Mighty Toyota's growing pains: the Japanese juggernaut must confront internal challenges

Chief Executive, The, August-Sept, 2004 by Toshio Aritake

The latest numbers give credence to a growing chorus of predictions that Toyota will capture 15 percent of the global auto market by 2015, dethroning General Motors as the world's largest automaker. Toyota expanded global sales by 9.9 percent for the fiscal year ended in March, finishing in a statistical dead heat with Ford and narrowing the gap with GM (see chart, facing page). It even defied the adverse effect of a strong yen and increased net earnings to $10.2 billion, making it inarguably the most profitable car company in the world.

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Toyota is gearing to expand its production capacity by 1.5 million vehicles worldwide by 2010. It is building a pickup truck plant in Texas that will open in 2006, and it will possibly build another one in Mexico or South America. That doesn't include expanding its Chinese joint ventures. To many, the 15/15 goal seems realistic. "Global manufacturing of 9 million units by 2015 does not look like a far-fetched number at all," says Credit Suisse First Boston auto analyst Koji Endo.

Toyota has been able to stage its astonishing assault on world markets by maintaining ruthless quality and cost controls. In addition to being the most profitable automaker, it consistently wins top quality awards from J.D. Power & Associates. To Toyota President and CEO Fujio Cho and other executives, the guiding principles have always been clear. They needed only to keep implementing concepts pioneered by the late blunt, flamboyant engineer Taichi Ohno such as kaizen (continuous improvement), just-in-time delivery and other elements of Toyota's "lean" manufacturing system.

But while the rest of the world fears Toyota, insiders are concerned about the company's ability to manage its growth and maintain the quality of its products. The company now has 260,000 employees in 26 countries. But it has not yet been able to develop the sophisticated decision-making balance between headquarters and local operating units that some Western multinationals have achieved. As a result, the company can either centralize decision making in Japan or allow it to devolve to U.S. or European managements. There seems to be little middle ground.

Even by Japanese standards, Toyota is famously insular, being headquartered in southern Aiichi prefecture and still dominated by the Toyoda family. That insularity leads to missteps: In mid-June, Toyota had to delete part of a U.S. television commercial for its new Scion brand that showed a character consuming peyote and then hallucinating. And in China, the company used the Chinese lion, one of the Middle Kingdom's most cherished icons, in ads for the sport utility vehicle Prado. The Chinese, mindful of Japan's wartime occupation, were outraged. The ad was withdrawn.

Another major issue inside the mighty Toyota is that the rapid globalization and production expansion has begun to strain its manpower supply. Cho told a small group of foreign correspondents earlier this year that Toyota's product quality remains high, but because of the demands to adapt products to local tastes, the company needs to design and manufacture vehicles that differ by region. As a result, "Everybody is becoming extremely busy," a condition that could lead to quality deterioration, he warned.

Toyota's success also has attracted higher levels of competition from automakers around the world. GM, for example, has been gaining against Toyota's North American quality performance. "Other makers are making great efforts at catching up with us--and the gap is narrowing," said Cho, who became CEO in 1996. "We must pay close attention to it and make more efforts to improve our quality."

Extensive computerization of the entire car manufacturing process, from design to production and distribution, is one of the methods that Toyota is adopting for quality control and cost reductions. But "the potential risk of too much computerization is that we might launch new cars that are not tested in actual driving environments, such as in high humidity and other conditions," one top executive confides. That might cause unforeseeable problems. He also noted "an explosive growth" of warranty claims for certain models, though they have not led to embarrassing recalls.

The twin goals of improved quality and cost reduction, coupled with the demand for raising productivity, are imposing pressures on employees and managers that they haven't experienced in the past. That pressure is what caught up with Toyota middle managers in charge of dealer mechanic training last December: To show off the superiority of their training courses, they cheated on a national auto mechanics exam by leaking answers to Toyota dealer mechanics so they could outperform rivals at Nissan. "Middle management is under incredible pressure," another insider says.

Suddenly, it seems, Toyota has a human capital problem. Over the past 70 years, Toyota's ground rule has been genba-shugi, or doing everything on the job, including worker training. It no longer can afford that luxury and has been obliged to begin classroom training of new workers, calling back skilled workers from the U.S. plants to Toyota City and using them as instructors, says Managing Officer Takashi Hata. Even so, he acknowledges, the company is experiencing labor shortages.