Presentation on theme: "Dr. Jun Zhao Associate Professor of Management"— Presentation transcript:
1 The Toyota Recall Crisis: Causes, Contexts, and the Impact on the Global Auto Industry Dr. Jun ZhaoAssociate Professor of ManagementCollege of Business and Public AdministrationGovernors State UniversityPresented at the 30th IASET Annual Spring conference
2 The Toyota Recall Crisis Toyota Recall Crisis TimelineAugust 28, 2009: Crash of a Lexus in San Diego that killed four people. Cause identified as pedal stuck under the floor matNov. 25th, 2009: Recall of 4 million vehicles by Toyota, for “unintended acceleration problems”Jan. 26, 2010: Toyota temporarily suspends production of several of its vehicles in the north AmericaMay 2010: Toyota pays $16.4 million fine to US regulators for being too slow to recall vehicles with defective gas pedalsFebruary 2011, NASA released its highly anticipated report about the Sudden Unintended Acceleration charge in Toyota vehicles, finding “no evidence that a malfunction in electronics caused large unintended acceleration” (www.nasa.gov/topics/nasalife/features/nesc-toyota-study.html)The question remainsHow did a company that’s known for superior quality, efficiency, and customer responsiveness, find itself in such a mess?To what extent the “fate” of Toyota reflect the challenges facing Japanese manufacturing industry today?
3 US Market Share of the Top 5 Auto Producers and Crisis Timeline Source: Andrews, Simon, Tian and Zhao (2011)
4 Toyota’s Global Expansion Toyota successfully entered the US market in the late 1960s, taking market share from its American rivals largely due to the fuel efficiency of its vehiclesBy 1984, exports accounted for 52.5% of Toyota’s sales, up from mere 19% in 1967.In 1983, Toyota entered into a 50/50 joint venture with GM under the name New United Motor Manufacturing Inc (NUMMI), a 250,000 capacity facility in Fremont, CA; By 2008, it had 10 assembly plants in the US producing 1.3 million vehicles per year (more than 50% of all Toyota vehicles sold in the US were locally produced)In 1989 Toyota moved to set up production in Europe; By 2008 it has four plants in Europe, with total production capacity of 800,000 vehicles a yearToyota expanded to the rest of Asia, adding three assembly plants in China by 2008 with capacity over 440,000 vehicles a year, and 10 other plants in Southeast Asia with annual capacity of over 1 million vehiclesThere are also significant assembly plants in South Africa, Australia and South AmericaHowever, compared to its Japanese rivals, Toyota still has the highest percentage of production at home (38% versus 25% at Honda and Nissan)
5 Toyota’s Lean Production System Toyota changed the “mass production” method pioneered by Ford, and introduced the “lean production system” which features short production runs, low inventory levels, and high product varietyOhno Taiichi, the creator of the TPS, successfully reduced the time required to change dies on stamping equipment from a full day to 15 minutes by 1962, and to as little as 3 minutes by By comparison, even in the early 1980s, many American and European plants required between 2 and 6 hours to change diesThe significantly reduced setup time made small production runs economical, and also had the added benefit of reducing inventories and improving product qualitySmall production runs made it possible to increase product variety while still keeping the cost lowThe role of “Just-in-Time” supply network in TPS
7 Toyota’s Unique Supplier System Assembly of components into final vehicle accounts for only 15% of the total manufacturing process in automobile manufacturing. The remaining 85% involves manufacturing more than 10,000 individual parts and assembling them into about 100 major components, such as engines and suspension systemsHistorical approach used by GM and Ford was to coordinate this process by vertical integration – even in the mid 1990s, GM made 68% of its own components in house, while Ford made 50%.Toyota only produced about 25% of its major components in house, the rest were contracted to independent suppliers; It is of vital importance to make sure these suppliers are integrated parts of Toyota’s manufacturing systemToyota has Tier one suppliers, and thousands of Tier 2 and Tier 3 parts suppliers.Toyota establishes long term relationships with its suppliers via cross-ownership, sending engineers to work with suppliers, and other strategies
8 Globalizing the Supplier System: The Challenges and Responses To facilitate the JIT system and integrate deeper into the local economy, Toyota has been moving its supplier network from Japan to the hosting countriesBy mid-2000s, the local content of cars produced in North America was more than 70%But maintaining the quality and efficiency levels for the foreign suppliers have been challengingIn 1990, Toyota reports that the defect ratio for parts produced by 75 North American and European suppliers was 100 times higher than their 147 counterparts in Japan (1000 defects per million parts versus 10 defects per million parts)Toyota also reports that parts manufactured by North American and European suppliers tended to be significantly more expensive than comparable parts manufactured in JapanTo improve the efficiency of its American based suppliers, Toyota established an aggressive supplier education process by creating the Toyota Supplier Support Center in 1992
