CCC Information Services, Inc., has released a report written by Lead Industry Analyst Susanna Gotsch discussing the impact of the Japanese tragedy on the automotive claims market:

Industry Report: The Impact of the Japan Tragedy on the Auto Claims and Collision Repair Industry

The devastating earthquake and subsequent tsunami on March 11 destroyed huge swathes of land in northern Japan, with at least 25,600 people killed or still missing. The survivors of the impacted region are trying to cope with all they've lost while working to provide a baseline of civic and economic normalcy.

Among those industries significantly impacted – one critical to the country's economic engine – is the auto industry. Many automakers experienced damage to their research and manufacturing facilities, and have seen new vehicle production slowed or even halted as numerous suppliers also received extensive damage. This dynamic is making it difficult to assess what the long-term impact will be; however, claims data analysis can potentially provide some basic framework for understanding its effect on the automotive claims and collision repair industries.

Slowdown in New Vehicle Production

The automotive industry has been left to assess damage to its own plants, as well as that of its suppliers. Rolling power outages and continued concerns over leaked radiation from the damaged nuclear plant have slowed recovery efforts. The resulting blackouts and brownouts are slowing the manufacturing of machinery, metals and chemicals used in parts production because these processes often require time to warm-up, calibrate or set properly.

Industry analysts estimate that the production of 516,000 vehicles has been lost in the month following the earthquake – 260,000 of which were Toyota vehicles.

Toyota also announced in mid-April that it would keep Japan production levels at 50 percent through early June, potentially cutting another 120,000 units out of production. Days-supply of new vehicles, which had been tight already, has fallen further – particularly among the Japanese-brand stores. Even domestic manufacturers such as GM and Ford have experienced production slowdowns with supply disruptions, all due to supplier part shortages. 

A late-March survey conducted by the Original Equipment Suppliers Association found that 78 percent of respondents had identified that some portion of their product comes from Japan. More than two-thirds of those respondents had yet to see an impact on production schedules, but fully expect some output reduction in the next several months.

Japanese suppliers are key producers of electronic components such as integrated circuits, sensors and semiconductors, as well as integral powertrain components including gears, clutch packs, solenoids and specialty materials. Shortages of electronics and resin-based products have already halted or slowed new vehicle production for many manufacturers including Nissan, Honda, Suzuki, Subaru, Toyota and Fuji Heavy Industries Ltd.

Even automakers that assemble vehicles in the U.S. have seen production hampered by part shortages. And, unfortunately, many of these parts are among the most difficult to quickly swap out with another supplier. High-tech electronic circuits and components that are used in engine control units, antilock brakes, airbags and other systems are particularly hard to resource as they're vehicle-specific and require significant redesign, retesting and recalibration if they have to be resourced elsewhere.

The following are some examples of the impact to date:

• Renesas Electronics Corp., the world's largest manufacturer of automotive microcontrollers, experienced significant damage to one of its two auto-related factories. The microprocessors are used to control electronic components in vehicles such as electronic parking brakes, engine control units, onboard entertainment systems, stability control and power steering. The average vehicle uses anywhere from 30 to 100 microcontrollers. The company initially projected that the factory would be out of commission until July, but is racing to bring production online before that date. Renesas has an estimated 41 percent of the global microcontroller market, with 90 percent of its global capacity in Japan, and nearly 40 percent of its production capacity is estimated to have been lost according to HIS ISuppli Inc. The company plans to shift production to other plants in Japan and Singapore, but that will account for less than half of the Japan plant's capacity. 

• Merck KGaA's factory, which produces key metallic automotive paint pigment called Xirallic, suffered significant damage. Xirallic is a key ingredient in black, gray and red-shade paint colors. This is significant, as PPG Automotive Industries research found that silver was the most popular color in 2010. Silver, gray and charcoal accounted for 31 percent of vehicle-paint choices in North America last year, black and white each accounted for 18 percent, and red came in third with 11 percent. Numerous automakers have stopped taking dealer orders for vehicles of colors that require this ingredient. Ford, GM, Chrysler, BMW and others have restricted dealer orders for vehicles of any colors that use Xirallic, helping to ensure that the supplies of the affected paint available in the market today will be conserved for current in-fleet vehicles versus in the production of new vehicles.

• Freescale Semiconductor Inc., the world's second largest maker of automotive chips, will not re-open its wafer fabrication plant in Sendai, Japan, located near the epicenter of the earthquake. They had planned to close this factory even before the earthquake, and will now pull forward the ramp-up of the transferred manufacturing to plants in Arizona and elsewhere.

Among the outcomes for struggling suppliers could be bankruptcies and the liquidation of smaller, weaker suppliers that are unable to meet payments due to the dramatic slowdown in vehicle production. Suppliers with a lock on any one particular component may be pressed to diversify manufacturing facilities geographically, or even see their customers move portions of business to rival suppliers as a precautionary measure.

Slowdown in New Vehicle Sales?

