Saturday, February 13, 2010

What Happened To Toyota?

It's another black eye for Japan, Inc.

In this case, it's Japan's "National Champion" global
automaker Toyota, Inc. which last year overtook a
weakened GM as the world's largest automaker.

The problems started back in early 2007, when reports of
sticking accelerators in certain Toyota models began to
filter back to Toyota's headquarters. But, as these incidents
were isolated and didn't affect the home Japanese market,
they were dismissed as minor and handled through the
warranty process. But later that year, there was a premonition
of problems to come when 2 million 2002-2005 U.S. market
Toyota Camrys were recalled to fix a seat belt assembly that
could detach from the car floor in a crash. This one was
caught early and handled relatively quickly.

But a year later came the real problems. Two million
2005-2007 Camrys sold in several markets were recalled
for sudden unintended acceleration, a problem ultimately
traced to accelerator pedals and throttle linkages that
became worn and would become trapped in the floor
mats, which themselves were poorly designed.

And now came the real problems. Two million more
Toyotas, this time including several models, have been
recalled not only for the previous "floor mat and pedal"
problem, but for problems with the electronic throttle
module. And, unlike the older models, these cars come
with electronic pushbutton starters - which means
if the car gets away from you, you can't shut it off.

And then finally, came the crusher. Toyota's flagship
product, the innovative 2010 hybrid Toyota Prius,
has been recalled for failure of its regenerative braking
system, affecting some 410,000 vehicles worldwide.
And this time, Toyota's luxury brand Lexus is also
affected, with its IS 250 hybrid recalled as well. To
cap off the embarrassment, this particular problem first
cropped up in Japan, where to their credit the Japanese
Transport and Trade ministries were instrumental in
alerting the U.S. and other markets to the extent of the

This, of course, has resulted in every global automaker's
worst nightmare - a complete halt to both production and
sales in the company's most important markets, while
engineers and safety experts inside Toyota and the U.S. and
Japanese governments feverishly search for solutions.

To my thinking though, something like this was bound to
happen sooner or later. While Japan, of course, has several
global automakers, including Honda, Nissan, and Mitsubishi,
none of these approaches the global scale of Toyota, which
manufactures not just in Japan but in the United States,
Brazil, India, Britain, and China as well. Adding
in countries where Toyota assembles cars from
partially built kits or has joint ventures to manufacture
other brands, Toyota either makes or assembles cars in
twenty different countries and sells them in a hundred

As you might imagine, managing global supply
chains for so many far-flung operations is a huge and
expensive venture, a task that at Toyota was always
under top management scrutiny for cost savings. The
first step in streamlining operations and reducing costs
was to design components and subsystems that could be
used across several different models and platforms - a
common practice among automakers worldwide, but one
that was relatively new to Toyota.

Second, Toyota became a leader in outsourcing the
design, testing and manufacture of these components
to other manufacturers, in order to focus on its "core
competencies" in design and marketing. Many of these
companies in turn further subcontracted their
manufacturing to others, in order to meet Toyota's
demands for "lean inventories" and "just-in-time"

What this means is that the typical Toyota vehicle
assembled in the U.S. may have only 51% U.S. content
(necessary to qualify as a "domestic" vehicle), and the
balance may come from not just Japan but Korea,
China, Brazil, Canada, and Mexico. Indeed, the final
Toyota product may have less than 50% original
Toyota-manufactured content. Contrast this, of course,
to Japanese-made Toyotas, where virtually all content
is Japanese - as prescribed by both law and custom.

And somehow in all the "co-ordination", "supply chain
management" and "global sourcing", Toyota's most
precious asset - its reputation for utter quality and
total reliability - got lost in the shuffle.

To be sure, remedial actions are the order of the day.
Reliable replacement parts are starting to arrive, and
some U.S. Toyota dealers are open around the clock
with help from Toyota to both repair customers' cars
and fix problems with dealer inventory. And Toyota
chairman Akio Toyoda, scion of the founding family,
publicly apologized both on Japanese national TV
and before a committee of the Diet - an unprecedented
loss of face for so important a figure of Japan, Inc.

The likely outcome of all this is that Toyota will, of
course, go on. But I wouldn't be at all surprised if
some of the remedial steps taken include a
"repatriation" of some manufacturing activities
and an "in-sourcing" of some component
design and manufacturing back to Japan.

And I don't think that this will affect overall
U.S. manufacturing employment for Toyota,
as the suppliers for the defective floor mats
and throttle parts, both U.S. companies,
do all their manufacturing in, of course, China.

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