‘JUST-IN-TIME’ UNDER SIEGE
Shortages and rising costs compel automakers to overhaul procurement and supply chain strategies. By Eri Sugiura and Akito Tanaka in Tokyo
The “just-in-time” manufacturing process enshrined by Kiichiro Toyoda, the founder of Toyota Motor, is being tested in the car industry as never before. Its essence, the “absolute elimination of waste” in stockpiles, overproduction and unused labour hours in every manufacturing layer, has become the norm for every automaker in the world. A super-efficient supply chain network spans the globe to build tens of millions of cars annually, each consisting of about 30,000 parts.
But Covid-19 has revealed vulnerabilities throughout the chain, suggesting that executives — including Akio Toyoda, president of Toyota and grandson of Kiichiro Toyoda — have unwittingly traded resilience for low costs.
An estimated 7.7 million units of vehicle production were estimated to have been lost in 2021 because carmakers were unable to secure semiconductors, according to AlixPartners, a US consultancy. That cost the industry US$210 billion in revenue — nearly equivalent to Toyota’s annual sales in 2020. And disruptions have extended beyond chips to other parts and to assembly, while surges in raw materials prices have become common.
As manufacturers race to ramp production back up again, the longerterm lessons are only beginning to be debated.
“My goal always is, from a supply-chain standpoint, to be invisible to the company,” Chris Styles, vice-president of supply chain management for Nissan North America, told an industry conference in October last year. “If everything is going the way it should, we should be invisible … and right now, we are the opposite of invisible.”
The urgent task for executives at an auto company “is to rethink its supply chain network and make it more resilient,” said Toshiyuki Shiga, a former Nissan executive who now chairs the Japanese state-backed investment fund INCJ, whose investments include the chipmaker Renesas Electronics. “The industry has to shift more toward a ‘justin-case’ mentality.”
Shiga was the chief operating officer of Nissan when the devastating 2011 earthquake and tsunami hit the industry, causing production strains for months in Japan. From that lesson, and to cope with a historically high yen, the Japanese auto industry stretched its supply chain further into Asia. Toyota even started stockpiling some key components. “But apparently, that was not enough,” he said.
The pandemic has buffeted the auto industry almost since it first emerged, creating a nonstop chain reaction of disorder. The manufacturing plants of several major carmakers and their parts suppliers are crowded together in the Chinese city of Wuhan, the Covid epicentre. Honda Motor, which has major factories there, was abruptly forced to halt production.
As the virus spread across China, the world’s largest auto market, other car factories throughout the country stopped, and it eventually brought similar halts in Europe and even in little-affected countries such as Japan when demand plunged.
When demand rebounded unexpectedly swiftly, a different problem emerged: shortages of semiconductors. Chip fabrication facilities like those of Taiwan Semiconductor Manufacturing Co (TSMC) did not have enough
capacity to allocate to the auto industry amid strong demand from other industries, including computers and other consumer electronics.
Covid restrictions in Southeast Asia for several months in 2021 dealt another heavy blow to carmakers, especially Japanese players that had built complex local supply chains. Semiconductor shipments from Malaysia, a global hub for chip assembly and testing, were suspended because workers could not commute to plants during that country’s lockdown.
And it has not just been chips. Similar disruptions erupted in Vietnam, a production hub for wire harnesses and other parts.
If semiconductors are the “brains” of a car — controlling everything from engines to airbags, windshield wipers and power windows — then wire harnesses function like its central nervous system, distributing electricity and information to systems and components.
Executives had thought they were getting ahead of a different problem by increasing wire harness production in Vietnam, according to analysts. “Manufacturers have been transferring production from China due to the US-China trade conflicts, and there have been moves to use Asean-made wire harnesses for North America,” said Yuji Matsumoto, a Nomura Securities analyst.
But shortages of such car cables added to vehicle production disruptions in September 2021, which was when Toyota shocked the industry by announcing a 40% monthly global output cut.
The waves of crisis have left executives asking, what next?
The scramble for chips has nudged carmakers toward measures that would be anathema under just-in-time lean manufacturing in normal times. Toyota and Nissan have been asking their suppliers to increase stockpiles of chips as a contingency measure, and there are also changes emerging to the industry’s pyramidal supply chain, with its rigid tiered structure.
“The shortage of semiconductors will
remain for a while. We will maintain our efforts to obtain stable chip supplies,” said Honda executive vice-president Seiji Kuraishi in an earnings conference call on Nov 5. The company has set out long-term measures to consider that include stockpiling inventory, purchasing chips directly from manufacturers rather than relying on its top-tier suppliers to do so, and signing long-term contracts with chipmakers.
Last month, Ford Motor signalled it could even go into the chip business itself, saying it planned to develop chips jointly with GlobalFoundries to boost its supplies.
Nissan, with its alliance partners Renault and Mitsubishi Motors, is putting more work into predicting the outlook for microchip supply, including studying demand from non-automotive businesses.
The three companies are also working on “how we can be connected to the last point of the supply chain”, such as contract wafer manufacturers, chief operating officer Ashwani Gupta said in November.
Visibility is currently limited to direct suppliers, known as Tier 1 suppliers, and their suppliers, called Tier 2. Chipmakers are usually considered Tier 2, but TSMC and other contract manufacturers belong to a lower tier, or what Gupta calls “Tier n”.
“It was only when the global supply glitch happened that we found out that carmakers weren’t aware of the overall picture of the supply chain structure,” said Kenta Yamashita, deputy director of the automobile division at the Ministry of Economy, Trade and Industry. “Carmakers used to believe that parts would be delivered as long as they made orders to Tier 1 suppliers.”
A ministry working group with 14 Japanese automakers is hoping to standardise how far in advance the industry orders chips, the better to ensure availability and plan investment.
In the meantime, vehicles themselves are being reengineered to address the crisis. Nikkei has learned that Nissan is redesigning its cars so it can use generic chips for functions such as regulating brakes and speedometers,
reducing its reliance on custom-made chips and meaning it can avoid shutting down its entire production system when a particular chip is out of stock.
GM is looking to co-develop semiconductors that can handle multiple tasks in its vehicles, thereby reducing the types of chips it uses to just three product families over the next several years. This simplification would enable the American automaker to shrink the variety of chips it orders by 95% for future vehicles, it says.
Helmut Gassel, a member of the management board of Infineon, a leading provider of auto-related chips, told Nikkei in October that the company anticipates the chip shortage could last all the way through 2022.
Seiji Sugiura, a senior analyst at the Tokai Tokyo Research Institute, said that although the chip crunch may eventually ease, “carmakers are aware that there might be new risks replacing the chip shortage”, potentially involving materials such as rare-earth metals and batteries.
Prices of battery materials are indeed surging. According to the Chinese market information provider Shanghai Metals Market, the average price of domestic battery-grade lithium carbonate stood at 264,000 yuan (about $41,500) per tonne at the end of 2021, a fourfold increase from early in the year. S&P Global Platts said the price of highgrade cobalt in Europe has risen almost 90% since the start of 2021.
Such price hikes are also occurring among more conventional materials, including steel.
Even if car companies get over the massive disruption caused by the pandemic soon, “they will need to fundamentally change the [supply chain] network”, said Shiga of INCJ. “It will come with a tremendous cost, but they’ll have to face it.”