9 Toyota’s Recent Moves to Reduce Costs CCC21 (Construction of Cost Competitiveness for the 21st Century)Launched in 2000, targeted 170 key parts/components for 30% price cut cross boardSaved Toyota nearly $10 billion over the next 5 yearsValue InnovationLaunched in 2005, lower cost by another 30%, and save more than $2.5 B annuallyBenchmark parts’ prices with Chinese suppliersBuying more from non keiretsu suppliersCut number of components by halfCutting number of steel parts from 610 to 500 to deal with soaring steel price
10 The Growing PainAverage 26 abrupt acceleration reported annually in Camry and Lexus ES modelIn models, this number soared to 132, almost 400% higher.Oct. 2007, Toyota lost the automatic recommendation from Consumer ReportsApr. 2008, Consumer Reports dropped 3 Toyota models from its 2008 recommendation list2009, 2010, Toyota and Lexus slid in 2 consecutive years in J.D.Power’s vehicle dependability reportJan. 2010, Consumer Reports withdraw 8 Toyota models from its recommendation list due to the massive recallJune 2010, Toyota dropped to 21st in J.D.Power’s IQS report
11 99-09 NHTSA Unintended Acceleration Complaint Rate Per 100,000 Vehicles
12 Recent Expansion of Toyota: Spread Out Too Thin?
13 The Context of Toyota’s Aggressive Expansion in the Global Market (I) The “super endaka” post Plaza AccordThe strong yen forced Japanese firms to further cut costs, lower prices, and reinvent themselves through transplants or other innovationsThe Japanese firms benefited from the massive drop in the prices of their raw materials imports, which offset the negative impact on its exportsAs the trade surplus actually soared to more than $90 billion annually after 1985, the Japanese invested in their stock market, foreign equities, real estate, and foreign debtAs the Bank of Japan lowered interest rates to 2.5% by 2/87, real investment skyrocketed from 27% to 32% of GDP by 1991 – an unprecedented level for a developed countryLand prices in Tokyo and Osaka more than tripled, and the Nikkei stock market average rose from 11,000 to 39,000 points in a few yearsJapanese banks and investment funds bought US Treasury bills, and Japanese businesses bought nearly $140 billion of U.S. equities and real estate such as Columbia Pictures, Pebble Beach Golf, and New York’s Rockefeller CenterJapanese manufacturers built plants in the US, Europe, and southeast Asia to gain market access and avoid protectionism, to gain access to technology, or to lower labor costs – Toyota was one of them
14 Selected Exchange Rates to the US Dollar Over Time
15 The Context of Toyota’s Aggressive Expansion in the Global Market (II) Eventually, endaka caught up with Japan. Under the pressure of asset speculation and a threat of inflation in 1989, interest rates were increased to cool off the economy. Rates rose further in 1990, and by 1991, Japan was in recession --The “lost decade” began.Challenges facing Japan and Japanese companiesProblems with economic structureHas the surge in outward Japanese FDI over the 1990s created the “hollowing out” effect on Japanese economy?BY 1993, the stock of outward Japanese FDI stood at $422 billion, almost 15 times the stock of FDI in Japan of $29 billionHow has the relocation of Japanese production abroad led to changes in Japan’s trade structure?Institutional concernsLabor marketsCapital markets: The role of “kereitzu” and cross-holding of shares within corporate families resulted in lack of transparency and flexibility
16 FDI Inflow and Outflow in Japan Source: IMF Working Paper, Bayoumi & Lipworth (1997)
17 Japan’s FDI Outflow and Trade Structure FDI outflows from Japan imply a movement of production capacity away from Japan to other countries, a structural change that is often linked to recent changes in the pattern of Japanese tradeIn the 1980s, Japanese FDI investments were mostly in the North America; Since the 1990s, investment in Asia has grown most rapidlyThe share of FDI outflows in manufacturing has also increased significantly during the 1980s; Even though the share of manufacturing sectors declined somewhat in the early 1990s, it became more dominant in recent yearsSince mid 1990s, Japanese FDI in North America has come to be dominated again by the manufacturing sector (electrical machinery, transport equipment and chemical industries), while in Europe it is still concentrated in the service sector (particularly, in finance & insurance and trade).In Asia, on the other hand, the service sector domination of Japan’s FDI during the late eighties’ bubble period, has since dropped steadily and by 2001, Japan’s FDI in Asia was dominated by manufacturing sector to the extent of some 65%. Of this, the electrical machinery industry continues to be the single largest recipient industry in Asia, followed by chemical and transport equipment and metal industries.
