Can the Toyota Way survive?

Toyota's legendary commitment to quality and its workforce are facing their biggest challenge in 50 years.

Until recently, there was only one company in Asia with a triple-A rating. And when that company announced that the grandson of the founder was taking management control of the company, it was a bit like the return of a super hero.

At the press conference announcing the elevation of Akio Toyoda to the CEO and president position of the world's largest car company in late January this year, one of the senior managers came out with a line that struck the journalists assembled in the company's Lidabashi office: "Toyota must be a good company as well as a strong company." It is a remarkable statement, and one that you can't imagine an 'Anglo-Saxon' company making.

Being a 'good' company will be difficult, however, given the unprecedented losses the company facing. Last Friday, Toyota announced that revenue in its fiscal third quarter to end-December declined 28.4% year-on-year to ¥4.8 trillion ($52.3 billion). When the top line shifts by that extent the impact on the bottom line is serious: net income dropped by ¥458.6 billion to a loss of ¥165 billion. Operating income for the quarter decreased by almost ¥1 trillion year-on-year, from ¥601.5 billion to a loss of ¥360.6 billion. The company's operating loss forecast for fiscal 2008 (which ends in March 2009) was increased to ¥450 billion from ¥150 billion. And adding insult to injury, the company lost its triple-A rating from Standard and Poor's.

Toyota blamed the results on "marketing activities" (selling cars at a discount among other things), which contributed a ¥560 billion hit to operating income, and said it lost a further ¥250 billion due to the strengthening of the yen against the US dollar and the euro. Goldman Sachs estimates that for every ¥10 appreciation against the dollar, the company's operating profit takes a ¥400 billion hit. 

Some analysts recognise Toyota's unique approach, as the following quotation from a report shows: "Toyota's essential proposition is to protect employment and offer attractive products to users. It plans to do everything in its power over the short- to medium-term based on this essential ethos," writes Takaki Nakanishi of J.P. Morgan in Tokyo. But it's not clear if Toyota will be able to maintain this unique -- and to Wall Street analysts and shareholders rather unwelcome -- commitment to both social and economic virtues, which is often referred to as the Toyota Way.

Apart from the uncontrollable vagaries of the exchange rate, Toyota is facing a relatively straightforward problem: it has a fixed cost base set up for manufacturing far more units than it can possibly sell in the current environment. Consolidated vehicle sales were 1.84 million units in the third quarter, down 443,000 year-on-year. Twenty-seven of the company's 74 global lines are currently down to one shift per day.

The company management has announced that it is aiming to reduce the cost of goods sold (COGS) and slash fixed costs by 10%. J.P. Morgan's Nakanishi estimates that the company will aim to 'wring out' further costs from its suppliers, but that the latter are so strained by the downturn in business that the goal will likely not be achieved.

Toyota does have a secret weapon, however, which goes to the heart of the 'restructured' Japanese economy. Back when former prime minister Koizumi was in office, he launched a wave of labour reforms specifically to support the auto industry. This policy coalesced around the creation of a sub-class of workers, so-called 'casual' workers -- who may work full time and for many years alongside 'regular' employees, but without gaining key benefits such as security of tenure and the crucial twice-yearly bonus. Almost one-third of Japan's labour force has been taken out of mainstream employment in this way. Toyota has announced plans to reduce its casual work force from 9,000 to 3,000 (in Japan only). Its total global workforce amounts to 325,000.

Wall Street would probably like Toyota's entire workforce to have casual status -- after all, this would make them easier to fire. But Toyota has achieved its awesome success in a way Wall Street could never prescribe: by creating a management and employee synthesis which generates the biggest volume of the best cars in the world. It's a process which is not well understood, but which John Shook, author of a book on the Toyota Way describes as "managing to learn", that is, teaching employees to learn, and then solving problems on their own. The aim of the manager is to facilitate progress rather than ordering the employee around, Western style.

In other words, Toyota has a problem. The easiest way to cut costs is to cut staff, but that could be tantamount to ripping the heart out of the company.

Fortunately, Toyota's management has (again in direct contrast to Wall Street strictures about not leaving cash unproductively on the balance sheet) accumulated some ¥3 trillion in cash. Current assets total an even more impressive ¥12 trillion, and debt levels are low. The question is now whether the company will retain its core staff in the teeth of the demands of hungry shareholders, or whether it will use its treasure to retain what could be the company's greatest competitive advantage: its workforce.  

¬ Haymarket Media Limited. All rights reserved.
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