New vehicle sales in the month of March 2011 were slightly down from the February sales rate, but still up 17 percent from the same month in 2010. The first quarter 2011 seasonally adjusted annual rate of new vehicle sales was 13.1 million units. Analysts point to improved credit and employment figures, lower interest rates and pent-up demand as the reasons for the increase. 

Demand for small cars rose, with small car sales accounting for 29 percent of sales in March, up from 26 percent one year earlier. Industry research group TrueCar.com credits higher gas prices for this shift, and for potentially 500,000 fewer overall units sold in March. Spreading instability in the Middle East has caused oil and gas prices to rise more than 25 percent in the past year, with prices now reaching levels last seen in 2008. In its World Economic Outlook released earlier this April, the International Monetary Fund predicts "increased scarcity" in global oil markets and the risk of additional sharp prices increases in the coming years. 

A fear of vehicle availability in the coming months is also helping lift demand and prices. For example, sales of the Toyota Prius surged 52 percent in March, as media reports projected shortages of the vehicle in coming months. Analysts are incorporating the latest data, now projecting U.S. new vehicle sales at 13 million for the year. The average net per vehicle sold in March was $300 higher than one year prior as incentives have continued to fall, and will likely follow that trend in the coming months. April sales data from CNW Marketing Research Inc. shows automakers and dealers getting the highest transaction prices since 1996, at 87 percent of MSRP.  That's a 10 percent swing from the average transaction price in 2009, when it was 23 percent under MSRP. The speed at which automakers are able to resume full production levels will also have an impact on dealers' pricing power. 

Many of the top-selling Japanese imports have seen production levels fall. According to analysis by Automotive News, of the 20 best-selling Japanese imports (accounting for nearly 1.1 million vehicle sales in 2010), at least 12 have stopped or significantly slowed production as of early April. Inventory analysis by Edmunds.com shows unseasonable drop-offs in inventory for Honda, Nissan, Toyota and Mercedes-Benz.

Will Used Sales Pick Up the Slack?

As the dealer market becomes increasingly concerned with the long-term impact on its ability to get new vehicle inventory, many are beefing up their used vehicle supply. Activity and prices at the wholesale auctions have risen dramatically over the last several weeks. Strong residual values of used vehicles also helps encourage more leasing, because deals require much less subvention on the part of the finance company, dealer or automaker. 

According to ADESA, the average value of wholesale vehicle at auction was $10,543 in March 2011, up 5.1 percent from February, but flat versus the prior year. ADESA's Tom Kontos attributes the crisis in Japan and the rise in fuel costs as the two key factors increasing used vehicle prices quicker than anticipated at the close of 2010. And gas prices have  also helped drive up demand of used small cars, whose supply has fallen to less than 40 days of supply, versus 80 days of supply just a year ago. Even values of light trucks have held up well, despite the $4 per gallon spike in gasoline. Again, this is largely due to significantly lower levels of these vehicles: The supply of used large SUVs is down 35 percent, and used large pickups are down 22 percent from 2008.

Impact on Automotive Claims Industry

The potential outcome of the earthquake to the automotive insurance and collision repair industries  includes a) the inability to get certain replacement parts; b) longer fulfillment time of certain replacement parts driving up claim and repair cycle times; and c) higher vehicle values driving up total loss costs. 

Automakers are scrambling to identify at-risk components and looking for alternative suppliers or manufacturing locales for affected parts when necessary. Everyone is closely watching inventory levels of these at-risk parts, and in some cases slowing new vehicle production to conserve these parts.

Toyota released a list of "Japan Limited Supply Parts" to its dealers soon after the earthquake, letting them know  that they would not be filling any orders of these short-inventory parts to replenish dealer stock. Of the nearly 250 parts included on that list, approximately 90 of them were shock absorbers, along with numerous stereo and electronic components; vehicles that Toyota manufactured in Japan – such as the Yaris, Lexus LS 400, SC 300 and IS 300 models are most likely to contain those parts. These vehicles accounted for less than 0.5 percent of the overall appraised vehicle volume for first quarter 2011. 

Honda has suspended all U.S. orders for Japan-built models such as the Fit, Insight, CR-Z, Civic Hybrid, Acura TSX, Acura RL and a small number of CR-Vs. Some of these vehicles might also potentially be at risk of uninterrupted collision part fulfillment, but these vehicles make up a very small portion of the overall appraised vehicle volume for first quarter 2011 (0.5 percent).

An analysis of "parts ordered to received average days" shows no significant change since mid-March for any of the different vehicle makes. Low volumes of those parts that automakers identified as already having limited supply also makes it difficult to assess whether there has been any impact to date. We will continue to monitor this closely to assess the impact to the industry.

Perhaps the most immediate impact the industry can expect is higher market values for vehicles, which is driving up total loss costs. The average total loss values had been experiencing steady month-over-month increases since late 2009, and the month-to-date increase this month has ramped up further. The vehicles most impacted are the ones that are affected by higher fuel prices and the slowdown in new-vehicle production. These include compact cars, small pickups and mid-luxury SUVs. 

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