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Toyota: playing the catch-up game, successfully

Toyota Motor Corporation is a latecomer to China, as far as automobile assembly is concerned. It established its first automotive joint venture, the Sichuan-Toyota Motor Co., Ltd. in 1998, 13 years later than Volkswagen of Germany. The leading Japanese automaker arrived also much later than General Motors, Honda, Citroën and other world automotive big names.
But as often happens in the business world, a latecomer may well catch up with and overtake the early birds if it has the right strategies and the right people to execute them. Toyota is well positioned to do just that in China.
Toyota’s catch-up game has already yielded impressive results. It has so far established four assembly plants in China, which turn out 10 vehicle models. It can now rely on 120 local suppliers for OEM parts. In February 2005 it set up an engine plant in Guangzhou, South China, which will supply not only for the Guangzhou-Toyota JV but also for export. It has set up another engine plant in Changchun, headquarters of its leading partner, FAW. In August 2005 a new model of Toyota, the Reiz, upset China’s medium-grade car market with a price that is markedly lower than that of other cars of a comparable grade. In 2006 Toyota is scheduled to begin making its popular Camry cars in Guangzhou.
Toyota has announced that it would strive to win a 10 percent share of the car market in China by the year 2010. This is certainly a tall order even for the “unstoppable” Japanese automaker, in the words of Business Week magazine, since at present its share in the highly competitive Chinese car market is only about 2 percent. But Toyota seems to have all the cards to win the game.
Apart from the successful courtship of two important local partners and the government, one of its strongest cards, perhaps, is that it has sent the right people to China.
When Toyota established its first joint venture in China, which is located in Chengdu in southwest China’s Sichuan Province, the company sent Ritsuo Shingo to serve as the CEO for the medium bus plant that makes the Coaster. From the outset Shingo set the goal of balancing expenditure and income in the first year for the joint venture. He vigorously implemented stringent cost-cutting measures at Sichuan-Toyota. One of Shingo’s rules was that staff members, including himself, could stay only in hotels that charge less than ¥400 ($50) a night for a room on business trips. He ordered second-hand desks and chairs for his office. Sichuan-Toyota was able to break even in the first year, quite a feat for a new joint venture assembly plant. During his three years at the Sichuan plant, Shingo never had a day off on weekends.
In January 2002 Isogai Masashi became the second general manager of Sichuan-Toyota after Shingo was promoted to be the chief representative of Toyota’s China Office. When Masashi took over, the plant had plenty of unsold Coasters and the company owed banks ¥90 million in loans.
“Our most serious difficulties were inventories and capital,” said Masashi. “We need desperately to work on sales and marketing.” That is how Masashi came to know and to be impressed by Sichuan’s fiery liquor. Toasting with hard liquor is an unavoidable form of public relations in China, especially when it comes to sales and marketing. As sales of buses are conducted through order placement gatherings, Masashi learned how to expedite sales with the white spirit. “I often drank at least 20 glasses of the local Chengdu liquor a day,” Masashi said with a smile.
To drive up sales, Masashi instituted a new pay scheme for the sales and marketing personnel. Their fixed salary has been replaced by a 60 percent fixed salary plus a 40 percent floating pay that is tied to sales performance. With such incentives, sales of the Coaster bus have gradually increased to a stabilized 4,000 units a year, or about 7.5 percent of the market for the medium bus in China
Masashi’s market acumen in China is not unrelated to the fact that he got acquainted with Chinese culture since childhood. His father used to teach ancient Chinese literature at a secondary school in Japan. “In fact, the biggest impact of Chinese culture on me is character formation,” he said. He has learned to remain calm and resourceful in the face of a crisis.
