How Toyota thrives when the chips are down

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© Reuters. FILE PHOTO: 89th Geneva International Motor Show, Geneva

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By Norihiko Shirouzu

(Reuters) – Toyota may have pioneered just-in-time manufacturing strategy, but when it comes to chips, its decision to store critical components in cars dates back a decade to the Fukushima disaster.

After the disaster severed Toyota’s supply chains on March 11, 2011, the world’s largest automaker realized that semiconductor lead times were far too long to handle devastating shocks such as natural disasters.

For this reason, Toyota has developed a Business Continuity Plan (BCP), according to which the suppliers have to store chips for the Japanese automaker worth two to six months, depending on how long it takes from order to delivery.

And that’s why Toyota has so far been largely unscathed from a global semiconductor shortage after coronavirus lockdowns saw demand for electrical appliances soar and compete with many competing automakers to shut down production, the sources said.

“As far as we can tell, Toyota was the only automaker best equipped to deal with chip shortages,” said a person familiar with Harman International, who specializes in car audio systems, displays and driver assistance technologies.

Two of the sources who spoke to Reuters are Toyota engineers and the others are companies in the chip business.

Toyota surprised rivals and investors last month when it said its production would not be significantly disrupted by chip shortages, even if Volkswagen (DE :), General Motors (NYSE :), Ford, Honda and Stellantis, among others, were forced to slow down or stop some production.

Toyota increased its vehicle performance for the fiscal year ended this month and raised its profit forecast for the full year by 54%.

CLASSIC LEAN SOLUTION

The source familiar with Harman said the company, which is part of Samsung Electronics (OTC 🙂 in South Korea, discovered a shortage of integrated central processing units (CPUs) and integrated circuits for power management back in November last year.

While Harman doesn’t make chips due to his continuity deal with Toyota, he had to prioritize the automaker and make sure it had enough semiconductors to keep its digital systems running for four months or more, the source said.

The chips that are currently particularly scarce are microcontroller units (MCUs) that control a number of functions such as braking, acceleration, steering, ignition, combustion, tire pressure gauges and rain sensors, the four sources told Reuters.

However, after the 2011 earthquake, Toyota changed the way MCUs and other microchips were bought. This caused a tsunami that killed more than 22,000 people and caused a fatal collapse at the Fukushima nuclear power plant.

In the aftermath of the quake, Toyota estimated that more than 1,200 parts and materials could be sourced and made a list of 500 priority items that would need secure supplies in the future, including semiconductors from key Japanese chip supplier Renesas Electronics.

The impact of the disaster was so severe that it took Toyota six months to bring production back to normal outside of Japan after it had done at home two months earlier.

It came as a huge shock to Toyota’s just-in-time system, as a smooth flow of components from suppliers to factories to assembly lines and lean inventory levels were central to developing as an industry leader in efficiency and quality.

At a time when supply chain risk is paramount in almost every industry, the move shows how Toyota was ready – and benefiting from – to issue its own set of rules for semiconductors.

A Toyota spokesman said one of the goals of its lean inventory strategy is to respond to inefficiencies and risks in supply chains, identify the potentially most damaging bottlenecks and figure out how to avoid them.

“The BCP was a classic lean solution for us,” he said.

NO BLACK BOXES

Toyota pays for its inventory agreement with chip suppliers by returning a portion of the cost reductions it requests from them each year during the life cycle of a car model through what are known as annual cost reduction programs.

The inventories of MCU chips, often combining multiple technologies, CPUs, flash memory and other devices, are held for Toyota by parts suppliers such as Denso, which is partially owned by the Toyota Group, chip manufacturers such as Renesas and Taiwan Semiconductor Manufacturing, and chip manufacturers.

There are different types of MCUs, but the shortage is currently not state-of-the-art chips, but rather mainstream chips with semiconductor nodes in the 28 to 40 nanometer range.

Toyota’s chip continuity plans have also protected it from the effects of natural disasters exacerbated by climate change, such as: For example, violent typhoons and rainstorms, which frequently cause floods and landslides across Japan, including the manufacturing center in the southern Kyushu region, where Renesas also makes chips.

One of the sources involved in semiconductor supply said Toyota and its subsidiaries have become “particularly risk averse and sensitive” to the effects of climate change. But natural disasters and are not the only threat on the horizon.

Automakers fear that the supply of chips will be disrupted more because of increasing demand as cars become more digital and electric, as well as fierce competition for chips from manufacturers of smartphones, computers and airplanes to industrial robots.

According to the sources, Toyota has another edge over some competitors when it comes to chips thanks to its longstanding policy of ensuring that all of the technology used in its cars is understood rather than relying on suppliers to provide “black boxes”.

“This fundamental approach is what sets us apart,” said one of the sources, a Toyota engineer.

“From the root causes of failures in semiconductors to important details about production processes like the gases and chemicals you use to get the process up and running, we understand the technology inside out. It’s another level of knowledge that you don’t easily get if you can I will only buy these technologies. “

“LOSE OUR GRIP?”

The use of semiconductors and digital technologies by automakers has skyrocketed this century thanks to the rise of hybrid and all-electric vehicles, as well as autonomous driving and connected car capabilities.

These innovations require even more computing power and in some cases use a new category of semiconductors, which is known as System on a Chip or SoC and, roughly speaking, combines several CPUs on one logic board.

The technology is so new and specialized that many automakers have left it to big suppliers to manage the risks.

However, consistent with its no-black box approach, Toyota developed a deep in-house understanding of semiconductors in preparation for the launch of its successful Prius hybrid in 1997.

Years earlier, technical talent was hired from the chip industry and a semiconductor plant was opened in 1989 to support the development and manufacture of MCUs for controlling Prius powertrain systems.

Toyota designed and manufactured its own MCUs and other chips for three decades until it moved its chip manufacturing facility to Denso in 2019 to consolidate the supplier’s operations.

The four sources said that Toyota’s early drive to develop a deep understanding of the design and manufacturing processes of semiconductors was a major reason it managed to avoid the bottlenecks in addition to its continuity contracts.

However, two of the sources said they were concerned that the Denso deal might indicate that Toyota is finally ready to ditch its no-black box approach, despite the fact that the supplier is part of the broader Toyota group.

“We were fine this time, but who knows what to expect in the future?” a source said. “We may lose track of technology in the name of the efficiency of technological development.”

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