Toyota: losing its shine
IT IS not unusual in Japan for corporate leaders to make semi-ritualized displays of
humility. But when Akio Toyoda, president of Toyota Motor Corporation since June and
grandson of the firm's founder, addressed an audience of Japanese journalists in October
his words shocked the world's car industry.
Mr Toyoda had been reading "How the Mighty
Fall", a book by Jim Collins, an American management guru. In it, Mr Collins (best known
for an earlier, more upbeat work, "Good to Great") describes the five stages through which
a proud and thriving company passes on its way to becoming a basket-case. First comes
hubris born of success; second, the undisciplined pursuit of more; third, denial of risk and peril;
fourth, grasping for salvation; and last, capitulation to irrelevance or death.
Only 18 months ago Toyota displaced General Motors, a fallen icon if ever there was one,
as the world's biggest carmaker. But Mr Toyoda claimed that the book described his own
company's position. Toyota, he reckoned, had already passed through the first three
stages of corporate decline and had reached the critical fourth. According to Mr Collins,
fourth-stage companies that react frantically to their plight in the belief that salvation lies
in revolutionary change usually only hasten their demise. Instead they need calmness,
focus and deliberate action.
Is Toyota really in such dire straits? And if it is, can a company that for decades has been
the yardstick for manufacturing excellence turn itself around in time?
A reliable engine stalls
In many ways, Mr Toyoda is right to sound the alarm.
Toyota could not have been expected to shrug off the
storm that swept through the car industry after the
collapse of Lehman Brothers in September last year; but
rivals, notably Volkswagen (VW) of Germany and
Hyundai Kia of South Korea, have weathered it far
better. In the past Toyota went on racking up profits in
booms and recessions alike. Not this time.
In the financial year that ended in March, amid
admittedly the worst sales slump in the industry's
modern history, Toyota made a net loss of ¥437 billion ($4.3 billion), it's first since 1950.
Even more startling, the former cash machine (it had rung up a record profit of ¥1.7
trillion the year before) managed to lose ¥766 billion in the three months to March
alone—the equivalent of $2.5 billion more than GM did in the same period as it hurtled
towards bankruptcy. Toyota expects to lose ¥200 billion this year. But for belated costcutting
measures and falls in raw-material prices, the forecast would be worse.
Some analysts think that is conservative, because sales in America and Japan appear to
be recovering slowly and costs are being slashed further (the company says it is shooting
for "emergency profit improvements" of around ¥1.25 trillion). In the most recent quarter
Toyota made a surprise net profit of ¥58 billion. It also raised its sales forecast for the
year from 6.6m units to 7m. Much, however, depends on the yen-dollar exchange rates.
The yen has been climbing, and a rise of ¥1 can subtract ¥30 billion from Toyota's bottom
line.
What should be worrying Mr Toyoda more than the firm's short-term financial position—
its cash pile is an enviable ¥2.65 trillion—is the loss of its once seemingly unstoppable
market-share momentum. In 2002 the then president, Fujio Cho, declared that Toyota
was aiming for 15% of the global market by 2010. It chased volume at almost any price.
By 2007 Toyota's sales had reached nearly 9m cars, 13.1% of the world total. Last year
that share was stable, but this year it seems likely to fall to 11.8. It has been flat or
falling in every important region except Japan, where it
has benefited from generous tax breaks on hybrid
vehicles, in which it is stronger than its domestic rivals.
In America, Toyota's largest and hitherto most profitable
market, its share has stayed at around 16.5%, hardly a
brilliant performance given Detroit's long, dark night of
the soul. So far this year its sales are down by nearly a
quarter—a figure not as dreadful as GM's, but much worse
than VW's and worse even than Ford's. Hyundai's sales
went up.
In Europe, Toyota's share was the lowest since 2005. Most
worrying, after several good years it fell back in China, not
only the world's fastest-growing car market but now also
it's biggest. Toyota lost more than two points of market
share, the worst performance of the 24 brands on sale in
the country (see chart 3). In Brazil and India, Toyota
scraped along with little more than 2% of either market.
Toyoda's to-do list
There is plenty here to concern Mr Toyoda. The first is that for a global carmaker Toyota
has been slow off the marks in several emerging markets that are likely to provide nearly
all the growth in sales when the mature markets of America, Western Europe and Japan
have recovered to something like normality.
VW is far ahead of Toyota in China and out of sight in Brazil. GM, for all its difficulties, is
still doing better than Toyota in China and sells nearly ten times as many vehicles in
Brazil. Hyundai almost overtook Toyota in China this year and is the biggest foreign car
brand in India. Toyota's first low-cost car designed especially for the price-sensitive
Indian market is still a year away.
