The auto industry could lose $60 billion in sales this year because of the scarcity of semiconductors. Toyota’s exhaustive monitoring of small suppliers led it to stockpile early.
When the Tohoku earthquake triggered a tsunami that struck Japan’s northeastern coastline in March 2011, killing more than 15,000 people, Toyota Motor Corp. spent half a year struggling to get back on its feet. One of the biggest hurdles: Tokyo-based Renesas Electronics Corp., a major producer of chips for the automotive industry, saw its main plant knocked offline for three months after the tsunami, sparking a supply squeeze that rippled through the industry.
As Toyota scrambled to repair its facilities and procure missing parts, it also pored over its supply chain to identify the most at-risk items in the hope of preventing a similar disruption in the future. The automaker came up with a list of about 1,500 parts it deemed necessary to secure alternatives for or to stockpile. The company also put in place an intricate system to monitor the vast network of suppliers that produce those items—and the smaller companies those suppliers buy materials from—to develop an early-warning system for shortages.
A decade later, that deep contingency planning is being put to the test. The world’s automakers have for months been grappling with a pandemic-induced shortage of semiconductors that threatens to knock about $60 billion off the industry’s global sales this year. On March 19 the situation got even worse, when a fire broke out at a giant Renesas chip plant in Hitachinaka. The damaged factory, which could take at least 100 days to get back to normal production, accounts for about 6% of global automotive semiconductor output, according to Barclays Plc. Toyota is one of Renesas’ largest customers.
During the industry crisis this time, however, Toyota’s bolstered inventories and steadier control over its supply chain mean it’s better positioned than many of its rivals. Toyota is in the process of gauging the extent to which its output will be affected by the fire but for now says it doesn’t see an immediate need to halt production.
Toyota President Akio Toyoda addressed the chips shortage last month at a briefing in his capacity as chairman of the Japan Automobile Manufacturers Association. Amid a global dearth of semiconductors, “there are automakers that are really struggling and others that are not scarred as deeply,” he said. “What’s proven important: very close communication between automakers, chipmakers, and the part suppliers that rely on those chips.”
Toyota’s ability to carefully manage its supply chains has helped it trudge through not only the chip shortage but also the past year in general, as pandemic-related disruptions threatened the industry’s access to everything from fibers used in air bags to the ships needed to transport its vehicles to foreign markets, says Nakanishi Research Institute head Takaki Nakanishi.
Other automakers haven’t been so lucky. Suzuki Motor Corp. on April 5 said it’s freezing production at two car plants because of chip shortages. Stellantis NV, the parent company of Chrysler and Fiat, on March 26 said it plans to idle five factories in North America starting on March 29 through early to mid-April, while Ford Motor Co. is temporarily shutting its Dearborn, Mich., truck factory. “The semiconductor crisis is one that everyone in the world could have avoided,” Nissan Chief Operating Officer Ashwani Gupta says. The problem is many automotive companies didn’t rigorously manage their supply chains when it comes to Tier 3 or Tier 4 suppliers. “We often don’t know the risks down there,” he says. Nissan is now looking to improve its digital supply chain management tools. “Every expert is good at backward analysis,” Gupta says. “It’s harder to look forward. Nissan has learned from this.”
The chip shortage sneaked up on many of the world’s biggest automakers precisely because it originated several layers below the top, among the chipmakers and foundries that big chip manufacturers outsource production to. Giant carmakers generally deal directly with only their first- and second-tier parts suppliers, which include major companies like Continental AG and Robert Bosch GmbH. Those big parts makers in turn communicate with smaller automotive-chip designers.
Toyota asks its Tier 1 suppliers to input detailed information about their most obscure parts and materials providers in a complex database that it maintains. Using this system to glean information about, say, a single headlight Toyota purchases for one of its cars, it can get information as granular as the names and locations of the companies that make the materials that go into surface treatments used on those headlights’ lenses and even the producers of the lubricants used on the rubber pieces in the assembly, Toyota spokeswoman Shiori Hashimoto says.
These lines of communication alerted the company early on that it needed to stockpile chips. “The process of making semiconductors is complex, and the facilities used to create them are specialized,” Hashimoto says. “With that in mind we’ve needed to make sure there’s enough stock to cover a period of potential supply disruption.”
The auto industry has for decades embraced just-in-time inventory management, wherein many components reach assembly facilities only days or even hours before they’re needed. But the Tohoku earthquake’s aftermath pushed Toyota to increase flexibility, and the value of inventory Toyota carries has almost doubled since 2011. Speaking at a briefing in February, Toyota Chief Financial Officer Kenta Kon said as part of the company’s business continuity plans, it keeps as many as four months of stock for some crucial components such as chips. Toyota didn’t expect the semiconductor shortage to disrupt production in the near term, he said.
That show of optimism came just one day after Japanese rivals Honda Motor Co. and Nissan Motor Co. disclosed they expected to sell a cumulative total of 250,000 fewer cars through March, in large part because of their inability to secure enough chips. Toyota, by contrast, is likely to account for only a “minor” share of the roughly 500,000 units estimated to be knocked off Japanese automakers’ output amid the shortage, according to a report from Mitsubishi UFJ Morgan Stanley Securities Co.
Toyota appears to be handling the shortages even better than it initially expected. In an email to suppliers seen by Bloomberg last month, Toyota warned that plants in the Czech Republic, Turkey, and the U.K. might have to partially or completely shut because of a shortage of chips. A Toyota official in charge of purchasing asked all suppliers using semiconductors to, as usual, “re-confirm their supplier delivery commitments are in place to secure supply in the coming months,” according to the memo. He asked the suppliers to contact Toyota immediately if they encountered any difficulty. A month later, only the Czech plant has been forced to temporarily halt its operations.
This isn’t the first time Toyota has overcome a pandemic obstacle. In early 2020 the automaker quickly learned to maneuver through the lockdowns, implementing infection prevention measures and ramping up production in China, where virus-related disruptions dissipated relatively early on. That helped it churn out a record number of vehicles each month since August, unseating Volkswagen AG to become the world’s top-selling automaker for the year. Toyota’s “ability to bounce back from supply crunches stands out,” Nakanishi says.
Bottom line – Chip shortages may cost the auto industry $60 billion in sales this year. Toyota has avoided much of the disruption by closely managing suppliers.