Tsunami: The aftermath

Editor's note: The March 11, 2011, earthquake and tsunami that hit Japan hammered the auto industry. Asia Editor Hans Greimel, who covered the disaster extensively, reports on the industry response -- and the struggle of a dealer who was in harm's way.

OTSUCHI, Japan -- When the earth finally stopped convulsing and the tsunami sirens began to wail, a familiar drill unfolded for Mazda dealer Eishi Kuramoto.

Get the cars to higher ground -- just in case.

In this port city along Japan's northeast coast, tsunami warnings come and go, always without mishap. So, he thought, why should this time be any different?

But as he started evacuating cars from his main store, black water began gushing over the tarmac.

"Forget the cars," the normally soft-spoken dealer yelled to his staff. "Save yourselves!"

When his last employee had fled before the rushing waves, Kuramoto scrambled into his black Mazda CX-7 crossover and raced for his home in the harbor district, hoping he would be in time to whisk his wife and two young daughters to safety.

Like Kuramoto, the rest of Japan's auto industry was caught off guard by last spring's unprecedented earthquake-tsunami double punch. But one year later, lessons from the March 11, 2011, disaster have piled deep for automakers, suppliers and dealers alike.

And it has changed the way they do business.

Automakers and suppliers are double-sourcing more parts, reinforcing factories, moving facilities from flood plains and improving emergency plans. They are even stockpiling bigger inventories -- anathema to believers in Japan's just-in-time manufacturing ethos.

Japan's car industry has spent decades quake-proofing its operations. But last year's turmoil showed just how far they have to go. Rolling out new, improved measures has only begun and will take years. Meanwhile, executives warn it's a matter of when, not if, another big temblor will rock the manufacturing heartland between Tokyo and Nagoya.

"We have just started to discuss how to deal with it," says Fumihiko Ike, senior managing officer and disaster task force chairman at Honda Motor Co. "All we can do for the time being is pray another problem won't happen again."

Kuramoto, president of Lotas Kuramoto Mazda, a three-dealership group, knows that even the best preparation can fall short. He managed to pick up his family, but the roads out of town were choked to a standstill with frantic drivers. "It was like the disaster movie Armageddon," he says.

His wife directed him down an alternate route on roads built more for bicycles than cars. When they arrived at the hillside rendezvous point to meet other dealership employees, they still hoped they would see their business again.

Two people were missing: a female employee and Kuramoto's 81-year-old grandfather, founder of the family's dealership business. No one knew where they were.

Suddenly ear-shattering explosions boomed through the air as the tsunami ripped through the town below, igniting household propane tanks and gasoline stations.

"Even then, I thought my house and dealerships would be OK," Kuramoto says. "But soon I saw buildings and cars that were on fire just floating by us. That's when it hit me."

When the waters subsided, they had wiped out Kuramoto's home and two of his dealerships. The tsunami had swept all 90 of his cars, the missing employee and his grandfather to sea.

When the grandfather's body washed up weeks later, Kuramoto had to make the identification at a makeshift morgue in the same gymnasium where he had graduated from middle school.

Getting started again was an immense task for Kuramoto, and for the industry.

Broken supply chains crippled auto output until late summer. The Achilles' heel was soon identified.

Automakers thought they had hedged risk by diversifying Tier 1 and Tier 2 suppliers. They had assumed the supply base looked like a tree's roots, spreading out further down the line. But the supply chain was actually more diamond shaped, with rival suppliers turning to the same subsuppliers for parts. These Tier 3 and Tier 4 suppliers were all but ignored by the carmakers themselves.

Key bottlenecks were Renesas Electronics Corp., a maker of microcontrollers for everything from engine control systems to onboard telematics; and Merck KGaA, a paint pigment maker whose lost production forced carmakers to cancel orders for vehicles of certain colors.

Japan's automakers now are racing to spread risk. But finding alternative suppliers and new manufacturing locations will take years.

Honda, for instance, had just started the process when massive flooding in Thailand last fall forced it to put the overhaul on hold.

Since the quake, Toyota Motor Corp. has cataloged nearly 1,000 at-risk parts that could be trouble in the next disaster, says Shinichi Sasaki, Toyota's global procurement chief. It has identified another 300 supplier factories in precarious locations -- straddling fault lines or lying in the path of a potential tsunami.

