Chip Shortage Finally Becomes Too Much for Toyota

Toyota TM has been stockpiling chip modules since the 2011 tsunami in Japan, which has allowed it to escape the vast majority of the production problems that rivals such as General Motors and Ford have suffered from the semiconductor shortage. However, the duration of the shortage and COVID-19 shutdowns in Malaysian chip plants have finally proved too much for even Toyota. On Aug. 19, the firm announced large shutdowns throughout the world, especially for 14 Japanese plants, that globally will reduce September output by about 40% from planned production, or 360,000 vehicles, according to Automotive News. We are not changing our fair value estimate or fiscal 2022 EPS and profit projections yet, because in an Aug. 19 SEC filing, Toyota said it is leaving its Aug. 4 guidance in place. We believe this guidance is in jeopardy, though, as it is highly uncertain as to when meaningful improvement in chip supply occurs or when COVID-19 will abate in Malaysia. Automotive News also reported that these losses are in addition to about 20,000 lost Japan units in August and a Toyota spokesperson told The Wall Street Journal that North America will lose 40% to 60% of planned North America August production, or as many as 90,000 units. Most of the lost 360,000 units break out as about 140,000 lost in Japan, 80,000 in China, 80,000 in North America, 40,000 in Europe, and 8,000 in other Asia markets. The impact is wide across many Toyota, Lexus, and Daihatsu models and includes popular U.S. vehicles, such as the Prius, RAV4 crossover, and various Lexus sedans and crossovers, such as the RX. We consider Toyota's balance sheet to be a fortress, so we are not worried about long-term damage to the company. We consider any prolonged sell-off of Toyota's stock to be a buying opportunity for patient investors. We believe that the more lost production occurs in calendar 2021 that the more drastic the volume recovery for all automakers will be once the chip shortage ends in 2022 or perhaps 2023.

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