Toyota shuts factories, investors shrug. That’s resilience

When the world’s biggest carmaker shut operations affecting almost half its global production on Tuesday, investors shrugged. This kind of nonchalance highlights the extent to which Toyota Motor Corp has built a level of supply-chain resilience that instills confidence in the toughest of times.

A systems glitch forced the company to halt production on 25 lines at 12 of 14 Japanese plants during the day, and take all 14 facilities offline during the evening, it said. The cause of the problem wasn’t immediately known, though a cyberattack was quickly ruled out, and orders for parts had to be suspended.

Japan accounts for 44 percent of Toyota’s total car production, yet shares dropped only as much as 0.8 percent during Tuesday trading. Clearly investors aren’t too worried, even though Toyota continues to have a backlog of cars it’s yet to deliver to customers. In Japan alone, more than 800,000 orders were awaiting delivery at the end of April, the company said in May.

Another severe interruption came in March last year when a ransomware attack at a supplier took Toyota’s factories offline, hitting around 5 percent of monthly production. Shares dropped immediately after the news, but reclaimed lost ground within a few weeks as investors trusted that the impact wouldn’t be too bad.

A shortage of semiconductors exacerbated by the COVID-19 pandemic lingers and is the main reason why automakers globally are still struggling to meet demand.

Toyota may not have seen the chip crunch coming nor anticipated a cyberattack, but it is building more flexibility into its operations while working to ensure its own suppliers are able to keep functioning. Though famed for its lean operations, the company’s stockpiles have grown substantially. Measured in days, inventories ballooned 50 percent over the past decade and are almost three times the level of 30 years ago.

Holding inventory can be seen as an expense because stockpiles equate to money that can’t be deployed elsewhere. Yet in Japan’s environment of chronically low interest rates this cost isn’t as severe. More painful is losing a sale because a certain component isn’t available, a familiar story for the car industry in recent years.

We can see this strategy clearly by drilling down into exactly what Toyota keeps on its shelves. Rather than holding onto more finished cars and after-sale parts — often a temporary measure before they’re shipped to customers — the carmaker doubled the level of raw materials required to keep its factory ticking along. This wasn’t enough to entirely ameliorate the chip shortage, but the shock could have been much worse.

By comparison, Ford Motor Co held roughly the same ratio between materials, works-in-progress and finished goods at the end of last year, but fewer days of total inventory. The US automaker was one of the worst afflicted by the lack of chips, facing a 100,000-vehicle shortfall in the fourth quarter of 2022 alone.

As semiconductor supplies catch up and vehicle production moves back into full swing, car companies are left to contend with the next big risk: the financial health of suppliers. Once again, Toyota is being proactive and has started surveying tier-1 vendors — those it buys directly from — to ensure they don’t have trouble paying their debts, Nikkan Kogyo reported Tuesday. It may even offer financial support to prevent supply disruption, the newspaper wrote.

An efficient, just-in-time strategy for manufacturing made Toyota’s production system famous. But its pragmatic approach to greater uncertainty and fragmentation is what’s keeping the Japanese car giant ahead of the pack.

Tim Culpan is a technology columnist for Bloomberg Opinion. Based in Taipei, he writes about Asian and global businesses and trends. Views are personal, and do not represent the stand of this publication.

Credit: Bloomberg