Sunday, April 16, 2006

The Toyota Way

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The car company in front
Jan 27th 2005 | NAGOYA
From The Economist print edition

Toyota makes lots of money and is overtaking General Motors to lead the world's car industry. What is the secret of its success?

THERE is the world car industry, and then there is Toyota. Since 2000 the output of the global industry has risen by about 3m vehicles to some 60m: of that increase, half came from Toyota alone. While most attention over the past four years has focused on a spectacular turnaround at Nissan, Toyota has undergone a dramatic growth spurt all round the world. Japan's industry leader will soon be making more cars abroad than at home. It has overtaken Ford in global production terms and is set to pass Chrysler in sales to become one of America's Big Three. In an industry strewn with basket cases, where hardly any volume producer makes a real return on its capital, Toyota is exceptional in that it consistently makes good returns (see chart 1).

Toyota's ebullient chairman Hiroshi Okuda has made little secret that he wants the company to win 15% of the global car market, snatching leadership from General Motors. Having reached Global Ten (10% of the world market) Mr Okuda has his eyes focused on his new goal. “It's just to motivate employees,” says Fujio Cho, Toyota's more downbeat president. “Somehow news of the banners in our factories leaked out,” he says disingenuously, as if you could keep such a secret after it has been blazoned to 264,000 workers around the world.

Market capitalisation says it all. Toyota is worth more than the American Big Three put together, and more than the combination of its successful Japanese rivals, Nissan and Honda. Last year Nissan may have outperformed Toyota in terms of operating margin, but over the long haul it has been the provincial powerhouse from Aichi prefecture near Nagoya that has consistently shown the way.

First, of course, it taught the modern car industry how to make cars properly. Few had heard of the Toyota Production System (TPS) until three academics in the car industry study programme run by Massachusetts Institute of Technology (MIT) wrote a book in 1991 called “The Machine that Changed the World”. It described the principles and practices behind the “just-in-time” manufacturing system developed at Toyota by Taiichi Ohno. He in turn had drawn inspiration from W. Edwards Deming, an influential statistician and quality-control expert who had played a big part in developing the rapid-manufacturing processes used by America during the second world war.

At the core of TPS is elimination of waste and absolute concentration on consistent high quality by a process of continuous improvement (kaizen). The catchy just-in-time aspect of bringing parts together just as they are needed on the line is only the clearest manifestation of the relentless drive to eliminate muda (waste) from the manufacturing process. The world's motor industry, and many other branches of manufacturing, rushed to embrace and adopt the principles of TPS.

In the process American and European cars went from being unreliable, with irritating breakdowns, leaks and bits dropping off in the 1970s, to the sturdy, reliable models consumers take for granted today. In real terms car prices may only have edged down over the past two decades compared with the drastic reductions seen in personal computers and all consumer-electronics goods. But the quality, content and economy of today's cars is incomparable with what was on offer 30 years ago. The main credit goes to the Japanese, led by Toyota. High petrol prices drove American consumers to buy economical Japanese imports; high quality kept them coming back. Europeans, too, were quick to see the attraction of cars that seldom broke down, unlike the native varieties. When trade barriers were erected, the Japanese built their plants inside them. Toyota may have been slower than Honda or Nissan to expand abroad, but its manufacturing method gave it an advantage once it did so.

So Toyota's success starts with its brilliant production engineering, which puts quality control in the hands of the line workers who have the power to stop the line or summon help the moment something goes wrong. Walk into a Toyota factory in Japan or America, Derby in Britain or Valenciennes in France and you will see the same visual displays telling you everything that is going on. You will also hear the same jingles at the various work stations telling you a model is being changed, an operation has been completed or a brief halt called.

Everything is minutely synchronised; the work goes at the same steady cadence of one car a minute rolling off the final assembly line. Each operation along the way takes that time. No one rushes and there are cute slings and swivelling loaders to take the heavy lifting out of the work. But there is much more to the soul of the Toyota machine than a dour, relentless pursuit of perfection in its car factories.

Another triumph is the slick product-development process that can roll out new models in barely two years. As rival Carlos Ghosn, chief executive of Nissan, notes in his book “Shift” (about how he turned around the weakest of Japan's big three), as soon as Toyota bosses spot a gap in the market or a smart new product from a rival, they swiftly move in with their own version. The result is a bewildering array of over 60 models in Japan and loads of different versions in big overseas markets such as Europe and America. Of course, under the skin, these share many common parts. Toyota has long been the champion of putting old wine in new bottles: over two-thirds of a new vehicle will contain the unseen parts of a previous model.

