Toyota, citing lessons learned from the 2011 earthquake, does not expect any significant semiconductor impact

Toyota does not expect any near-term effects from the semiconductor shortage, but it has included some impact of the supply shortage in its production forecasts for this year, Chief Financial Officer Quinta Kuhn said on the company’s earnings call this week. Kuhn said the OEM refused to increase production levels, choosing instead to produce a “conservative” and “cautious” estimate.

Kuhn said company executives met with a semiconductor supplier after a fire at its facility, referring to the fire at the Renesas plant this year. Kuhn said the supplier’s constant work to restore production, with workers working long hours, “contributed to our enjoyment of the situation where there is no impact on the semiconductor supply.”

But the automaker is also applying lessons it learned in the wake of the disruptions from the 2011 earthquake and tsunami to help reduce the impacts.

After the Great East Japan Earthquake, after efforts to curb [and] In mitigating the impact of disasters, Kuhn said we are now able to make assessments of alternative products in a fast manner, and that was one of the factors behind our ability to mitigate the impact of semiconductor supply.

Automakers have spoken of their struggles with semiconductor supplies over the past few months, as demand for components soared and suppliers faced problems, including a factory fire and a winter storm in Texas that brought production to a halt. Throughout it all, Toyota seemed to be an exception.

“Do we expect any significant impact?” Kuhn said this week. “No.”

Lessons learned

After the 2011 earthquake, Toyota conducted a major review of its supply chain. Toyota production fell 78% year-on-year in April 2011 as a result of the earthquake, according to figures cited in a 2015 paper by Hirofumi Matsu, a researcher at Kobe University.

“[W]We researched multiple layers of our suppliers and created a system that enables us to know which suppliers and parts are at risk in the early stage of a crisis, ”Kuhn said in a call with analysts in February, according to a transcript provided by a spokesperson.“ When we confirm positions with suppliers, we provide suppliers with a production plan. Proven and trusted for the next several months, sometimes a three-year expectation. ”

He said Toyota is regularly reviewing its supply of semiconductors and alternative products, making switching to a new product easier when needed.

“Do we expect any significant impact? No.”

Being able to design a system that allows different parts to be swapped out is not easy. Mike Ramsay, vice president and analyst for automotive and smart mobility at Gartner, said in an email that it could be worth it in situations like this.

“For example, if your design was flexible in manufacturing to take chips of different sizes, or the components could be swapped out, you wouldn’t be stuck waiting for a very specific chip – the only chip that would work – to finish your vehicles,” Ramsey said. It has to be done on purpose, and flexibility usually comes with some other costs but it clearly pays off in situations like this. ”

Having financial ties between Renesas and Toyota could also help, according to Phil Amsrod, chief automotive analyst at IHS Markit.

“They have a different relationship between customers and suppliers, because of that, more than most – probably all – other OEMs who don’t have any kind of financial stake in their supply chain failure,” said Amsroud.

But the changes made after the earthquake also had an important impact. He said Toyota will now segment its product categories in order of importance and carry more inventory for components deemed to be of higher priority.

This is called a “business continuity plan,” and it requires suppliers to carry between two and six additional months in stock, according to a Reuters report that relied on two unnamed Toyota engineers. This year Kuhn said the company “secured one to four months stock of semiconductors” as part of the plan.

Folds for the coming months

While Toyota does not expect any short-term effects, Kuhn noted that the continuing risk into the second half of the year was the reason for the conservative production estimate. The latest projections on the issue from Garter indicate that the shortfall is expected to extend into the second quarter of 2022.

“Tracking leading indicators, such as capital investments, the inventory index, and revenue growth forecast for the semiconductor industry as an early indicator of inventory conditions can help organizations stay up-to-date on the problem and see how the industry as a whole is growing,” Gaurav Gupta, vice president of research at Gartner In a statement.

Amsrud said IHS Markit expects the supply of semiconductors to have recovered to the point where it can keep pace with demand for car production by the end of this year. But he said that did not explain the backlog, which is building up as supplies remain short.

“It’s the same effect that led people to stock up on toilet paper …” I don’t know if I need this, but I would rather have it over not have it if it turns out I do. “

Phil Amsroud

Senior Automotive Analyst at IHS Markit

There is also the issue of “phantom demand” in the system as manufacturers overcome the demand for components in an effort to boost inventory due to shortages. Amsrud said he’s heard that semiconductor companies are seeing a demand approaching 100 million cars a year, but the real demand from the automakers is probably closer to 90 million.

“It’s the same effect that prompted people to stock up on toilet paper … at the start of COVID,” he said. “I don’t know if I need this, but I’d rather have it than not have it if it turns out I want it.”

Amsroud agreed that things will likely not return to normal until next calendar year.

“I would say maybe more in the first quarter but definitely … it will be 2022 when things start to get back to normal in terms of being able to meet constant demand and have enough capacity to refill any lost order that OEMs want.”

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