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The March 11, 2011 earthquake and tsunami that rattled Japan is having a major negative effect on the country’s auto industry. The tragedy hobbled assembly work and damaged factories at Toyota (TM), Honda (HMC), and Nissan (NSANY). Both Toyota and Honda believe that they won’t be able to fully restore production until at least the fourth quarter of this year, though Nissan expects to return to normal production by June. While most automakers around the world have reported some adverse effect on operations from disruptions at Japanese parts suppliers, Toyota and Honda have been hurt the most.

We believe Toyota has been the hardest hit by the disaster. The company has a relatively low overseas production rate, meaning that a large share of its auto manufacturing is done in Japan. This is a major problem, given the issues in that country. Not only have many of its parts suppliers suffered significant damage to their plants, but Toyota has also had to deal with considerable power shortages, which have limited production capabilities.

We believe Toyota likely lost production of roughly 300,000 vehicles in Japan and 100,000 overseas from mid-March through the end of April. April vehicle sales plummeted 69%, and we think the company may post a loss of nearly $2 billion for the quarter ending June 30th. Inventory at overseas plants will likely be depleted sometime during the second quarter, and production probably won’t return to normal until November or December. In fact, production at all its Japanese plants has only been running at about half capacity since April 18th.

Significant parts shortages will also continue to hurt results at Honda. We think output will remain at 50% capacity through June and we look for double-digit declines in volume in both Japan and the United States. Management indicated that production outside Japan will be made on a case-by-case basis according to the availability of parts. This situation will no doubt severely hurt operating results, particularly given rebounding U.S. demand, which the company will not be able to fully profit from. All told, we don’t expect production levels to return to normal until the end of this year.

On a positive note, Honda has a much higher overseas production rate than Toyota, which should allow it to recover more quickly than its competitor. Even though supply constraints will temper production at some of its U.S. and European plants, these facilities have not been damaged like many of Toyota’s Japanese operations, and this should give it an edge over its rival.

Nissan seems to be in slightly better shape than either Toyota or Honda. Although the earthquake is no doubt putting a strain on capacity utilization, only one of its plants was directly damaged. It is still dealing with supply shortages like its competitors, so we believe it will post an operating loss for the June quarter. The automaker expects operations to return to normal by June, a few months ahead of its rivals. This could represent an opportunity for Nissan to gain market share on its rivals.

All told, the tragedy that hit Japan on March 11th will no doubt have a significant adverse impact on results at Japan’s three major automakers. Operating losses are almost certain at all three during the June quarter, and may extend another quarter or two for Toyota and Honda. It is difficult to tell how long it will take parts suppliers to get back to full capacity, but this a major concern, particularly given the overall rebound in global auto demand. American manufacturers, including Ford (F) and General Motors (GM), have posted strong profit gains for the March period, and it may be a while before Japanese car manufactures can profit from these improving global demand trends. 
 
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.