Pleasing Mrs Jones

Spend some time with Toyota people and after a time you realise there is something different about them. The rest of the car industry raves about engines, gearboxes, acceleration, fuel economy, handling, ride quality and sexy design. Toyota's people talk about “The Toyota Way” and about customers. In truth, when it is written down the Toyota creed reads much like any corporate mission statement. But it seems to have been absorbed by Japanese, European and American employees alike.

Mr Cho thinks something of the unique Toyota culture comes from the fact that the company grew up in one place, Toyota City, 30 minutes drive from Nagoya in central Japan, where the company has four assembly plants surrounded by the factories of suppliers. In this provincial, originally rural setting, Toyota workers in the early days would often have small plots of land that they tended after their shift. Mr Cho, who made his career in the company by being a pupil of Mr Ohno and becoming a master of production control, thinks that the fact that Toyota managers and their suppliers see each other every day makes for a sort of hothouse culture—rather like Silicon Valley in its early days.

Jim Press is boss of Toyota's sales in North America. He left Ford in frustration 35 years ago, because he did not think it handled customer relations properly and he suspected that the upstart Japanese company making its way in the American market might do better. He was right. Toyota shares a production plant in California with GM. Identical cars come off the line, some badged as GM, the rest as Toyotas: after five years, according to one study by Boston Consulting Group, the trade-in value of the Toyota was much higher than that of the American model, thanks to the greater confidence people had in the Toyota dealer and service network.

Mr Press talks with a quiet, almost religious, fervour about Toyota, without mentioning cars as such. “The Toyota culture is inside all of us. Toyota is a customer's company,” he says. “Mrs Jones is our customer; she is my boss. Everything is done to make Mrs Jones's life better. We all work for Mrs Jones.”


But not even the combination of its world-leading manufacturing, rapid product development and obsessional devotion to customer satisfaction is enough to explain Toyota's enduring success. There is one more ingredient that adds zest to all these. Tetsuo Agata doubles as general manager of Toyota's Honsha plant in Toyota City and as the company's overall manufacturing guru. The magic of Toyota's winning culture was summed up for him by an American friend who observed that Toyota people always put themselves “outside the comfort zone”: whenever they hit one target, they set another, more demanding one. That relentless pursuit of excellence certainly explains much of what has been happening to the company in recent years, at home and abroad.

The strain of going global

Life started changing for Toyota when the economic bubble burst in Japan at the start of the 1990s. First it had to work hard to improve its competitiveness as the yen strengthened. Mr Okuda, president in the mid-1990s, launched a programme of cost-cutting to make the company's exports competitive even at a yen level of only 95 to the dollar. When costs fell and the yen subsequently weakened, Toyota reaped a double reward.

But the company also had to face up to a car market at home that slumped from nearly 6m sales a year to just over 4m. And Toyota has had to respond to renewed competition in its domestic market, after an aggressive push by Honda and the revival of Nissan. One reaction by Mr Cho to tough competition at home has been a further round of cost cuts that have helped Toyota re-build market share in Japan from 38% in the mid-1990s to 44.6% last year, helped partly by windfall sales after the implosion of Mitsubishi Motors.

But European imports of Volkswagens, BMWs and Mercedes cars have mopped up 7% of the Japanese market, mostly for premium models, and forced Toyota to introduce its luxury Lexus brand into Japan. Until now, cars that Americans and Europeans have known as Lexuses have been sold as plain old Toyotas in Japan. Now Mr Cho has decided, as part of a wider reorganisation of Toyota's distribution network, to sell these vehicles separately with the Lexus badge and support from their own up-market retail outlets.

One of Toyota's strengths has been its army of privately owned car dealers, long organised into five competing channels, each one more or less specialising in different parts of the range. The multiplicity of distribution channels arose simply because of the rapid growth of the Japanese market and Toyota sales from the 1970s onwards. But in February 2003 Toyota administered what was called the Valentine's Day shock. It streamlined the number of channels down to four, including a new one aimed at the young people turned off by mainstream Toyota's staid image. (It is having to go even further in America with a separate sub-brand called Scion to appeal to young consumers.)

Like all car companies Toyota in Japan has had to get used to a fragmentation of the market, which means there are no longer huge runs of a few bestselling models. The boss of the Tsutsumi plant, where the firm's trendy Prius hybrid cars are made, recalls the good old days when all they had to do was churn out half a million Camrys and Coronas. Today's lines have been adapted and made flexible so that no fewer than eight different models can be manufactured simultaneously. The Prius—despite its revolutionary engine—still has to share an assembly line in the Tsutsumi plant with several conventional models.

