Toyota's Stumble is Not a Metaphor for Japan Inc.

Toyota's dramatic fall from grace has come as a great shock in Japan, especially as many abroad tend to view this as emblematic of the country's decline. Inside Japan, though, the car manufacturer's troubles are seen as more political than technical in origin.

All the explanations underlining Toyota's problem of global overstretch, however, make the prognostication of Japan's demise premature.

Toyota is synonymous with manufacturing excellence and Japan's international success. And manufacturing, especially cars, is a major contributor to the country's export-dependent economy and economic growth. The so-called Toyota way is the stuff of manufacturing legend: a “cult” of unceasing improvement (kaizen) in the quest for manufacturing perfection; a “just-in-time” system to avoid cluttering the factory and raising warehousing costs; and the empowerment of every line worker in the factory to stop the production line if any imperfection in the assembly kit or vehicle is spotted.

Until its recent troubles, the Toyota way seemed to have squared the manufacturing circle: the amazing ability unceasingly to improve quality and production while reducing cost by management and workers pulling in the same direction. But the mass automobile recalls, around eight and a half million, suggest that Toyota has lost its way and skidded off the track. Even though President Akio Toyoda performed acceptably at his US congressional hearing, Toyota will be dogged by legal battles, if not class action suits, in the US for a number of deaths in crashes apparently due to sudden and unintended acceleration coupled with failed brakes.

Toyota's travails are being linked to the country's weakness because they have come at a time when China is poised to overtake Japan as the second largest economy in the world – a title which Japan held for four decades. Moreover, China is now the largest automobile market in the world.

That relative national decline notwithstanding, some Japanese auto experts believe that Toyota's woes stem from the very innovation that accounted for its success: structural transformation of car manufacturing and technology; from simpler mechanical to complex computerized systems (with the greater possibility of electronic glitches). Ohmae Kenichi, the management guru, notes: “In an average Toyota, there are about 24,000 inputs and outputs, with as many as 70 computer chips processing information and sending it on to other chips to operate the engine control units. It is a very complex system.”

Apparently, Toyota has been relying more on computer testing than actual road tests to shorten the production cycle of new models to meet global demand. Conditions like humidity and heat and their impact on complex car parts and their operation cannot always be captured by computer simulation but by traditional, arduous road tests under different and difficult climactic conditions present in different markets.

Toyota itself has acknowledged flaws in its global supply chain, blaming its US sub-contractor for poor quality pedals in the North American market. The implicit argument is that Toyota vehicles for the Japanese domestic market do not have similar pedal problems because domestic sub-contractors produce better quality parts. Analysts have sought political reasons behind Toyota's problems in the US with some Japanese media castigating the US for picking on Toyota. Indeed conspiracy theories abound in Japan. They argue that the US government is now the de facto owner of GM and Chrysler and is putting Toyota down so that its own auto makers can recover and compete for a larger share in the emerging eco-car market. There is also the perception that certain US politicians may exploit the Toyota crisis for political gain ahead of the US midterm election in November 2010.

Another view is that Toyota bashing is, in part, due to US dissatisfaction with the new Hatoyama administration of the DPJ (Democratic Party of Japan) for suspending the deal of transferring the US marine base in Futenma to Nago in Okinawa as a condition for relocating eight thousand marines to Guam. The decision on Futenma will be made only in May 2010. Moreover, the US is displeased with the Hatoyama administration for advocating an East Asian Community and closer ties with China at the expense of the US-Japan Alliance.

Despite blaming the US, the Japanese are hardly supportive of the company. Sympathy for Toyota has recently eroded, in part, due to the company's ruthless firing of temporary workers when global demand for vehicles dipped sharply during the global financial crisis triggered by the US sub-prime problem. In a country where the norms of lifetime employment and egalitarianism remain strong, the layoff of thousands of workers by Toyota is frowned upon by many. Toyota has also gained notoriety for squeezing the sub-contractors in its supply chain.

While some of Toyota's sins are those of a global company seeking to maximize profit by cutting cost through supply chain, the critics, both in Japan and abroad, fault management for not only poor crisis management and a tepid response to consumer complaints, but also a lack of sound global strategy. Japanese business magazines write that Toyota's management has failed to capitalize on the newly emerging auto markets of China and India. Indeed, Suzuki (with its affordable little cars) has impressively captured at least a 50 percent share of India's market, and Nissan is ahead of Toyota in China.

By focusing on the US market (which has yet to recover from the sub-prime triggered financial crisis) and maintaining its dominance in the Japanese market (with two decades of economic stagnation and a shrinking and ageing population), Toyota had a strategic problem even before the global recall crisis. Toyota's crisis may be viewed by some as symbolic of Japan's national decline, but is in actuality a boon to Honda, Nissan, Mazda, Subaru, Mitsubishi and Suzuki to increase market share domestically and internationally. The Suzuki-Volkswagen alliance may well establish itself as number one globally due to complementary geographical presence and better product mix. Toyota's crisis is an opportunity for other Japanese car makers and does not necessarily herald the end of Japanese manufacturing excellence.

Toyota is not defenseless in the US either. It employs almost 200,000 workers, sub-contractors and dealers in that market. The company has factories and offices which provide tax revenues to local governments in Kentucky, Indiana, Alabama, West Virginia, Missouri, Texas and Mississippi. Four US governors from states with Toyota factories rushed to the defense of the company. In a sense, Toyota is also an American company. Moreover, Toyota has tried to be a good corporate citizen in the US by contributing financially to culture and philanthropy to gain local goodwill. But it is not inconceivable that Toyota will painfully learn its lesson after being in the hot seat, ride out this storm and remain a global player in the wave of the future – through better hybrid and electric cars and emphasis on emerging markets.

Notwithstanding Chicken Little cackling “Toyota and the End of Japan,” it would be mistaken to equate Toyota with a failing Japan. While Toyota's wheels have been punctured, other Japanese manufacturers are racing ahead in emerging markets. The globalization of Japan Inc., especially Toyota, landed it in trouble; but the solution still lies in globalization, done more intelligently.

Dr. Lam Peng Er is Professor of Political Science at National University in Singapore and a Senior Research Fellow at the East Asian Institute.

Reprinted with permission from YaleGlobal Online, the flagship publication of the Yale Center for the Study of Globalization