The news that Toyota has reclaimed the top spot as the world’s best-selling automaker from General Motors on Monday is astonishing. When you take into account the unexpected acceleration (UA) recalls and litigation, which may be the largest product issue a major automaker has faced since the Pinto, the accolade is all the more astounding.
In reality, Toyota signed a $1.1 billion deal to end the legal dispute over the UAs just one month ago. However, many news stories on Toyota’s recent income accomplishments merely use broad generalizations to describe the crisis as “large-scale recalls without any mention of the settlement.
The UAs interfered with Toyota’s reputation for quality, but it was only a temporary hiccup. This fact provides lessons in litigation communications and crisis management, but it also attests to how strong the Toyota brand was even before the round of recalls and Congressional appearances ever started. And while firms that develop reputational equity in times of calm have an advantage in times of crisis, Toyota’s success in doing so required much more than aggressive PR.
The announcement’s timing, which coincided with Boeing’s ongoing struggles with the widely reported safety problems involving the 787 Dreamliner, is key to understanding that success. The tales of Toyota and Boeing highlight the dramatically different approaches to outsourcing, supply chain management, and the quality management required in a market where public anxieties swell each time a severe product risk is linked to a foreign source.
The Dreamliner may be the most outsourced and offshored airplane ever conceived, as we reported in this column last week, and it just so happens that Boeing’s present problems started with a Japanese supplier (now exonerated). Isolated issues are easier to resolve than systemic flaws, which can permanently damage the ship and its manufacturer’s reputation, as we have already stated.
Boeing and the authorities are still looking for the malfunction that caused the problem, but another shadow looms large in the public’s mind: Can we trust any high-risk, truly high-tech product that depends on components created by unidentified people doing unidentified things in unidentified places? The problem is made more difficult in Boeing’s situation because the corporation relied on several prime suppliers, tertiary partners, and secondary suppliers for the Dreamliner project.
Toyota has three natural advantages over Boeing that Toyota does not have, as seen by the company’s noticeably higher trust score today. First off, car crashes are much more common than airplane crashes. Additionally, many vehicle product recalls do not contain flaws that pose a risk to human life. The perception is that all aviation recalls have this effect.
Second, a lot of Toyota “outsourcing to American suppliers, so it isn’t really outsourcing in the eyes of American consumers. Of course, the mere fact that a supplier is located in the United States does not ensure quality, but it does signal that engineers are nearby, headquarters inspection is not far away, and a common language and regulatory framework are in effect. In addition to less xenophobic market sentiments, fears that Chinese manufacturers would cut corners on even the most basic safety measures have persisted after the 2007 toy recall.
Third, Toyota has had sizable plants in the United States since the middle of the 1980s. The company has, perforce, also learned how to bridge the cultural synapses that plague other companies, including Boeing, in their relationships with foreign suppliers. This goes beyond just the goodwill that accrues during a crisis because you happen to employ about 40,000 natives (without counting dealerships).
Since your chain of command is only as strong as its weakest link, Boeing was essentially obliged to hand off this support task to subcontractors, who occasionally relied on secondary subcontractors with whom Boeing did not always have a solid working relationship. Boeing was forced to intervene when onsite quality control was not offered, sending hundreds of engineers to address production-delaying supplier-level issues. The fact that Boeing has increased outsourcing for the Dreamliner over the 35 percent to 50 percent with the 737s and 747s gives some indication of the scope of the disaster.
If you are the CEO of a business that has adopted a sizable outsourcing plan or has considering doing so, pay attention (especially if your business is in a high-risk, high-tech area). Savings that are only based on salary rates conceal the true cost of outsourcing. That truth is underscored by Boeing’s recent losses, manufacturing delays, planeloads of engineers en route to and from Japan, stock price drops, and the evident cost of the current grounding.
Toyota also outsources somewhere in the neighborhood of 70% of vehicle production, but the company strictly controls design and engineering, working only with suppliers who have a track record of meeting deadlines, maintaining high standards of quality, keeping costs in check, and introducing new technologies. This network exudes a tangible sense of trust, with incentives for on-time delivery rather than just penalties for lateness (as at Boeing). In contrast to customary systems where suppliers are free to work at the slowest speeds they can get away with, more efficiency is therefore built into the system.
Toyota has typically been more driven to overcome linguistic and geographic barriers because it is a Japanese firm. Instead of an overly emphasised reliance on computerized systems as the key communication channels, if anything, those problems merely encouraged more face-to-face contractor/subcontractor communications.
Boeing’s reliance on suppliers to update work-in-progress on its recently launched Exostar system, another putative efficiency tool, is a clear illustration of the latter. Denning notes that trust and cultural factors played a significant role in why it backfired. Again, as a company with sizable installations outside of Japan, Toyota had expressly identified and started addressing these problems decades before.
In reality, Toyota’s whole reliance on American suppliers is premised on the advantages to quality that come from suppliers being close to manufacturers, in addition to cost savings. According to Mike Goss, external affairs manager for Toyota’s engineering and production division in North America, “we’ve always held the notion that we should build vehicles where they are sold” because the region is home to 500 significant suppliers. As a result, Toyota vehicles are being produced more quickly than any rival. While Toyota continues to realize significant cost reductions at the end of the day, the supply chain is constructed for quality.
Great firm Boeing has always prioritized safety. It has now created an aircraft that will revolutionize aviation by cutting fuel costs by 20%. But the business is also paying a price for failing to fully weigh the advantages and disadvantages of wholesale outsourcing. All firms should take this as a wake-up call, hopefully.
If so, we haven’t overpaid for this important lesson: there haven’t been any wrecks, fires, or debilitating airline delays. Simply a huge waste of time and resources.
