Since surpassing General Motors to become the world’s largest car manufacturer in 2007, Toyota has suffered a rather ill fate. In the last year Toyota has recalled over ten million cars. The company’s largest recall ever, 3.8 million cars, occurred in September 2009. Where did it all go wrong for the company who could once credibly claim to produce “The best built cars in the world”?
Flashback to 1995 and Toyota was a company with modest profits (3.4 percent of total sales, only half that of GM at the time) and relatively small market shares in Europe and America (2.5 percent and 8 percent respectively). It was built on a combination of cutting edge manufacturing; an obsession with customer satisfaction; and a culture of excellence and empowerment. This ruthless trio was instrumental in the realisation of Toyota’s global ambitions over the next decade.
America’s “Big Three” of GM, Ford and Chrysler had no answer to Toyota’s revolutionary Just-In-Time production system. A system built on the principles of eliminating waste and continuous improvement. The American companies had no option but to copy elements of the Japanese system, ironically modelled on US Second World War production techniques.
Production was fully synchronised and empowered workers could halt assembly at any time, should they discover an error. This contributed to a brand built on quality assurance. High petrol prices drove Americans to the economical Toyota models, and high quality kept them coming back.
Toyota had enviable flexibility owing to its ability to produce as many as eight different models simultaneously on its assembly lines, and a product development process which lasted just 18 months. This meant that when the market began to lean towards environmentally friendly cars, Toyota could react quickly by bringing out the Prius, a trendy hybrid.
One strength Toyota had, which could not easily be replicated by its competitors, was its culture. This was founded upon half a century of treating its employees with respect and dignity. A lifetime employment policy is one such example of the confidence it placed in its employees.
Toyota had flexibility, low cost, high quality, and it could not be beaten on technology. It seemed unstoppable.
The Japanese titan grew rapidly as the world watched in awe. On the eve of overtaking GM as number one in 2007, danger was on the horizon. Product recalls, albeit small ones by the standards to come, were starting to become a theme. Toyota models were slipping in consumer reports.
The first signs that Toyota had overstretched its assembly lines in efforts to chase volume were beginning to show.
A consequence of its breakneck expansion was that it became increasingly reliant on suppliers outside Japan with whom it did not have prior working experience. In other words, Toyota began to cut corners by its old standards – the old standards upon which all of its success was built.
Generally speaking, things were not all bad. It was financially healthy, posting returns of 6.7 percent and profits of $11 billion (over twice its nearest competitor, Nissan), and its image of reliability and quality was still largely intact.
With the recession came Toyota’s first annual losses in 50 years as the whole industry took a hit. Then the cracks in the armour really started appearing.
Recall upon recall was followed by appearance after appearance of Toyota President Akio Toyoda making public apologies. The most notable was in December 2009 when he rather dramatically spoke of the demise of Toyota to stunned Japanese journalists. Share prices tumbled as more models were recalled, mainly due to acceleration problems.
The flexibility which was once Toyota’s hallmark began to be replaced by sluggishness. In China it failed to take advantage of tax breaks for vehicles with smaller engines. In Europe it did not respond to scrappage schemes. The company which prided itself on staying ahead of the game was being left behind by its rivals.
In January of this year, the firm announced that it would halt production temporarily at six assembly plants in North America and suspend sales of eight of its most popular models, including the Camry, the best-selling car in the United States. The mystique of the Toyota brand was gone. To be seen as just another car manufacturer was once the worst nightmare of Toyota management, but it soon became a flattering prospect.
So, after a year of embarrassment, what does the future hold?
In July it appointed its first non-Japanese head of European operations, Didier Leroy, as part of its strategy to give regional branches more autonomy. Over the coming years, Toyota will look to emerging markets for much of its growth.
It is enjoying some success in the environmental end of the market, with the Prius passing the 2 million sales mark last month.
On the supply side, Toyota should recover without much trouble. It still has some of the best engineers in the world, and capital to invest. As for demand, the scars on Toyota’s hard-earned reputation will not be so quick to heal. For another brand this would not be so bad, but for a brand built on quality assurance and reliability, the extent of the damage remains to be seen.
The world owes a debt of gratitude to Toyota for its contribution to the evolution of manufacturing. Its place in history is assured; its place in the future will be decided over the coming years.
