Prefecture in March, followed by the temporary shutdown of four lines at three plants in Japan through June. Nissan too carried out production adjustment at three domestic plants between March and April. Suspension of operations due to shortages of auto parts spread beyond ordinary automobile manufacturers to light motor vehicle, truck, and bus manufacturers.
Curtailment of production by final assembly companies affects the companies integrated into their supply chains significantly. According to Teikoku Databank, Japan’s largest credit research agency, the Toyota Group, has a total of 41,427 subcontracting companies (15 major affiliates and subsidiaries) across Japan. Of these, 22,310 are subcontracting companies involved in manufacturing.
If overseas production bases are included, the impact is even greater. There are many automobile and auto parts companies that use Southeast Asia as a global production and export base. In 2020, ASEAN was the eighth largest exporter of auto parts (parts and accessories of motor vehicles, so-called HS8708 in foreign trade) in the world. Japan was ASEAN’s largest export partner making up 17.8% of ASEAN's exports, followed by the US (15.4%) and China (10.2%). Furthermore, auto parts manufactured in ASEAN are exported as far as South Africa, and Mexico and Argentina in Latin America. The “supply shock” from Southeast Asia has spread not only to Japan but also to the world.
Strong supply network fails to avert crisis
Among Japanese automotive manufacturers, Toyota in particular has made the most significant efforts to strengthen its entire supply network, including the development of an alternative production system and the creation of a “visible” supply network.
In 2013, after experiencing the Great East Japan Earthquake and Thailand floods in 2011, the company created “RESCUE” (REinforce Supply Chain Under Emergency), a supply network database of around 400,000 parts for various vehicle types, and suppliers up to the tenth-tier, which can be traced instantly.
Whereas previously it could take several months to identify the type and quantity of missing parts, with RESCUE, it now takes just one day to do this and consider measures to deal with the situation. Even Toyota, which has done so much to strengthen its entire supply network, was unable to avoid this supply shock from Southeast Asia.
Communication with investors needed
In Southeast Asia, the Delta variant has been rampant since the spring of 2021. Even in Vietnam and Thailand, which had been exemplary in suppressing infections, the number of Covid-19 cases has risen sharply. Prior to this, measures taken by countries to control the spread of infection were mainly targeted at individuals, such as restrictions on activities, and took into account the need for manufacturers to remain in business to avoid, as far as possible, any impact on the economy. The latest spread of infection has led Vietnam and Malaysia to introduce measures that have a direct impact on the business operations of companies, with auto parts manufacturers suffering a deterioration in operating rates, resulting in a “supply shock”.
The “supply shock” from Southeast Asia exposed the risk of concentrating production in the countries concerned. If these are perceived as a “country risk,” companies may avoid production in those countries in the future.
Since May 2021, in response to the spread of infection, as well as imposing restrictions on movement, Vietnam has adopted a “factory quarantine” policy as a condition of continued operation, whereby employees sleep and work on the factory premises. Once an employee has gone home, they cannot return to work. A spate of resignations by employees unhappy with this policy ensued, and the operating rate fell.
In June 2021, Malaysia implemented a lockdown, severely restricting production activity in all but those sectors deemed essential by the government. Restrictions on workplace attendance were imposed, including at factories and other production sites, with a maximum permitted rate of workplace attendance in the automotive sector during lockdown set at 10%.
The “supply shock” from Southeast Asia exposed the risk of concentrating production in the countries concerned. If these are perceived as a “country risk”, companies may avoid production in those countries in the future. The governments both in Japan and ASEAN member states need to communicate with investors to promote mutual understanding, intending to restore confidence.
Related: Japan is not decoupling from China | Wake-up call for ASEAN countries: Curb over-reliance on China and seize opportunities of global supply chain restructuring | Shifting supply chains from China to Southeast Asia is hard but necessary