Toyota began exporting work when?
In the years following World War II, Toyota concentrated on building factories in Southeast Asia and Latin America. The first step was the founding of a manufacturing company in Brazil, a resource-rich nation with the highest national income in the underdeveloped region of Latin America and significant market development potential, as well as the expectation of a national law that would domesticate the automobile industry and the large number of Japanese immigrants since the pre-war era. Due to domestication regulations in various nations, the initial overseas production was distinguished by a switch from exporting completely built-up (CBU) vehicles to a knockdown configuration. As the global economy became more borderless starting in the middle of the 1980s, particularly in North America and Europe, so did the number of abroad production facilities. By the end of 2011, Toyota had 50 production affiliates spread over 26 nations and regions.
Planta Reo de Mexico, S.A. in Mexico was partnered with for assembly and sales (manufacturing started in December 1960 and ended in March 1964)*.
With Toyopet Commercials Pty. Ltd. in South Africa, an agency agreement has been reached (Production by Motor Assemblies Ltd, commenced in June 1962)
partnership established with the Philippine-based Delta Motor Corporation (manufacturing started in November 1962 and ended in December 1983)
Production of four-wheel drive vehicles began in Venezuela in January 1963. Tocars C.A. obtained the permission to produce them in September 1992. TMC invested in Tocars in November 1989.
With Australian Motor Industries Ltd. (AMI) in Australia, an agency agreement has been reached (production commenced in April 1963)
An deal for the construction of the Land Cruiser was made with ES Motor in Venezuela (production started in December 1963 and ended in October 1971)*.
In Uruguay, a CKD arrangement was made with Domingo Basso (manufacturing started in September 1963 and ended in December 1972).
Agreement for the export of CKD was made with ECASA in Costa Rica (manufacturing started in September 1965 and ended in October 1982)*.
Finalized agency agreement with South Korean manufacturer Shinjin Motors (manufacturing started in May 1966 and ended in October 1972)*
Consolidated Motor (CMD) in New Zealand and the tie-up were formed (manufacturing started in January 1966 and ended in October 1998)*.
Established Toyota del Peru S.A. (manufacturing started in April 1967 and ended in March 1998)*
SMA began producing in New Zealand; it stopped doing so in October 1998.
Agency contract signed with Malaysia’s Borneo Motors Pte. Ltd. (production by Champion Motor commenced in February 1968; Champion was renamed ASSB in 1975)
Arrangement made with Taiwan’s Lio Ho Motor Co., Ltd. (manufacturing started in December 1968 and ended in January 1973)*
Beginning in October 1998, CIL’s production in New Zealand came to an end.
In Portugal, a CKD deal was made with Salvador Caetano (now TCAP) (production commenced at Tasso in November 1968 )
CKD contract signed with Ghana’s Fattal Vehicle Assemblies (manufacturing started in July 1969 and ended in August 1978)*
Canadian Motor Industries created a tie-up; production there started in September 1969 and ended in November 1975.
National Motors Ltd. started producing in Pakistan (manufacturing was stopped in August 1985)*
Beginning in March 1982, PT. Gaya Motor in Indonesia stopped producing its cars.
Manufacturing started when a CKD agreement was signed with Amar Auto Supplies Ltd. in Trinidad and Tobago (production ended in December 1995)*.
In Indonesia, Toyota-Astra Motor was founded (manufacturing got underway in June 1977).
Agreement for the outsourcing of truck bed production between Atlas International Inc. and Toyota Motor Sales, USA (production commenced in January 1972)
Toyota Ireland and CKD Production engaged into an arrangement; production started in February 1973 and ended in December 1983.
Production of Toyota automobiles began at Awami Autos Ltd. in Pakistan; it was halted in August 1986.
Kenyan company Associated Vehicle Assemblers (AVA) was founded (production commenced in August 1977)
Ford Singapore starts outsourcing production, which is afterwards stopped in October 1979.
Established in Thailand, Toyota Auto Body Thailand (manufacturing of stamped components started in May 1979 and ended in 2010)*
Aftab and I signed a master CKD assembly arrangement in Bangladesh (production commenced in July 1983)
In Zimbabwe, a KD agreement was made with WMI (production started in May 1981 and ended in November 1991).
Manufacturing of KD by RZL in Zambia commences (production started in March 1983 and ended in August 1991)*
Production for DCM Toyota (DTL) in India began in May 1985 and ended in October 1996 as a result of a merger.
NUMMI was founded in the United States of America (manufacturing started in December 1984 and ended in April 2010)*
Production starts at Ayax S.A. in Uruguay and ends in December 1992.
Production of KD begins at Maresa in Ecuador (production started in October 1986 and ended in February 2001)*
Memorandum of Understanding for the Hanover Project was signed with the German Volkswagen AG (manufacturing started in January 1989 and ended in February 1997)*.
Chinese company Shenyang Jinbei Automotive Co., Ltd. and I have a technical agreement (production commenced in October 1990)
TMCS purchased Bodine in the United States (production at the Troy Plant commenced in January 1993)
TMC invests in SOFASA, a joint venture between Renault and Columbia (manufacturing began in March 1992 and ended in November 2008)*.
Catalytic converter manufacture at the TABC plant began in May 1989; it was halted in April 2011 after CCP was formed in the United States.
Production for TJAC began in China in July 1997, and the capital relationship concluded in January 2011. (status changed to that of a supplier)
In Czechoslovakia, TPCA, a joint venture with Peugeot, was founded (production commenced in February 2005)
Contract for production outsourcing signed with Indonesia’s PT. Astra Daihatsu Motor (ADM) (production commenced in December 2003)