Lessons from Fukushima

Friday Reflection | September 3, 2021

Buying a car is a rite of passage for new drivers and a recurring milestone for most people who depend on their cars for daily use. Buying a brand new car is exciting, but data shows that the car will lose approximately 10% of its value the minute you drive it off the lot.[1]  Historically, used cars have offered better value. Recently, shopping for a used car feels like you’ve entered the Twilight Zone, with inventory reduced and some used cars surpassing their original MSRP despite having the wear and tear of a prior owner. Cars have effectively become an appreciating asset, turning upside down the natural order of vehicle pricing.
 
Despite stock prices continuing to hit new record highs, disruptions to manufacturing capacity and consumer buying patterns have become common during the pandemic. Many of these disruptions are being categorized as ‘transitory’, allowing investors to discount their impact in the short term. As interruptions to the global supply chain persist, the impact on long-term valuations will grow as investors question how companies will recover and protect their profits against future disruptions.

A Perfect Storm

The pandemic caused purchase patterns to shift, and increased demand for private transportation. At the same time, chip shortages for today’s electronics-heavy vehicles have cramped manufacturers’ ability to produce new cars. Both people who need to navigate from the suburban house they bought to escape the confines of their urban apartment, as well as those who previously relied on public transportation, are newly in the market for a car. Demand has increased.
 
The unexpected spike in demand isn’t the only factor in the current situation – there are supply shortfalls as well. Beyond pandemic-driven limitations, a series of additional unpredictable disasters have exacerbated problems in the vehicle semiconductor supply chain. A historic cold snap in Texas in February shut down factories of top chipmakers. In March, a fire tore through a factory at Japan’s Renesas – a key chip supplier for the automotive industry.[2]  Around the same time, drought in Taiwan interrupted the island’s semiconductor production, since chipmaking is a water-intensive process that uses pools to wash away industrial chemicals.
 
This combination of events forced automakers to reduce production as they struggle to work around the shortage of computer chips. Ford, General Motors, Tesla, BMW and Daimler are among the companies that reported production cuts this year. GM Chief Executive Mary Barra said she expects the Detroit automaker to produce roughly 100,000 fewer vehicles in North America in the second half of the year due to shortages. Overall, the global auto industry will produce nearly 4 million fewer vehicles than planned this year because of the shortages, losing about $110 billion in sales.[3] All this creates more headaches for consumers, and higher prices for both new and used cars.

One Company Was Prepared

Toyota has been the one auto manufacturer able to keep production levels humming along while competitors have struggled. In the second quarter, the company was the No. 1 automaker by sales in North America, marking the first time since 1998 that GM hasn’t held the top spot.[4] Toyota maintained production due to a prescient stockpile of key inventory, including those coveted computer chips. The surprising reason for their stockpile of inventory: their response to the Fukushima nuclear disaster in March 2011.

Toyota pioneered the just-in-time manufacturing strategy decades ago, but the company decided to shift its strategy in recognition of new risks in a changing climate. The 2011 earthquake and resulting nuclear disaster severed Toyota’s supply chains, highlighting the vulnerability of semiconductors due to the extreme lead-time needed to rebuild or expand production after a natural disaster.[5]

Toyota came up with a business continuity plan that requires the company’s suppliers to stockpile anywhere from two to six months’ worth of chips for the Japanese carmaker. Toyota also implemented a formidable online system that contains a comprehensive database of supply chain information for around 6,800 parts. Toyota communicates with thousands of suppliers at all levels on a near daily basis, giving its management team the data they need to make strategic decisions and stay ahead of peers.

Despite its preparation, Toyota’s inventory of semiconductors eventually ran out. The company announced it will cut production in September, highlighting how this scarcity is hitting even the best-prepared companies. The landscape is being further complicated by outbreaks of the Delta variant in Asian ports that are delaying shipping times. Still, the reduced global inventory has pushed the price of cars higher and Toyota was able to report a record $8.2 billion profit in Q2 of this year due to its preparation. Their stock price also avoided the -15% swoon that hit other automakers’ stocks as production was shuttered this summer.

The Advantage of Adaptation

Toyota showed that it is possible for companies to learn from disasters and adapt business models and supply chains to be more resilient. The current pandemic has forced countless companies to expand their capacity to handle online orders and deliveries, creating resiliency against future pandemics or shelter-in-place events. We know that unexpected events are always a risk, but adaptation can mitigate risk in a way that allows short term concern to morph into longer term stability.

Our clients have lived through disruptions ranging from global to personal, and that firsthand experience can help catalyze appropriate adaptation. This can mean ensuring they have the liquidity to take advantage of opportunities, or the proper insurance to protect against unforeseen disruptions ranging from wildfires to leaky roofs to long-term health events. When clients draw on their assets for regular income or substantive expenses, we support revisiting their investment allocation. The right adaptation allows them to more calmly navigate their life without worrying where their liquidity and cash flow will come from when the next crisis befalls the market.

In both our personal and investment decisions, the wisdom that comes with experience brings a broader perspective.  That broader perspective allows us to enjoy the present despite its disruptions, and to simultaneously be confident in our plans for the future.

Resources

[1] Depreciation Infographic: How Fast Does My New Car Lose Value? Edmunds.com

[2] Japan’s Renesas sees fire-damaged chip plant back to full capacity by mid-June Reuters

[3] Semiconductor shortage hammering automakers, costing billions in lost production and sales Washington Post

[4] How Toyota kept making cars when the chips were down Fortune  

[5] Setting up a new semiconductor factory requires an upfront investment of more than $12 billion, according to chipmaker GlobalFoundries, and new factories take three years to become production-ready from construction to groundbreaking.  Channel News Asia

Brian Kozel, CFP 

About Brian Kozel, CFP®

Brian Kozel works as a partner and lead advisor at North Berkeley Wealth Management to help his clients feel confident in their financial decisions.

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

By |2021-09-17T14:22:35-07:00September 3rd, 2021|