FMCO won’t be so messy if Malaysia thinks like Toyota, here’s why

While the Malaysian government works as if it’s feeling its way in the dark in implementing the latest FMCO Lockdown, Toyota is forecasting a 14 percent increase in profit for financial year 2021, as if the global shortage of semiconductor chips is not happening.

What has our government’s messy FMCO lockdown’s implementation got to do with Toyota? Quite a lot actually, more on that later.

Nearly every one of Toyota’s rivals, including Korea’s Hyundai Motor Group and Germany’s Volkswagen Group are struggling to keep their plants running. They have even called on their respective governments to intervene and to use diplomatic channels to secure supplies from chip foundries, most of which are located in Taiwan.

Also read: After MCO, chip supply shortage is slowing car production in Malaysia

Yes, Toyota too has to idle two of its plants due to shortage in chips supply but what many news reports missed out is that the reduction in Toyota’s output amounted to just 20,000 units, and is limited to just 3 models (C-HR, Yaris, and Yaris Cross).

For a company that makes nearly 10 million units a year, the loss of 20,000 units in production is not a big deal.

Meanwhile, Nissan is estimating 500,000 units in loss production for this year, the Volkswagen Group has already lost 100,000 units in just Q1 2021 alone and the number is expected to keep climbing.

How Toyota is able to profit while the chips are down (literally) will be explained later.

Closer to home, despite having more than one year of experience in dealing with MCOs, our government’s adjust-as-they-go method of implementing the latest lockdown is so amateurish, one wonders if we even have a functioning government.

From the many U-turns on permit applications (from MITI to KPDNHP and back to MITI), to the CIMS 3.0 site that keeps crashing, MITI hotlines that don’t work, to a fluid expiry date for permits (first it was 31-May, then it was 3-June), not forgetting the questionable list of what’s an essential service and what’s not.

Also read: MCO 3.0 Lockdown: In U-turn, Putrajaya says business permits to be applied through MITI, again

Meanwhile, heavy traffic is reported daily in city centres. Is everyone an essential worker now?

Then there’s the comical U-turn regarding Carslberg and Heineken breweries being classified as an essential services activity, only for the permit to be revoked days after it was approved. This is the second time this has happened, after a similar incident in 2020.

Also read: MCO 3.0: A confusing Monday for car companies and dealers in Malaysia

Meanwhile, many car workshops, which are supposedly allowed to operate as an essential services business, have yet to successfully submit their applications.

Also read: Car workshops & service centres are still waiting for approval from MITI, why so slow?

Does MITI even know how to properly assess what is really essential and what is not?

The simple answer is they don’t, and it’s impossible to expect them to make a good judgment because industry supply chains are just too complex for MITI to separate what’s essential and what’s not.

Factories are Covid-19 clusters, why are they still operating?

Without a high resolution visibility of supply chains, it is impossible for MITI to predict what the spill-over effects of shutting down one factory are.

This explains why factories – which are responsible for many Covid-19 clusters - continue to be allowed to operate while hotels, which have very clean record of adherence to SOPs, are not.

If you stop a plant that makes chemicals for vulcanization of rubbers, the rubber products plant making gaskets cannot operate. Without rubber gaskets, medical syringes – which are super important - cannot be made, and this is just an overly simplistic example.

The real supply chain of any industrial product is so complex that even the manufacturers themselves don’t know how far the interconnected chain extends until.

Toyota is learning from past mistakes, Malaysia isn’t

In March 2011, Toyota was greatly affected by the 2011 earthquake and tsunami that took out most of Japan’s Tohuku region. It also crippled Japan’s manufacturing sector.

A few months later in May, Thailand was hit by a massive flood which also took out most of the automotive (and electronics) industry’s supplier base.

The twin disasters affected not just the automotive industry, but also electronics manufacturers like Samsung and Lenovo.

The same plant that makes chips for cars also makes chips for laptops.

It was a wake-up call not just for automotive manufacturers, but the entire manufacturing industry, all of which operate under the ‘Just-in-Time’ (JIT) philosophy pioneered by Toyota.

JIT was born out of Toyota Production System (TPS), which is now better known in business school courses as Lean Manufacturing. The TPS method was developed by Toyota’s legendary industrial engineer Taiichi Ohno.

The basic concept of JIT is this – in the manufacturing world, warehousing cost is an unnecessary waste and if you can time your logistics to deliver the parts only when they are needed, you can reduce the need to keep parts in storage, thus improving efficiency.

Of course, reality is that some amount of warehousing in necessary and in smaller volume markets like Malaysia, it’s not realistic to make daily deliveries, but the main idea of JIT remains.

Rethinking JIT, the Toyota Way

The disasters of 2011 however, showed Toyota and the rest of the manufacturing world that perhaps a rethink of JIT is necessary.

But eventually, businesses recovered and everyone went back to their normal ways, except for Toyota.