In April 2003, as the Prado SUV reached its critical pre-launch debugging stage, Toyota headquarters was sending a 30-member technical team to the Sichuan plant to help. But just during that period an epidemic, SARS (severe acute respiratory syndrome), assaulted China. The airport in Chengdu was half closed. Any delay of the team would mean a postponement of 3-5 months for the launch of the Prado. Masashi was terribly worried, but remained calm in dealing with the crisis situation. He quickened the work tempo at the plant, contacting the local government, investigating conditions of the airport and sending all relevant information to Japan. With proper arrangement, the technical team arrived in Chengdu as scheduled. As scheduled, too, the Prado came off the assembly line.
“I love Sichuan,” said Masashi, who was promoted to head the Toyota (China) Investment Co., Ltd. when it was founded in Beijing in January 2004.
His successor at Sichuan-Toyota is Satoru Mori, who has since then placed utmost emphasis on cutting costs in face of hiking prices of raw materials. Mori set the goal of cutting ¥80 million in costs for 2005. This cost cutting alone, if accomplished, would enable Sichuan-Toyota to increase profit by 30 percent, calculated on the basis of its profit of ¥280 million in 2004.
Sichuan-Toyota’s cost cutting measures in manufacturing involve three areas: reduction of in-house manufacturing cost, reduction in the rate of rejects of machined parts and cost-cutting proposals from the workforce.
In each area are listed specific cost cutting items. For example, According to the company’s analysis in 2004, 46 percent of the in-house cost came from raw materials, eight percent from auxiliary raw materials, eight percent expendables, eight percent labor, four percent energy consumption and 24 percent from equipment depreciation.
The cost-cutting program requires a reduction of 10 percent in the use of raw materials, for example, from ¥7,067 to ¥6,355, including a reduction of 4.3 percent in the use of coating and paint, from ¥1,338 to ¥1,281. In 2004, a total of 239 cost-cutting proposals were raised from the workforce, involving ¥240,000. In 2005, proposals were expected to help cut cost by ¥1 million.
Detailed records are made of everyday changes in cost at Sichuan-Toyota. The record of a manufacturing team shows that, from September 1 through 8, 2005, cost for a single item for the Coaster bus fell from ¥1,036.15 to ¥869, against the cost-cutting goal of ¥883.96 for the entire year.
Figures such as these are mind-boggling and may be monotonous. But this is precisely part of Toyota’s way of doing things, which has enabled Sichuan-Toyota’s profit to increase by big margins year after year.
A veteran worker at Sichuan-Toyota said: “At the beginning, we were told to strictly follow rules no matter how trivial the rule might be. On tying of wires, for example, technicians from Toyota insisted on a certain way of tying. At the beginning, we thought it quite unnecessary. But as we kept doing the job in the correct way, efficiency has greatly improved.”
Toyota has emphasized on mutual growth with parts suppliers. Since founding, Sichuan-Toyota has established cooperative relations with 88 parts suppliers in east, north and southwest China. This has made it possible for the company to increase the rate of localization and cut production costs. It also complies with Toyota’s industrial policy of seeking joint development with parts suppliers. The rate of localization for the Coaster has reached 60 percent and that for the Prado, 25 percent, according to Haruaki Hoshino, who has recently succeeded Mori as CEO of Sichuan- Toyota. Mori was promoted to the position of general manager of FAW-Toyota Motor Sales Co., Ltd.
An important part of the Toyota Way is to refrain from borrowing from banks. Sichuan-Toyota was able to comply with this policy a long time ago. In 2001 it repaid the last of its bank loans, to the great relief of Isogai Masashi and Liu Jurong, deputy general manager .
It took the Sino-Japanese automaker two years to complete plant construction and three years to become profitable. In fact, its profit and tax payment has kept increasing at an average annual rate of 32.5 percent.
Sichuan-Toyota may be just a part of Toyota operations in China. But observers note that the Sichuan joint venture is Toyota’s model plant here. It has been able to copy the Toyota Production System to the fullest extent thanks to a succession of competent, hardworking executives from the Japanese auto giant. The story of Sichuan-Toyota offers but a partial picture of Toyota’s operations in China, but its success is ample evidence that Toyota is catching up with the early birds, fast.

Rewritten based on stories published in 21 Shiji Jingji Baodao (21st Century Business Herald) and Meiri Jingji Xinwen (National Business Daily)

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