Seeds of success

Making all these changes at home is relatively easy compared with Toyota's biggest challenge, now that it has set itself the goal of making more cars outside Japan than at home. Apart from seeking to switch production to exports, Toyota also chased growth outside Japan by building three more plants in North America and two in Europe, starting with Derby in Britain, followed by Valenciennes in the north of France. Between 1993 and 2003, overseas production more than doubled to 2m units, while in Japan it declined from 3.5m to 3m before recovering in the later years to its old level, boosted by exports; about half of domestic production is exported.

This globalisation process has transformed the size and shape of Toyota. In 1980 Toyota had 11 factories in nine countries; in 1990 it had 20 in 14 countries; today it has 46 plants in 26 countries. In addition, it has design centres in California and in France on the Côte d'Azur, and engineering centres in the Detroit area and in Belgium and Thailand.

Although Japan remains its biggest single market, sales topped 2m in North America for the first time last year, and in Europe Toyota is passing through the 1m mark, with 5% of the market, after a long period of slow growth. The opening of plants in Turkey and France and the introduction of the European-designed Yaris small car have done much to make Toyotas more appealing to Europeans, while in America its entry (not without a few hitches) into the enormous market for pick-up trucks and sport-utility vehicles has been responsible for its steady march to beyond 10% of the market. It is now breathing right down the neck of Chrysler.

Let us Prius

Mr Cho acknowledges that such international growth and globalisation is the biggest change happening to the company. He sees his greatest challenge as maintaining Toyota's high standards in such areas as quality while it grows so fast across the globe. For Toyota has only recently started to transform the way it is run to make itself a truly global company rather than a big exporter with a string of overseas plants. Its top-heavy all-Japanese board has been drastically slimmed and five non-Japanese executives, including Mr Press, have been made managing officers, which means that they sit on the executive committee in Tokyo, but are also left free to run their overseas operations on a day-to-day basis without deferring to head office. For Toyota, that is a big step away from centralised rule by Toyota City.

Another leap has been the creation of a Toyota Institute, not just for training Japanese managers, but also for developing groups of executives from all over the world. The centre is expressly modelled on the Crotonville Centre that has played such a big part in the success of General Electric. By having squads of managers moving through development courses, head office can keep tabs on the potential of its people, whilst ensuring that they are thoroughly steeped in Toyota's way of doing things, whether it be in manufacturing, retailing, purchasing and so on.

But globalisation and the rapid growth of production now in places such as China is also straining the learning process further down the hierarchy. Toyota has a flying squad of line workers who move around the world to train locals at new factories or move in to help out when there is a model change going on. These line supervisors train local workers. Toyota has also made astute use of joint-ventures to ease the strain of manning overseas operations: apart from its original one with GM in California, Toyota now has another with a local company in Turkey, with PSA Peugeot Citroën in the Czech Republic and in China, which is the fastest-expanding part of Toyota, in line with the country's rapid motorisation. Toyota reckons that it will learn much about purchasing more effectively in Europe from its French partner in the new joint-venture, which is preparing to unveil a budget car for the European market at the beginning of March at the Geneva Motor Show.

But the company is finding there are limits to the number of Japanese managers and foremen who are prepared to work as expatriates, either on a temporary or permanent basis. So it has opened a Global Production Centre in a former production area in Toyota City. Here, on a given day you can see Filipino and Chinese workers being taught how to assemble Toyota cars. To get round obvious language barriers the instruction makes heavy use of video recordings and inter-active DVDs, a sort of automated, virtual version of watching how Nelly does it.

The best gets better

Perhaps the best single example of Toyota managers' aversion to taking it easy in the comfort zone is back where it started—in the mysteries of the TPS. Mr Agata, one of the firm's manufacturing experts, regards his job as inculcating the virtues of the TPS in a younger generation. But he has concluded that the company has to raise its game. “We have always proceeded by steady improvement,” he says. “But now we need to make step changes as well to keep ahead.” That means finding radically different ways of manufacturing things like bumpers or doors, reducing the number of parts, and developing new machines to form parts more economically.

As GM's bonds sink towards junk status, and as Japanese carmakers steadily overhaul America's Big Three, it must be a chilling thought that Detroit's nemesis is working on ways to improve its performance. No wonder one GM planner mused privately that the only way to stop Toyota would be the business equivalent of germ warfare, finding a “poison pill” or “social virus” that could be infiltrated into the company to destroy its culture.

What else could stop Toyota? Soon it will have the scale to outgun GM. A technological revolution will not threaten it, since Toyota is leading the way with hybrid electrics en route to full-scale fuel-cell electric cars. Consumer preference for exciting designs? Toyota has shown that it can play that game: there is a stylish edginess in recent models such as the Prius, Yaris, the new Avensis and even its venerable LandCruiser SUV. At least the man from GM put his finger on the key to Toyota's success. Provided its culture can be sustained as it goes from being an international Japanese company to a global one, then Toyota's future seems secure.

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