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Automobiles

Honda cuts car production on massive chip shortage

Japan output slashed by 4,000 units this month while February looks 'grim'

Honda fit cars roll off a production line at the automaker's factory in Yorii, near Tokyo in 2013. (Photo by Ken Kobayashi)

TOKYO -- Honda Motor will reduce vehicle production due to a supply crunch in semiconductors, Nikkei has learned, a sign that a pandemic-spurred global shortage is threatening the auto industry.

The Japanese automaker will first shrink production by about 4,000 units this month. The change will mainly affect the Fit subcompact manufactured at a plant in Suzuka, a city in Japan's Mie Prefecture.

There are warnings that the cuts could be worse later in the year. "The period starting in February may be grim," said a source familiar with the matter. The shortage could "impact tens of thousands of vehicles during the January-March quarter on the domestic side alone," the source added.

Honda has apparently run short on semiconductors used in vehicle control systems. As people stay mainly indoors and work from home, demand has surged for chips used in smartphones and computers. As chipmakers focus on meeting that demand, semiconductor supplies to auto parts manufacturers have stalled.

In October last year, Asahi Kasei suffered fire damage at its semiconductor plant in Japan's Miyazaki Prefecture. That has contributed to a shortage in chips for audio components. But the incident apparently is not connected to Honda's production cuts.

"We have secured inventories [for that component] at this moment," said a Honda representative.

Honda will not halt factory operations this month, but the company is expected to limit the daily number of vehicles produced. A cutback of 4,000 autos represents less than 0.1% of the 4.77 million units produced globally in fiscal 2019.

Because the process of procuring material and turning it into semiconductors takes more than three months, adjusting production volume quickly based on demand is a tall order. The coronavirus pandemic caused demand for cars to drop during the first half of 2020. At the time, automakers temporarily cut orders for semiconductors, and the chip suppliers modified production plans accordingly.

The auto market began staging a comeback last summer, especially in China. But semiconductor production capacity has been unable to keep pace.

"The auto market recovery from the COVID crisis was faster than expected" because of economic stimulus measures the world over, as well as people purchasing vehicles to avoid having to take public transportation, said Masashi Okada of the consultancy Arthur D. Little Japan.

Honda has been ceasing production at some global factories to improve earnings of four-wheel vehicles. Last year, the company ended production in Argentina and the Philippines. In India, Honda merged four-wheel capacity at two factories into one. This year, the Honda assembly plant in Swindon, U.K. is due to shut down.

The market recovery from the coronavirus impact has kept Honda's factories busy. In November, global production shot up 11.4% from a year earlier to 457,671 vehicles. In Japan alone, production jumped 22.5% to 64,843 units.

But just as Honda pruned excess capacity and is enjoying the comeback in demand, an unexpected fallout from the pandemic is forcing Honda to hit the brakes on production. 

"Demand from smartphones, 5G base stations, gaming and elsewhere are robust, so there is limited production capacity to devote to automotive semiconductors," said Kazuhiro Sugiyama at British market intelligence company Omdia. The surge in demand from Chinese electric vehicles have contributed to the supply crunch as well.

In Germany, Volkswagen announced last month it will cut back on production in China, North America and Europe due to a shortage in chips. Auto parts suppliers Continental and Bosch have acknowledged that deliveries have been delayed due to the same scarcity.

Some in the Japanese auto industry worry that such a trend will spread in their backyard. "I'm concerned that makers apart from Honda will move to decrease production as well," said the head of a supplier.

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