"It was quite delusional of us to have thought before the quake we had a good grasp of the supply chain," Sasaki said.

Toyota has more than 500 Tier 1 suppliers in Japan, including global companies operating here. Since the quake, about half have cooperated by detailing their supply chains to Toyota. But the other half refused to share, saying it was proprietary information, Sasaki said.

"Half of that is black-boxed to us," he said.

By the end of March, Toyota plans to decide how to shore up the weak links it has pinpointed. The company wants to fix them by autumn, Sasaki said. Steps will include asking suppliers to make the same part at multiple locations or getting the same part from different suppliers. Toyota may even carry larger inventories of sensitive parts.

The company also wants to commonize about half of the about 5,000 parts in a car, Sasaki said. A top goal: lower per-part costs to offset the higher costs of duplicate manufacturing plants.

"Risk control must not lead to higher costs," he said of the push for common parts. "This process takes time. ... Four years is the time frame I have in mind."

Kuramoto, 31, became president of the dealerships just eight months before the quake. Despite his loss, he was lucky in some ways.

Because Mazda Motor Corp. has its assembly plants and supplier base in western Japan, far from the quake zone, it wasn't as badly hurt as rivals such as Toyota or Honda. While dealers worldwide were screaming for shipments of new vehicles, Kuramoto at least received a steady trickle.

The real eye-opener was the surging demand for used cars -- a key lesson for dealers anywhere who are affected by disasters.

Throughout northeastern Japan, an estimated 410,000 vehicles were rendered junk by the quake and tsunami. Survivors craved cheap replacements for immediate use. Used-vehicle prices exploded by as much as 40 percent for months after March 11.

Dealer friends in unaffected areas sent Kuramoto charity shipments of vehicles to sell.

And fortunately for him, he had a place to sell them. The smallest of Kuramoto's three stores was gutted by waters that reached the ceiling. But the walls were standing.

For the next three months, employees cleaned the debris-clogged service bays and repaired the shattered office. They reopened shop June 25 -- with eight cars.

Because of the disaster, sales of new and used vehicles for the dealership group in 2011 climbed to 400 vehicles, compared with 300 in a normal year.

In fact, when Japan's assembly plants started coming back on line in the summer, new-vehicle sales began to boom across the six quake-hit prefectures in northern Japan. From September until year end, sales there surged 28 percent to 136,735 units.

Kuramoto's next move: Rebuild one of his lost stores. But that plan is on hold as the city debates building a new tsunami wall and highway.

Japan is a tectonic time bomb. For the industry, rebuilding goes hand in hand with reinforcing against the next disaster. Japanese scientists say there is a 70 percent chance of a 7.0-magnitude earthquake hitting the Tokyo region in the next 30 years.

The March quake was a 9.0, but even a 7.0-magnitude rumble could devastate the densely populated industrial center around the nation's capital.

Honda, Subaru and Mitsubishi have their global headquarters in Tokyo, while Nissan and Suzuki have theirs in the central-eastern part of the country.

Meanwhile, the quake-prone coastal stretch known as the Tokai region, between Tokyo and Toyota's head office, just outside Nagoya, is the fragile backbone of Japan's manufacturing center, including auto manufacturing. A monster quake strikes Tokai about every 150 years. One last battered the region in 1854. If the pattern holds, the next one is overdue.

"A strong localized quake is now a hot topic in Japan," says Honda's Ike, warning that one erupting in central Japan would have far worse consequences than last year's quake in the relatively remote north. "It's too scary to think about."

Like many automakers, Honda is reviewing every building with an eye for weak points.

The company's global r&d center in Tochigi, north of Tokyo, remained standing after last year's quake. But the ceiling of the sprawling third-floor body design unit came crashing down on workers, and the damage derailed development programs. A wall of the cafeteria next door also collapsed, killing one worker.

"Japan's earthquake resistance standards are valid only for the building," Ike says. "Standards for things like suspended ceilings are vague with no numerical targets.

"We will revise them all. It may take a few years, perhaps four."

Honda also will renovate plants to resist stronger quakes, but hasn't started yet.

"The employees working at places like Tochigi are still traumatized," Ike said. "So from the viewpoint of emotional care, it is the company's responsibility to provide an environment in which they can work safely with peace of mind."

Honda's renovations will cost tens of millions of dollars, he said.