18 Japan’s Restructuring Efforts to Increase Corporate Competitiveness In mid 1990s, a comprehensive reform program dubbed the “Big Bang” was introduced, encompassing reforms in banking, capital markets, insurance, and accounting standards.In April 1996, the Japan Investment Council's statement on M&A espoused a new willingness on the part of Japanese corporate sector to embrace M&As as part of the market-oriented approach to corporate restructuringThe key FDI targets include finance, insurance, the telecommunications industries, and automobile and machineryPreviously, Japanese corporate law was full of restrictions that prevented companies from changing their corporate structure. Restructuring moves such as spin-offs of underperforming units were not allowed. Such bans were lifted in late 1990s, giving corporations more freedom in restructuring their organizationsAs a result of both the “push” of global FDI increase and the “pull” of domestic policy changes, FDI inflows in Japan experienced a surge in the late 1990s. The cumulative total from 1998 to 2002 together amounted to $97.0 billion – almost twice the $49.8 billion registered during the period 1970 to 1997However, even at this level, Japan’s FDI inflow accounts only 1.5-2% of global FDI inflows; In contrast, US accounted for 26% of global FDI inflows in 1999
19 Contribution of Cross-Border M&As to FDI Inflow to Japan 19951996199719981999200020011. Cross-border M&A sales by Japan*541171930834022164311554115183Growth rate in cross-border M&A sales by Japan218%79%30%309%-5.4%-2.3%FDI Inflows*39307084560510240210622899817921Cross-border M&A sales as % of FDI inflows13.8%24.3%55%39.3%78%54%85%* In Millions of US Dollars (notification basis)Source: Japanese Ministry of Finance
20 The Impact of the Restructuring on Japan’s Auto Industry Since the revision of the cross-border M&A regulation, two major Japanese automakers have been targets of foreign acquisitionRenault acquired controlling stakes in Nissan, and DaimlerChrysler did the same for MitsubishiAs a result of the Nissan and Mitsubishi Motors deals, only two of Japan’s twelve car makers, Toyota and Honda, remain independent, while eight now have foreign partners. Toyota holds stakes in the remaining two, Daihatsu and HinoWhile Renault’s acquisition of Nissan proved to be successful, the Mitsubishi deal turned out to be a failure. In 2004, DaimlerChrysler decided to abandon its Japanese partner after Mitsubishi’s finances spiraled out of controlHow competitive are Japanese manufacturing industries today?What are Japan’s top exported goods currently?
21 The Global Auto Market: Post-Toyota Crisis The Toyota crisis will also have significant implications for the global auto industry as a whole, at both operational and strategic levelsIn early 2010, GM announced that all its new vehicles will have brake override system installed, as a precaution to prevent possible problems Toyota vehicles had experiencedBoth GM and Chrysler also introduced sales incentives for Toyota owners to trade their cars with GM and Chrysler brands, which to some extent led to sales increase for both manufacturersEuropean automakers will continue to build market share worldwide by emphasizing on the quality and safety features of their productsIn the meantime, the emerging automakers from China and India are making inroads to the global auto market through aggressive acquisitions of leading brands such as Jaguar, Land Rover and Volvo Cars, signaling intensified competition from previously insignificant players from these regionsThe million dollar question: Will Toyota continue its rise to the No. 1 automaker in the world, despite the setbacks caused by the massive recall?The 3/11 earthquake and Tsunami have led to setback in Toyota’s production in Japan. It’s predicted that Toyota will fall behind GM and even Volkswagen in global vehicle sales this yearQuarterly report released on May 11th 2011 shows sharp decline of profit and uncertainty of earnings future