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Toyota production method no longer a mystery

According to its operational report for fiscal 2004, Toyota’s sales maintained a 10 percent growth momentum but unlike in the previous fiscal year, its sales revenue and profits failed to keep pace. Its profit growth of 5.3 billion Yen in 2004 is a far cry from its profit growth of 240.2 billion Yen in 2002 and 395.2 billion Yen in 2003.

As news of reduced profits for Toyota spreads, Wall Streeters who maintain a bearish view of Toyota have immediately found reasons to downgrade the Japanese carmaker. With this latest bad news and its recent recall of large numbers of its pickups and SUVs in the United States, Toyota looks as if it has gone past its growth peak, following in the footsteps of Daimler-Chrysler, Volkswagen, Ford and General Motors.

What has caused Toyota to stall in its seemingly unstoppable growth? Does this indicate that the world auto industry is going downhill as a whole? Is this slowing down of growth out of control for Toyota? To what extent will it affect Toyota’s operation in the next year? An analysis of Toyota’s annual report in the context of recent developments of the world auto industry reveals a few interesting trends.

TPS no longer a mystery

Beginning from the 1960s, the Toyota Production System (TPS) has had the same epoch-making significance for manufacturing as the mass assembly line invented by Henry Ford early in the 20th century. After the production line was adopted throughout the world, however, this invention alone could no longer maintain Ford Motor Company’s lead in auto manufacturing. In the last 20 years, Toyota has shared its precious asset with the rest of the world. According to a source inside Toyota, a man who had worked for Toyota earned millions of dollars after leaving the Japanese company by giving lectures and instructions on TPS, of which he had no more than a half-baked understanding. Almost all manufacturing businesses have learned TPS. They may not have applied the system as proficiently as Toyota, but they have narrowed their gaps with the Japanese automaker. When a slump hit the world auto industry last year, every manufacturer knew the importance of cost control.

In the meantime, as Toyota builds plants and employs people abroad, its management mode has been forced to integrate into European and American cultures. In the last ten years, Toyota has doubled its manufacturing facilities abroad to 51 locations. This has gradually changed the company’s concepts of economizing and quality control rooted in the soil of Japan as a country with a small land area. In the United States, some Toyota plants have been less successful in applying TPS than other manufacturers. In China, Shanghai-GM has operated more like a Toyota outfit than Toyota’s joint ventures there.

Cost-reduction no longer effective

History often repeats itself. In the 1980s, Toyota captured a considerable share of the U.S. auto market with its low-cost, fuel-efficient cars. Today, just as Toyota is achieving simultaneous growth of sales and profit on the U.S. market and is trying to stabilize its market position, the successful Japanese maker is being upset by Hyundai of the Republic of Korea with cheap cars and ten-year warranties. As a result, Hyundai is slowing down Toyota in its effort to upgrade its brand image.

Japanese competitors have always exerted great pressure on Toyota. Honda had originally kept its operations in the United States small but efficient. In recent years, however, to avoid the risks of a weak dollar and a strong yen, Honda, following Toyota, has been building more production facilities in the United States. When such facilities begin production, Honda is expected to reduce prices for its cars to win a bigger share of the market, thereby dragging Toyota into a price war. Already, Honda has posed a growing challenge to Toyota. According to a survey by CNW, a market research firm, in a persistent war between Honda’s Accord and Toyota’s Camry, Honda has achieved a higher sales volume by offering double the discount.

To keep their shares of the home market, GM and Ford have aggressively promoted the sales of their models by slashing prices and offering steep discounts. All these have cut into Toyota’s profit margins. The company’s per-vehicle profit was 194,000 Yen in 2001, 218,000 Yen in 2002, 248,000 Yen in 2003 and 158,000 Yen in 2004.

Company reports show that Toyota’s revenues from cost reductions have kept declining by ¥70 billion annually in recent years.

In February of this year Toyota announced that president Fujio Cho would be replaced by Katsuaki Watanabe, known as a “cost killer.” In the last five years, Watanabe has saved $10 billion for Toyota. In one cost-cutting measure, he contracted a single supplier to make hand-
brake handles of the same kind for almost all Toyota models. With cost reduction having gone to such length, can Toyota save another $10 billion through economizing?

Concession and cooperation amidst rivalry

Since the beginning of this year, GM and Ford have suffered from plunging sales and fi nancial losses. By the end of April, soon after Standard & Poor’s lowered its rating for GM to junk status, Toyota chairman Okuda Hiroshi said Toyota was willing to raise prices for its cars in the United States to give GM and Ford some breathing space.

Toyota evidently does not want GM and Ford down in the dust because that would offer
the aggressive Hyundai a great opportunity.

Toyota has built six plants in the United States. This shows Toyota’s determination to conquer the biggest auto market in the world. On May 17 Toyota announced its biggest recall in the United States, involving 774,856 pickups and SUVs. The defect involved does
not pose a threat to safety. The massive recall shows how much Toyota treasures its reputation as a maker of quality cars.

Toyota’s search for quality is legendary, but it does not seem to care much about complaints that it does not seek performance for its cars, that steel plates are too thin to survive collisions and that it is too fl ashy. People wonder where Toyota is spending its more than $10 billion in profi t. And why does’t Toyota make cars that can beat German cars in performance?


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