Toyota aims for quake-proof supply chain

YOKOHAMA, Japan Tue Sep 6, 2011 8:32am EDT

YOKOHAMA, Japan (Reuters) - Toyota Motor Corp (7203.T) is working to create a robust supply chain that would recover within two weeks in the event of another massive earthquake like the one on March 11 that is still affecting output after six months, a top executive said.

Toyota and other Japanese automakers were forced to halt a large portion of their production both inside and outside Japan for months after the earthquake and tsunami cut off the supply of hundreds of parts from the country's devastated northeast.

"We're making checks now to see what needs to be done to enable a recovery within two weeks when the next one -- expected in the (central) Tokai region -- hits," Executive Vice President Shinichi Sasaki told Reuters in an interview on Tuesday.

"We're about 80 percent done with those checks."

Sasaki, in charge of purchasing, said Toyota was taking three steps to fight supply chain risks that he expected would be completed in roughly five years.

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 (6723.T), 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.

Sasaki said the measures would also help offset losses from the strong yen by eventually lowering costs and creating a natural hedge -- whereby costs and revenues are in the same currency -- cutting foreign exchange exposure within regions.

More than the March 11 disasters, Toyota is hurting from the yen's historic strength, which is wiping billions of dollars from the export-dependent company's profits.

NO PLAN TO BOOST IMPORT PARTS

Toyota last year built 43 percent of its 7.6 million vehicles in Japan and exported more than half of that, making it more vulnerable to the yen's rise than Nissan Motor Co (7201.T) and Honda Motor Co (7267.T).

Nissan and Honda posted profits for the April-June quarter. Toyota had an operating loss of 108 billion yen ($1.4 billion).

Almost all Japanese automakers, including Nissan and Honda, have said they planned to make use of the strong currency to import more components and cut costs for cars built in Japan.

But Sasaki said that would not help in light of the time and money required to package and transport the parts, coupled with a higher level of manufacturing efficiency in Japan.

"Even if we imported 100 percent of the parts, it wouldn't make sense." He added that an exception might be the import of materials that don't require complex packaging, such as some of the steel Toyota buys from South Korea's POSCO (005490.KS) for the Japan-made Camry.

"Instead of importing parts, there are still a lot of parts that we export from Japan for the cars we build overseas, so we're asking our (domestic) suppliers for help with that."

Toyota procures about 90 percent of its parts locally in North America and Europe, but the remaining 10 percent -- mainly engines and transmissions from Japan -- is costing more due to the dearer yen.

Sasaki said affiliate Toyota Tsusho (8015.T), a trading company, was helping to facilitate smaller parts makers' moves overseas by setting up a "supplier park" and handling much of the logistics. Thailand already has one, and Sasaki said he hoped another would follow also in Indonesia, where Toyota is expected to ramp up vehicle production.

(Additional reporting by Kentaro Sugiyama; Editing by Joseph Radford and Helen Massy-Beresford)

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