The production suspension crisis caused by chip shortages is sweeping the global automotive industry.
Interestingly, Toyota said last month that its production would not be significantly affected by the chip shortage, even if companies such as Volkswagen, General Motors, Ford, Honda and Stellantis were forced to slow down or suspend some production, which surprised competitors and investors. At the same time, Toyota also raised its production forecast for the fiscal year ending 2021 and raised its full-year profit forecast by 54%.
This makes people wonder, who gave Toyota such confidence? In fact, in terms of chip products, its decision to stockpile key automotive components can be traced back to the Fukushima disaster ten years ago.
Disasters teach Toyota lean solutions
After the 2011 earthquake in Japan disrupted Toyota's supply chain, the world's largest automaker realized that the delivery time for semiconductors was too long to cope with destructive shocks such as natural disasters.
That's why Toyota has come up with a business continuity plan (BCP), which requires suppliers to stock 2-6 months of chips for Toyota, depending on the time from ordering to delivery.
Sources said that it is precisely because of the BCP plan that Toyota has been able to become an automaker that has been largely unaffected by the global semiconductor shortage so far. A person familiar with Harman International said: "As far as we know, Toyota is the only automaker that is able to cope with the chip shortage."
It is reported that Harman International is the current global leader in Internet car technology and is well-known for its high-end multimedia, navigation and vision systems. In November 2016, Samsung Electronics announced that it would acquire Harman International Industries for $112 per share in cash.
A source at Harman International revealed that as early as November last year, the company had a shortage of CPUs and power management integrated circuits. The source explained that although Harman does not produce chips, due to the continuity agreement with Toyota, it has to give priority to automakers and ensure that there are enough semiconductors to maintain the supply of digital systems for four months or more.
Four sources told Reuters that the chips that are in particularly short supply are microcontroller units (MCUs), which control a range of functions including braking, acceleration, steering, ignition, combustion, tire pressure gauges and rain sensors.
However, Toyota changed the way it buys MCUs and other microchips after the 2011 earthquake. Specifically, after the disaster, Toyota estimated that more than 1,200 parts and materials it purchased might be affected, and drew up a list of 500 priority items that needed to be securely supplied in the future, including semiconductors manufactured by Renesas Electronics, a major Japanese chip supplier.
The impact of the disaster was so severe that it took Toyota six months to restore production outside of its home country to normal levels, while production in Toyota's home country returned to normal within four months.
Obviously, this is a huge blow to Toyota's "just-in-time" strategy, as the smooth flow of parts from suppliers to factories to assembly lines, as well as streamlined inventories, are critical to its becoming an industry leader in efficiency and quality.
Nowadays, supply chain risks have become the focus of attention of almost the entire industry. Toyota's previous transformation path shows that in the semiconductor field, Toyota has made its own rules and is reaping the benefits.
A Toyota spokesman said one of the goals of its lean inventory strategy is to become sensitive to inefficiencies and risks in the supply chain, identify the most potentially damaging bottlenecks, and find preventive measures. "BCP is a classic lean solution for us," he said.
No black box operation
Under the so-called annual cost-cutting program, Toyota returns part of its cost cuts each year during the life cycle of any model to pay for inventory arrangements with chip suppliers, the sources said.
Toyota's MCU chip inventories, which usually combine multiple technologies, CPUs, flash memory and other devices, are usually held for Toyota by parts suppliers (for example, Denso, which is partly owned by Toyota Group), chipmakers such as Renesas Electronics and TSMC, and chip traders.
While there are different kinds of MCUs, the MCUs that are in short supply are not the latest chips, but rather mainstream chips with semiconductor nodes ranging from 28 to 40 nanometers.
Toyota's chip continuity plan also insulates it from natural disasters. A source involved in semiconductor supply said Toyota and its affiliates have become "extraordinarily risk-averse and sensitive" to the impact of climate change. However, natural disasters are not the only threat at hand.
At present, the automotive industry is making great strides towards the "new four modernizations", and chips are playing an increasingly important role. However, the chip market is being occupied by manufacturers of consumer electronics such as smartphones, and automakers are worried that this market will face more intense competition.
Toyota has an advantage over rivals when it comes to chips, thanks in large part to its long-standing policy of ensuring it understands all the technology used in its cars, rather than relying on suppliers to provide "black box" information. "This fundamental approach makes us different," said a Toyota engineer.
“We need to understand everything from what causes semiconductor defects to the production process. If you just buy the technology, you can’t simply get a different level of knowledge.”
This century, automakers’ use of semiconductors and digital technologies has exploded due to the rise of electric vehicles, autonomous driving, and connected cars. These technologies are so new and specialized that many automakers have handed over risk management to large component suppliers. However, in order to avoid black box operations, Toyota has conducted in-depth internal understanding of the semiconductor field in preparation for the successful launch of the Prius hybrid car in 1997.
Toyota poached engineering talent from the chip industry several years ago and opened a semiconductor factory in 1989 to help design and build the MCUs used to control the Prius' powertrain systems.
In fact, Toyota designed and manufactured its own MCUs and other chips for three decades until it handed over its chipmaking plants to Denso in 2019 to consolidate the supplier's operations.
Admittedly, Toyota previously had an in-depth understanding of semiconductor design and manufacturing processes, which was the main reason why Toyota managed to avoid being affected by the chip shortage in addition to its continuity plan.
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