On March 5, just before the quake's anniversary, Nissan Motor Co. held its annual disaster simulation drill -- with some significant upgrades. COO Toshiyuki Shiga led about 100 people in troubleshooting the initial fallout from a hypothetical earthquake expected to hammer the Tokai region and trigger 16-foot tsunamis.

In the past, Nissan didn't simulate damage from the killer waves. This year it assumed its seaside Oppama plant, which makes the Leaf electric vehicle, would be under water.

"This time we're simulating large tsunami damage -- to life and facilities," Tadashi Sugawara, senior manager of corporate risk management, said after the drill. "That's probably closer to reality."

The rehearsal also for the first time roped in key Nissan transmission supplier Jatco Ltd., which has plants up and down the tsunami-exposed coast.

Despite stepped-up rigor in preparing for the worst, the company still discovered gaps in its coverage. Shiga said Nissan still needs a better grip on logistics. Highways, ports and railroads can expect heavy damage, but how to cope?

"That's our homework," Shiga said.

A survey of Japan's largest automakers shows they all plan to better reinforce factories and offices against quakes. But few offered specifics or promised timelines.

The new safeguards vary.

Subaru went without e-mail for several days because its server was in an area affected by blackouts. Now the server gets a dedicated power generator.

Mazda, long assumed to be out of harm's way in seismically quiet western Japan, is putting its earthquake plan in writing and stepping up disaster drills.

Mitsubishi and Suzuki have the bulk of their operations along the Tokai region's sliver of flatland next to the sea. Now they are getting more serious about tsunami risk.

Mitsubishi is studying facility relocation -- including its car pools near the coast.

Suzuki decided to invest ¥50 billion, or about $618.5 million, to build a technical center and assembly plant farther inland, out of a tsunami's reach. The r&d center opens in 2016, the plant in 2017.

"With the lesson learned from the earthquake which hit Japan in March 2011, Suzuki will disperse the risks from the anticipated Tokai earthquake, assumed to occur in the Tokai district, the area where Suzuki's hub is concentrated," the company said when announcing the move.

Most Suzuki facilities are about two miles from the Pacific Ocean, and some are only 220 yards from the shore.

Another consideration for Suzuki: The nearby Hamaoka nuclear power plant.

Suzuki's Sagara assembly and engine plant lies less than 12 miles away. If Hamaoka gets whacked by a quake -- as the Fukushima nuclear plant was last March -- Suzuki's operations there could be swallowed by a no-go radiation zone.

Chairman Osamu Suzuki bemoaned his company's risky neighborhood last year, telling reporters, "We need to scatter because we are trapped."

"But we don't have enough money to relocate all of them at once," Suzuki said.

The quake broadsided balance sheets.

Toyota, Honda and Subaru expect operating profit to tumble in the fiscal year ending March 31. Mazda warns it will swing to a loss.

Much of that financial damage is done by the yen's surge against the dollar and euro. But the quake alone cost Japan's seven biggest automakers a combined $5.6 billion over the fiscal years ended March 2011 and March 2012.

For quake-wracked dealers, there was an even tighter cash crunch.

Kuramoto estimates his losses at $2.47 million. Insurance covered only 10 percent of that. And to reopen by June, he had to shell out another $371,100 to repair the shop and restock with the eight initial cars.

But in towns up and down Japan's Pacific coast, the human cost was highest.

The morning of the quake, the fishing town of Otsuchi had 16,085 villagers. The next day, 1,254 people -- 8 percent of its residents -- were dead or missing.

The hamlet is wedged into flatland between towering mountains that dip into the sea. And the narrow bay channeled the 39-foot tsunami through downtown with devastating effect.

A year later, Otsuchi resembles post-World War II Hiroshima -- a ghost town of crumbled concrete foundations where acres of buildings once stood.

About 100 of the 3,600 customers in Kuramoto's database died.

And after all the turbulence and suffering of the past year, those who remain have become different buyers. Gone is the appetite to haggle about prices and add-ons.

In the post-quake world, dealers throughout the disaster region -- Kuramoto and rivals -- are shifting to one-price models, in deference to fellow disaster victims.

"Their mind-set has changed. People are turned off by the hard sell," Kuramoto says. "It felt bad enough to do that before the quake. It feels even worse to do it now."