The second thing that Mr Toyoda should reflect upon is that Toyota is sluggish for
different reasons in different markets. This may make answers harder to find. In China, it
took longer than rivals to respond to tax breaks for vehicles with smaller engines and it
has made less effort to develop cars specifically for the Chinese market. In Europe, the
solid but ageing Yaris and the dull Auris left it poorly placed to exploit the scrap page
schemes that boosted sales, and its lack of a full range of competitive diesels continues to
hinder it.
In America, Toyota is still hugely powerful. It sells more cars there than anyone (the
Detroit Three remain highly dependent on big pickups and sport-utility vehicles), it leads
in small trucks and it has the bestselling luxury brand in Lexus. But it has also been
clobbered by an avalanche of bad publicity, after the recall of 3.8m Toyota and Lexus
vehicles. The recall was prompted by the crash of a Lexus saloon in which a California
Highway Patrol officer and his family were killed. The apparent cause was "unintended
acceleration".
At first the National Highway Traffic Safety Administration (NHTSA) and Toyota thought
that a badly fitting floor mat could have jammed the accelerator open. Both still think that
probable. But the NHTSA is continuing its investigation, having received more than 400
complaints about acceleration problems that appear to have been responsible for several
fatal accidents. It is now focusing on possible problems with the design of the throttle
pedal and the vehicles' electronics. On November 25th Toyota announced that it would
reshape the suspect pedals or fit redesigned ones in 4.26m vehicles. Some will also get
reshaped floor-pans and a brake-override system.
America's ever-eager plaintiff lawyers already have Toyota in their sights. A Californian
law firm specializing in customer class-action suits, McCuneWright, filed a suit on
November 5th. Citing 16 known deaths and hundreds of injuries, it alleged that "neither
driver error nor floor mats can explain away many other frightening instances of runaway
Toyotas."
Almost every carmaker has had to contend with recalls and ambulance-chasing lawyers,
but in a place as litigious as America the reputational damage can be severe. Audi (part
of the VW Group) has taken more than 20 years to recover from reports of unintendedacceleration
allegations that ultimately proved to be groundless.
In another class-action suit, triggered by a former employee, a corporate lawyer named
Dimitrios Biller, Toyota is accused of trying to cover up evidence that it knew some of its
vehicles could be deadly in rollover accidents. These were not high-sided SUVs, which are
prone to rolling over, but its bestselling Camry and Corolla saloons. The company has
raised questions about Mr Biller's veracity and employment record, but the allegations
have not gone away. The suggestion that squeaky-clean Toyota's behavior may have
resembled that of Ford and GM, which in the distant past covered up problems with the
Pinto and the Corvair, is especially wounding.
Last month Toyota's standing was dealt a further blow. The Insurance Institute for
Highway Safety, a car-safety research group funded by insurers, announced its highestrated
cars and SUVs for 2010, having added a rollover roof-strength test this year. Not
one of the 27 vehicles it chose was a Toyota. The company called this finding "extreme
and misleading".
The danger in all of this for Toyota is that its loyal (and mostly satisfied) customers in
America have long believed that the firm was different from others and thus hold it to a
higher standard. The moment that Toyota is seen as just another big carmaker, a vital
part of the mystique that has surrounded the brand will have been rubbed away.
Another part of that mystique has also suffered some scratches. Just as Cadillac used to
be synonymous with luxury and BMW with sportiness, Toyota was a byword for quality
and reliability. A few years ago its crown slipped when a number of quality problems
surfaced. In July 2006, after a spate of well-publicized recalls, Katsuaki Watanabe, Mr
Toyoda's immediate predecessor, bowed in apology and promised to fix things with a
"customer first" programme that would redirect engineering resources and, if necessary,
lengthen development times.
However, the recalls continued and Toyota started
slipping in consumer-quality surveys. A year later
Consumer Reports, an influential magazine, dropped
three Toyota models from its recommended list. The
magazine added that it would "no longer recommend
any new or redesigned Toyota-built models without
reliability data on a specific design".
People within the company believe these quality
problems were caused by the strain put on the fabled
Toyota Production System by the headlong pursuit of
growth. Toyota now looks as though it has been largely
successful in solving them. In the latest annual reliability
study published by Consumer Reports, Toyota boasted
18 of the 48 leading vehicles. Honda, the next best, had only eight.
