Toyota appears on track to pass General Motors in global vehicle sales.
James B. Treece - Automotive News - August 18, 2006
Prius is an example of heavy spending on r&d, eliminating waste, and constant improvement.
TOKYO - To see the roots of Toyota Motor Corp.'s excellence, go beneath its new assembly plant in Guangzhou, China. Toyota group suppliers zip parts through a series of underground tunnels to the line building Camrys.
Some parts never go outside before being installed on a car. They therefore require less packaging than similar parts delivered to assembly plants in Toyota City, reducing their cost.
As the Guangzhou plant shows, Toyota's strength does not lie in a single core competency. It rises from a complex, interlocking set of extraordinary skills. These include working closely with suppliers, continually finding ways to innovate and improve, and constantly challenging itself to cut costs.
The result is a carmaker that today dominates the industry in a way no single company has since the glory days of the Ford Model T or General Motors' global dominance in the 1950s.
This year could mark a milestone: Toyota appears on track to pass General Motors in global vehicle sales. In the first half, Toyota's sales rose 10.4 percent to 4.36 million, narrowing the gap as GM's fell 2.3 percent to 4.60 million.
That changing of the guard is not just the result of Toyota's strength in Asian markets such as Japan or Thailand. Much of Toyota's future growth will come in the United States, at the expense of its U.S. rivals. Indeed, Toyota's total sales in the United States topped Ford's during July.
Investors have shown their faith in Toyota's future by bidding up the share price. Toyota's stock market value is roughly 30 percent of the value of all global carmakers combined.
Irrational exuberance? Not at all. Toyota churns out about 30 percent of the global automotive industry's operating profit every year.
If you combined all carmakers' global profits, Toyota would account for about one-third. Other Japanese carmakers would combine for another third. All European, North American and other Asian carmakers together make up the final third.
Toyota's success allows it to invest heavily in the future.
Although the automaker is firmly committed to hybrid powertrains, it also is researching and developing diesel engines, engines that run on biofuels, fuel cells and all of the other potential power sources of future vehicles.
"We have to go ahead with the development of many and diverse types of powertrains," says Toyota CEO Katsuaki Watanabe. Other carmaker CEOs may feel that way, but few can afford to do it.
Consider the current talks between General Motors and the Nissan Motor Co.-Renault SA alliance. Carlos Ghosn, CEO of Nissan and Renault, would like to build light trucks at GM's underused plants. That would be cheaper than Nissan's building factories in North America.
But Toyota doesn't have to seek cheaper alternatives. With a war chest of $19.69 billion in cash, time deposits and marketable securities, it can afford to build any plants it wants.
And it has. Toyota has been opening new plants at a pace that would do Starbucks proud.
Over the past five years, Toyota has opened three assembly plants in China, one in Mexico and a joint-venture plant with PSA-Peugeot/Citroen in the Czech Republic. It also opened powertrain factories in China, India, Poland and Alabama. It currently is building assembly plants in San Antonio; Woodstock, Ontario; and St. Petersburg, Russia.
Toyota paid cash for all of them. It has not borrowed any money to pay for the new plants.
How did Toyota climb to the top?
Some of its strengths are cultural ones shared by the best Japanese companies. These include a respect for lifelong learning that aids kaizen, or continuous improvement. In addition, a consensus management style, combined with a Confucian respect for hierarchy, allows the rapid implementation of decisions.
The Japanese emphasis of the group over the individual also promotes a devotion to the company that some Westerners find extreme. It has not spread abroad easily.
"Japanese companies essentially are a community, not an economic entity," says James Abegglen, a co-founder of Boston Consulting Group and the dean of Japanese management gurus. Abegglen coined the phrases "Japan Inc." and "lifetime employment."
"Remember quality circles?" he asks. They failed in the West because they ran up against a different workers' mind-set, he says. "Stay after work at no pay to help the company get better? Forget it."
That devotion to the company rather than the individual extends beyond the factory floor all the way to the CEO's office. Consider the issue of executive pay.
"U.S. CEOs' income is 550 times greater than the average employee's," says Abegglen. Citing figures from compensation consultants Tower Perrin, he says that in Japan, "the multiple is about 10 or 11 - almost identical to Germany."
"Compensation is distributed within the community, and no one person is given room to be so overly compensated," he says.
To be sure, Japanese management is not a panacea. Lots of Japanese companies have followed Japanese management methods right into bankruptcy.
What sets Toyota apart is its superb management of so many aspects of a complex business. Here are some areas where it excels.
1. Elimination of waste
Perhaps Toyota's most defining characteristic is its obsession with eliminating waste, or muda in Japanese. It is a mind-set that goes well beyond the cost-cutting espoused by other carmakers.
A month before Watanabe became Toyota's CEO in June 2005, the carmaker announced operating profits of ₯1.67 trillion, or $14.60 billion at then-current exchange rates, for the fiscal year that ended March 31, 2005. It was the fattest profit for any Japanese company ever.
One of his first acts as president was to warn the troops against going soft.
Don't think we're flush, he wrote in a companywide memo. We still need to attack costs and waste as much as ever. When making copies, he wrote, always use both sides of the paper.
Analyst Christopher Richter of CLSA Asia-Pacific Markets connects that aspect of Toyota's corporate culture with the company's leadership in hybrids.
"I can imagine Toyota engineers sitting around and talking about all the energy that is lost to heat in braking and how they can recapture that," he says.