Yes, the inventor of JIT, and grand master of kaizen could not just walk away without learning from the incident and making sure that Toyota will never face the same problem again.

For everyone else, JIT is the goal. For Toyota, JIT is merely the starting point, that’s what many non-Toyota experts of JIT and Lean Manufacturing often misunderstand.

Toyota’s overarching goals are always unachievable ideals, because life is an endless journey of learning and continuous improvements. Conversely, if you aim to be No.1, what happens after you’ve become No.1? You return to becoming No.2, or lower.

For Toyota, the goal is making ever better cars. Keyword ‘ever better.’

This is why Toyota never bothered to make TPS a secret.

At the height of the USA-Japan trade war in the ‘80s, Toyota even invited its competitor GM to visit its plant, because Toyota knows that the secret to its much vaunted quality lies not in some fancy machine or manufacturing technology, but in its way of thinking, which can be taught (only if the student is willing to learn), but cannot be copied.

Toyota even offered to teach GM on TPS, by setting up the joint venture NUMMI plant in Fremont, California, taking over GM’s worst performing plant to teach the Americans how to build cars the Toyota way, but the American bosses at GM were too proud to learn. Today, the NUMMI site belongs to Tesla.

How Toyota managed the chip supply shortage crisis

After 2011’s twin disasters, Toyota scrutinised its supply chain and was shocked to learn that there are so many steps hidden below the usual Tier-1, Tier-2 and Tier-3 suppliers, and that it has no idea how vulnerable its supply chain is.

Toyota went through the 1,200 parts affected by the disasters, traced the source of each material and shortlisted 500 critical ones that are most vulnerable - parts that rely on the same, small base of suppliers, one of them is semiconductors.

Also read: Think the Perodua Myvi is a simple car? Here's how much it relies on microchips

It also helps that unlike European car makers, Toyota does not simply outsource the production and development of critical parts / technology to suppliers - the ‘black box’ approach that's common in Europe, where the car manufacturer works more like a systems integrator of third-party parts, than actually developing the car from the ground-up.

One of the reasons why Toyota hybrids are so reliable, despite the high level of electronics, many of it used for the first time in production cars, is because Toyota took the effort to understand the technology themselves, before getting suppliers like Denso or Panasonic to build it.

In contrast, European manufacturers prefer to simply buy off-the-shelf solutions from the likes of Bosch or Continental, because it’s cheaper and faster, at the expense of control.

This high level of understanding in electronics, combined with their deep understanding of supply chains, allows Toyota to make assessments on what parts are most vulnerable.

Also read: German cars are better? Korean cars are bad? Here are top-5 myths on German vs Japanese/Korean cars

Well before the global chip supply crunch happened, Toyota already has a healthy supply of semiconductor chips stocked up - the opposite of what JIT teaches - and have put in place agreements with its suppliers that in the event of a supply crunch, deliveries to Toyota takes priority.

A report by Reuters revealed that Samsung’s subsidiary Harman has to prioritize Toyota over its fellow countrymen Hyundai and Kia because it has agreed to ensure at least 4 months of uninterrupted supply to Toyota.

Harman doesn’t make chips but to honour its contract with Toyota, Harman has to maintain a minimum 4-month level of stocks for all the materials needed to produce car speakers for Toyota.

In return, Toyota incentivized suppliers by returning a portion of the cost reductions gained back them.

After the recovery from 2011’s disaster, Toyota’s rivals were too busy chasing their next targets that they failed to look behind to learn from their past mistakes, while Toyota beat themselves to recognize their mistakes. Those who failed to learn from the past are now repeating the same mistakes.

Of course, the global chip supply crunch is not going to go away soon, estimates say the problem will stretch to 2022 but Toyota is not losing sleep over it.

Toyota will continue to face more sporadic, small scale cuts in production, but the company expects these problems to be manageable, and is projected make 2.5 trillion Yen in operating profit for financial year ending March 2022.

Has Malaysia learned?

In the 1980s, former Prime Minister Dr. Mahathir pushed the country towards a ‘Look East’ policy, to learn from Japan, a country that rebuilt itself after being bombed to ruins in World War 2, to building the world’s best cars and fastest trains in just one lifetime.

If Japan can grow so fast, so too can Malaysia, if its people are willing to learn from Japan, so thought Mahathir.

He forgot one thing – studying for knowledge is easy. Building character and adopting a new, kaizen way of thinking is difficult.

Kaizen goes beyond manufacturing, it's a way of thinking, applicable beyond manufacturing. Here is Toyota’s TPS being applied in hospitals and disaster recovery efforts.

From our failed national car projects, failed Multimedia Super Corridor, an economy that’s only a shadow of its glory days in the ‘90s, and why all our neighbours are overtaking us, Malaysia has yet to learn.

The current government has had one year’s worth of practice with MCO, and yet it can still manage to mess things up so badly.

If Malaysia is a student, it must be the slowest learner in school. So what should we do with slow learners?