However, Ford vehicles, long among the also-rans, are now showing "world-class
reliability". To back up the claim, Ford's highly praised new Fusion beat not only the
Camry but also its main rival, the Honda Accord, as the best in the hugely important midsize
segment. In an annual study of the dependability of three-year-old vehicles, J.D.
Power, an automotive consultancy, placed Buick (a GM brand) and Jaguar joint first,
ahead of both Lexus and Toyota.
For years Toyota has been the quality benchmark for every carmaker, but at the very
moment it faltered, others were finally catching up. The truth is that although a few fail to
make the grade—Chrysler still has a lot of catching-up to do—most cars these days are
extraordinarily well-made. The quality surveys by which buyers used to set such store are
now based on minute differences. This is the main reason why the manufacturers'
positions in the league tables have become increasingly volatile.
If Toyota can no longer rely on its superior quality to give it an edge, its vehicles will
inevitably be judged increasingly on more emotional criteria, such as styling, ride,
handling and cabin design. In America, Toyota is likely to face much more consistent
competition from at least two of Detroit's Big Three, while both Hyundai and VW are
starting to snap at its heels. The South Korean company has put on an astonishing spurt
this year, adding about two points of market share to take it to 7.2%. Its Lexus-rivaling
Genesis saloon was named North American car of the year. In 2010 it will start selling the
new Sonata, which looks like being a great improvement over the old model, aiming it
squarely at the Camry.
And whereas Toyota's sales have fallen by 23.8% in America so far this year, VW's sales
have dropped by only 6.6%. In 2011 VW will start making cars in America after a break
of more than 20 years. The first car out of the factory in Chattanooga, Tennessee, will be
a saloon specially designed for the American market. It too will take on the Camry. VW is
planning to double its sales in America by 2018, to around 800,000. Though far short of
the record 2.6m vehicles Toyota sold in America in 2007, this is a sign of the German
group's intent.
The relentless pace at which VW continues to churn out an unending succession of new
models across its unmatched stable of brands, each one keenly priced and brimming with
showroom appeal, has shaken the rest of the industry, Toyota included. VW is laying
plans that it believes will sweep it past Toyota to become the world's biggest carmaker
within a decade. Even now, it is not far behind, although this year it has been helped by
its geographic sales pattern compared with Toyota's. This week VW said it would buy a
stake of 19.9% in Suzuki, a Japanese car- and motorcycle-maker that dominates the
Indian market through Maruti, its local subsidiary.
How will Toyota respond?
Publicity-shy Toyota executives hate announcing detailed strategies to the outside world.
Nor have many of them yet come to terms with Mr Toyoda's urgency and appalling
frankness. Uniformly they spout that his words about the firm "grasping for salvation"
were widely misunderstood. But for all that, there is plenty going on behind the scenes
beyond ferocious cost-cutting. Upon seizing the reins in June, Mr Toyoda immediately
ordered a back-to-basics overhaul of product development across the firm's global
operations.
One conclusion was that Toyota should be more ruthless in exploiting its early leadership
in commercializing hybrid systems and electric-vehicle technology. Although every other
big carmaker is launching new hybrids and purely battery-powered vehicles, or is
preparing to, Toyota is convinced that it is still ahead of the pack. Within a few years
there will be a hybrid version of every car Toyota makes and there are plans to extend
the Prius brand to cover a range of innovative low- and zero-emission vehicles.
Another conclusion and possibly a more radical notion was that Toyota must stop making
so many dull cars with all the appeal of household appliances. Importantly, Mr Toyoda is
what is known as a "car guy", a part-time racer and an enthusiast for cars that are
designed with passion to engage the right-side as much as the left-side of the customer's
brain. At the Tokyo motor show in October he said pointedly: "I want to see Toyota build
cars that are fun and exciting to drive."
There is also only so much that one man can do to shift the culture of a vast organisation.
But there is nothing engineers like more than to be challenged, and Toyota employs many
of the worlds finest. The latest, third-generation Prius and the brilliant little iQ city car
show what they are capable of. So, in a very different way, does the 202mph (325kph)
Lexus LFA. Kaizen, the pursuit of continuous improvement, is, after all, embedded deep in
Toyota's DNA and only needs prodding.
The test will be to keep the ingredients that have made Toyota great—the dependability
and affordability—while adding the spice and the flavors that customers now demand. It
will not be easy, and the competition has never looked more formidable. But by
recognizing the scale of Toyota's problems, by proclaiming their urgency and then by
drawing on the firm's strengths to fix them, Mr Toyoda has already taken the first, vitally
important, step towards salvation.
No comments:
Post a Comment