Toyota Prepares For The Next Earthquake

| About: Toyota Motor (TM)

By Marty Lariviere

Virtually every automaker took a significant hit when an earthquake and tsunami hit Japan back in March. (We have several posts on this.) What surprised many people — even to some in the auto industry — was that even non-Japanese firms suffered. Several firms did not find out until too late that a supplier to a supplier was dependent on components that could only made in one plant and that plant was unfortunately in the affected area. One would obviously hope that firms would learn from the Japanese crisis and try to keep such disruptions from happening again.

Toyota (NYSE:TM) has been working on a plan to reduce their exposure to such disasters with the aim of being able to recover to full production in two weeks instead of the six month slog they went through this time (Toyota aims for quake-proof supply chain, Sep 6, Reuters). Toyota’s is focusing on three steps to reduce their exposure.

The first is to further standardize parts across Japanese automakers so they could share common components that could be manufactured in several locations, he said.

The second step is to ask suppliers further down the chain to hold enough inventory — perhaps a few months’ worth — for specialized components that cannot be built in more than one location, or take anti-quake measures that guarantee safety against any tremor or tsunami, he said.

This was to prevent a repeat of what happened this time with Renesas Electronics Corp, whose production of certain microchip controller units (MCUs) is still seen a few weeks away from full restoration.

Part of the second step would involve developing technology that would provide more options for parts and materials, such as substituting rare earths found mostly in China.

The third step to becoming more resilient was to make each region independent in its parts procurement so that a disaster in Japan would not affect production overseas.

There are some interesting things going on here. Standardizing parts across firms is in isolation curious. With more common parts across firms, it should be conceptually harder to build distinct cars. Clearly this should focus on things that are fundamentally commodity parts that don’t affect the customer experience. Think of things like power windows. Those systems have many components like electric motors and actuators that can be interchangeable across cars that to consumers are very different.

On the surface, this reliance on a more limited number of parts seems to create a greater number of choke points like the Renesas Electronics example mentioned above. Unless, that is, suppliers are willing to play ball and expand their footprint. If the increase in volume is enough to support multiple plants in distinct geographies, then Toyota should get what they want out of this. To state the obvious, this will favor bigger suppliers.

If you want to think about getting suppliers to play ball, look at their second lever of getting suppliers to hold more inventory — a lot more inventory. There are some really tough questions here. For example, who is paying for this? If the inventory is on the supplier’s books, why should they necessarily give Toyota preference in the event of a disruption?

Assume that Toyota succeeds with its first step. Then whatever component is being held in inventory is going to be needed by a lot of firms. Unless Toyota pays something upfront, the supplier may be sorely tempted to let the components go to the highest bidder. Now you might argue that a supplier likely cannot afford to anger Toyota but that statement would also apply to Ford or Volkswagen. Further, if you jump forward ten years, these risk reduction schemes may well lead to further consolidation in the supplier base so it may be even harder for an OEM to credibly threaten to walk away from a supplier.

Finally, the third step is a natural outgrowth of the first. If there is a enough volume in North America or Asia outside of Japan, a supplier can afford to expand its network and supply Toyota’s US assembly from North America. The article notes that this would also provide Toyota with a hedge against an over-valued home currency. One suspects that has as much to do with this move as preparing for natural disasters.