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CCC Information Services Gauges Effect of Japanese Tragedy on Automotive Market

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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:

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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.

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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.

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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.

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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.

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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. 

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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.

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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.

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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. 

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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. 

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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. 

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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.

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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.

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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. 

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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.

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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. 


More information:

Read the latest edition of CCC’s Crash Course

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