Friday, May 7, 2010


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


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


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


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


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