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Toyota’s New Crown as Global Leader- At What Cost?

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Business media headlines this week are declaring that Toyota has reclaimed the title of the world’s largest auto maker in 2012, taking that title from General Motors. Toyota sold 9.75 million vehicles in 2012, compared with the 9.29 million sold by General Motors.  An impressive 27 percent sales increase in the U.S. certainly helped to regain this crown.

This achievement comes after Toyota was dealt two significant prior business challenges, some of which may have greatly impaired other global manufacturers Massive product recalls which began in 2009 were associated with problems of sudden unattended vehicle acceleration and misaligned floor mats among certain Toyota vehicles. Those incidents resulted in massive product recalls and significant threats to Toyota’s brand image among global consumers. The 2011 devastating earthquake and tsunami that hit Northern Japan added another blow that impacted global production volumes for months.

Supply Chain Matters was quick to praise Toyota’s supply chain teams for their extraordinary efforts in overcoming severe supply challenges brought about by the 2011 earthquake. It took almost a year and a half to totally recover in global output production levels. Regarding the crisis of brand image, an unprecedented formation of a corporate-wide steering committee chartered to oversee Toyota’s vehicle based quality processes and corrective programs was initiated. Chief quality officer roles were created among major geographies including Europe and North America, to insure localized autonomy on the decisions related to consistency of product quality and vehicle safety.  For the record, and in the spirit of disclosure, this author has been a long-standing customer of Toyota, dating back over 15 years. Six months ago, we changed that loyalty.

In its reporting of Toyota’s new crown, The Wall Street Journal indicated that sales increases came as a result of aggressive sales incentives in the U.S. market that included a cut of profit margins that were previously allocated to Toyota’s retail dealers. Meanwhile, manufacturers GM and Ford held back on sales incentives, resulting in single digit sales increases in 2012. This author can recall a barrage of continuous Toyota media ads throughout 2012 that urged buyers toward the latest sales incentives, to the point of “all right, already”.

Toyota’s new milestone comes with an important lingering implication, one that relates to former challenge of consistency in vehicle quality. Readers may recall that previous business media coverage and indeed, our Supply Chain Matters commentaries noted an admission by Toyota senior management as far back as three years ago that the race for number one global producer may have come at the expense of Toyota’s prior brand reputation for unmatched vehicle quality and reliability. The race for global volume outpaced that of quality and process consistency.

In 2012, Toyota had to take a $1.1 billion charge after reaching agreements with customers over liability lawsuits related to the SUA incidents. In a Financial Times interview, Toyota Motor USA CEO Jim Lentz indicated that the company had strengthened its customer care functions and had much greater ability to analyze data related to emerging quality problems. Lentz noted Toyota CEO Akio Toyoda as urging: “Make sure that we still are built on a solid foundation of quality, reliability and value because that is the hallmark of the company.” In essence, that is the declaration of the core business value of the company.

Last October, Supply Chain Matters noted the global recall of 7.43 million Toyota vehicles, the equivalent number involved in the SUA incidents over two years ago, this time related to a master power window switch defect. The Washington Post was quick to note that this flaw “raises questions about whether Toyota Motor Corp. has solved quality and safety issues that embarrassed the company in 2009 and 2010.” Also at the time, The Financial Times indicated in its reporting that Toyota was aware of the master window switch problem as far back as four years ago. It further indicated that Toyota did not respond sooner because it was unable to replicate the root cause. In our commentary at the time, ee raised the open question “as to whether Toyota would revert back to its former ways of opaque centralized corporate management, with revenue and output goals paramount to any other needs. Would the global-wide quality steering team have the corporate power, agility and dedicated resources to take proactive action on avoidance of future large-scale product quality issues and overrule sales team zeal for output?” Readers may recall that Hyundai last year made a conscious decision to throttle back current global output momentum in order to address quality and process consistency needs.

This very same week as the pronouncement of global sales leader, comes a separate announcement that Toyota is recalling more than 1 million 2003-2004 Corolla and Corolla Matrix vehicles sold in the U.S. over faulty airbags and windshield wipers. The faulty windshield wiper issue further affects 270,000 Lexis IS models sold between 2006 and 2012. This is the third product recall since October involving more than one million vehicles.

Thus, the open question remains.  Has Toyota’s new crown come at a cost to its reputation for quality and reliability?  Have the new processes for analyzing data and trends related to vehicle quality had their full impact resolving issues sooner?  Has aggressive incentives at the cost of dealer profits incurred a new dynamic for dealer loyalty toward Toyota? On a positive note, has the former announced corporate-wide steering committee addressing vehicle quality monitoring made its presence with this string of ongoing product recalls?

What continues to puzzle us is why Toyota management has not been forthcoming in addressing its progress toward chairmen Akio Toyoda’s charge for core business value.  Right now, business and social media control a narrative that the prize of global leader has again come at a price, and with certain perils. In our view, Toyota would be best served by actively managing the narrative and openly addressing progress made in its initiatives addressing supplier and production quality consistency and early-warning as to defects.

What’s you view?

Bob Ferrari

©2013 The Ferrari Consulting and Research Group and the Supply Chain Matters Blog.  All rights reserved.

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