"I'm sure that when that engineer started to sell hybrids to his superiors, the light bulbs all went off: This was a way to eliminate waste," he says. "I'm convinced that's why hybrids have such great appeal to Toyota."
2. A culture rooted in manufacturing
Throughout the company, there is a deep respect for monozukuri. The Japanese term literally means "making things." The term connotes a craftsman's devotion to manufacturing, whether by traditional or high-tech methods.
At other carmakers, executives are often split between "bean counters" and "car guys." Factory experts are a distant third in the race to the CEO's job. At Toyota, there are manufacturing men - and everyone else. Both Watanabe and his predecessor, Fujio Cho, worked in Toyota's manufacturing ranks before becoming CEO.
One byproduct of that manufacturing culture is a rabid devotion to solving problems. Things go wrong in a factory. Machines break down. Workers call in sick.
Toyota managers are indoctrinated into the best ways to solve problems.
Don't treat a problem as a one-time glitch. Find out why it happened, and fix it so it won't happen again. Do root-cause analysis, asking the "five whys" to find out the real reason that machine broke down. Don't rely on a written report. Go to the site of the problem and check it out yourself.
Better yet, anticipate problems.
In a classic encounter, Toyota and GM managers met in the mid-1980s to review that week's production at their new joint venture, New United Motor Manufacturing Inc. in Fremont, Calif. A lifetime GM manager, trained not to bother his boss with problems, brightly reported "no problems" in his department. His new Japanese boss looked him in the eye and said, "No problem is a problem."
It's a mind-set that extends into all areas of Toyota's business. Toyota may not want to admit to a problem publicly, but it rarely is in denial.
For example, it never liked to concede to outsiders that younger buyers were turned off by the company's bland styling. But it formed the Scion division to target a younger audience, and it raised the status of the company's designers.
3. Fast, disciplined product development cycles
GM and Ford tend to renew their vehicles on a "leisurely" six- to seven-year product cycle, says CLSA's Richter. "Toyota never lets its lineup get all that old," he says.
Weighted for sales volume, the average age of Toyota's U.S. model lineup is a mere 38 months, Richter says. That includes pickups and luxury models - which Toyota, like its competitors, leaves unchanged longer than its other passenger cars.
Steady investments in plants, equipment and r&d support a regular cadence of new models. Especially compared to American carmakers' lineups, Toyota's are "always fresher and newer - which means they can charge higher prices and get higher profits, which get turned into more new products," Richter says.
Toyota routinely re-engineers models in 18 months or less. By shortening the development time for redesigns, Toyota can make sure its new models are in tune with current market trends, not last year's.
4. Consistent and relentless
Toyota is astoundingly consistent. Some call it steady. Rivals choose another word: relentless.
"They always know where they want to be five years from now and are working at getting there," says Steven Wilhite, who this month left Nissan in Japan to become COO of Hyundai Motor America.Toyota has had some down years. But in a cyclical industry, it manages to mute the swings. In its worst year of the past 10, operating profits fell 9.5 percent in the year that ended March 31, 1999 - to a profit of $6.55 billion.
Toyota hasn't been in the red once during the past half century. It last posted a loss in the six months that ended March 31, 1950. That was three years before GM CEO Rick Wagoner was born.
What are Toyota's weaknesses? What risks does it face?
It will have to cope with external challenges: rising oil and other raw material prices, currency swings and such. But all carmakers face those risks.
The greatest risk arises from its own phenomenal growth. "Toyota has recognized its management constraints. It can only grow so fast," says Ashvin Chotai, an auto analyst at market researchers Global Insight, based in London.
Building factories is easy. Training new hires to understand the Toyota Production System is much harder. So far, Toyota has been able to do it. Walk into any Toyota assembly plant on the planet, and you'll find it runs the same way as the others. That's no small feat, as any automaker will concede. But the effort is putting a strain on Toyota.
Stretched thin, Toyota is reallocating personnel to keep up. It used to send manufacturing experts to Toyota group affiliates such as Kanto Auto Works Ltd., which assembles the Corolla, Lexus SC 430 and others. Now Toyota is calling those experts back to have enough trainers for workers at its new St. Petersburg, Russia, plant.
Chotai argues that stretched management resources may be the real reason that Toyota is increasing production in Japan, despite flat demand there. Toyota thinks it can bring up new capacity more quickly in Japan than in North America because of the strains already evident in its ability to train new workers, he says.
Some cite pell-mell growth as a possible factor behind a notable rise in Toyota's recalls in recent years. In Japan alone, Toyota recalled 1.1 million vehicles through July 20 this year. That's a big increase since 2002, when Toyota recalled just 485,000 vehicles during the entire year.
After accusations that Toyota had refused to issue a recall for a problem that later led to an accident, seriously injuring five people, Japanese who owned Toyota vehicles began calling the company to ask whether their car was safe. Watanabe and other executives issued public apologies and urged owners to bring their cars to dealerships for inspections if they had any concerns.
The company has changed the way it tracks defects and upgraded the status of the executive in charge of quality.
In the United States, Toyota's reputation for quality is intact. But it no longer sets the standard. In the latest J.D. Power and Associates Initial Quality Survey, the Toyota brand came in fourth, behind Porsche, Lexus and Hyundai.
Toyota's future success is not guaranteed. But don't bet against its ability to solve problems.
The day before the official launch of the Camry at the Guangzhou plant, the underground tunnels flooded. A day later, the plant opened on time.