Rise of EVs gives Toyota a supply chain quandary

With great fanfare last month, Toyota put on an event showcasing its planned next generation of internal combustion engines, the clearest demonstration yet of its bet on the hybrid boom.

Beyond the immediate need to convince investors and analysts, Toyota’s chief executive and chief technology officer had another audience in mind too: the group’s suppliers.

“It is important for us to make clear which direction we are going to create a future together with these companies. That is why we declared today that we want to create together the future for internal combustion engines,” said Koji Sato, Toyota’s chief executive.

Toyota’s famous “just-in-time” supply chain has long been a key element of its success, allowing the development of a lean production approach that has been adopted worldwide by multinationals. And executives have long said they feel a moral obligation to maintain the country’s millions of auto jobs.

That is all fine and good when things are going well, but what if things go wrong? What if there are corporate decisions they cannot make at sufficient speed due to the obligation to protect the supply chain and jobs?

“Toyota’s defence of its supply chain — which makes economic sense at the moment due to the continuing demand for hybrids — could become a liability at some point. And it’s not just about Toyota but about Japan’s auto industry as a whole,” said James Hong, autos analyst with Macquarie.

Such a dilemma might also confront carmakers in Germany, France and the US. It is one where risks and the benefits are complicated by the broader political economy.

The operations of auto companies often reflect the workings of the countries where they are founded. Their development over time can be very directly linked to subsidies, aid and unofficial support. This can have a deep impact on how the companies, and their home countries, view social obligations in areas like jobs. It can also provide the parachute during periods of difficulty.

More jobs can equal more stability for companies across different sectors, in a similar way that the size of a big bank’s balance sheet size can render it too big to fail. When things get rough you have a built-in corpus of consumers, voters and lobbyists who are ready to argue for your survival. And industries like auto production carry more weight than others.

Auto industry-related employment — from fuel retailers to insurance to shipping — totals some 5.5mn jobs in Japan, according to the country’s automobile manufacturers association. The sector is estimated to account for 2.9 per cent of the nation’s GDP and 13.9 per cent of the manufacturing GDP. Sato said that Toyota did business with about 100 so-called tier-one suppliers, companies that sit at the top of the pyramid and provide products directly to big manufacturers. Beneath them are many more smaller companies who in turn supply the top tier.

“Be it in China, Japan or Europe, automaking is a highly political industry and I think it’s extremely rare to see a country sacrifice its automotive industry. It’s a bit like steel or banks or ships, you just don’t do it,” said Thomas Besson, head of autos research at Kepler Cheuvreux.

Renault in France, Volkswagen in Germany, BYD in China, Ford and GM in the US — they are all the products of their country’s political economies. Toyota is also clearly a product of Japan and a clearly successful one. The world’s largest carmaker is churning out record profits and sales. And Toyota’s defence of its supply chain is a reflection of the scale and variety of technological bets that protect it against uncertain regulations, politics and consumer preferences.

But if a carmaker must defend its supply chain and its jobs — be it in Japan, Germany or another country — then it is not overly difficult to see the risk that responsibility becomes a hindrance, slowing down innovation and burdening a company with unnecessary costs. 

With the car industry in turmoil over the development of electric vehicles, that strategic issue is becoming more pressing. In Europe, a 2021 study for a supplier trade body by PwC estimated that a switch to EV production only in the region by 2035 would lead to the loss of some 500,000 jobs in power-train production for cars with internal combustion engines. This would be offset by 226,000 new jobs related to EV power-train production but there still would be less employment.

“The danger point . . . could arrive sooner than they are planning for due to EVs and China ramping up competition and supply even quicker than was estimated,” said Hong. “And the simple point is that you don’t need as many suppliers for EVs.”

david.keohane@ft.com