The Emergence of Japanese Automobile Manufacturing in the 1930s and 1940s
In 1933 a Japanese man named Kiichiro Toyoda traveled to the United States, where he visited a number of automobile production plants. Upon his return to Japan, the young man established an automobile division within his father’s loom factory and in May 1935 produced his first prototype vehicle. General Motors and Ford already were operating assembly plants in Japan, but U.S. preeminence in the worldwide automotive industry did not deter Toyoda.
Since Japan had very few natural resources, the company had every incentive to develop engines and vehicles that were highly fuel efficient. In 1939, the company established a research center to begin work on battery-powered vehicles. This was followed in 1940 by the establishment of the Toyoda Science Research Center (the nucleus of the Toyota Central Research and Development Laboratories, Inc.) and the Toyoda Works (later Aichi Steel Works, Ltd.). The next year Toyoda Machine Works, Ltd. was founded for the production of both machine tools and auto parts.
As Japan became embroiled in World War II, the procurement of basic materials for automobile manufacturing became more and more difficult. At one point Toyoda was manufacturing trucks with no radiator grills, brakes only on the rear wheels, wooden seats, and a single headlight. Pushing toward the limits of resource conservation as the course of the war began to cripple Japan’s economy, the company started piecing together usable parts from wrecked or worn-out trucks in order to build ‘recycled’ vehicles.
When the war ended in August 1945 most of Japan’s industrial facilities had been wrecked, and the Toyoda (or Toyota as it became known after the war) production plants had suffered extensively. The company had 3,000 employees but no working facilities, and the economic situation in Japan was chaotic. But the Japanese tradition of dedication and perseverance proved to be Toyota’s most powerful tool in the difficult task of reconstruction.
Postwar Challenges and Innovations: The Birth of the Small Car
Just as the Japanese motor industry as a whole was beginning to recover, there was mounting concern that American and European auto manufacturers would overwhelm the Japanese market with their economic and technical superiority. Japan’s automakers knew that they could no longer count on government protection in the form of high import duties or other barriers as they had before the war.
Since American manufacturers were concentrating their efforts on medium-sized and larger cars, Toyota’s executives thought that by focusing on small cars the company could avoid a head-on market confrontation. Kiichiro Toyoda likened the postwar situation in Japan to that in England. ‘The British motorcar industry,’ he said, ‘also faces many difficulties, but its fate will be largely determined by how strongly American automakers feel they should concentrate on small cars.’ It was January 1947 when Toyota engineers completed their first prototype for a small car: its chassis was of the backbone type (never used before in Japan), its front suspension relied primarily on coil springs, and its maximum speed was 54 miles per hour. After two years of difficulties the company seemed headed for success.
This was not to be accomplished as easily as expected, however. Two years later, in 1949, Toyota suffered its first and only serious conflict between labor and management. Nearly four years had passed since the end of the war, but Japan’s economy was still in poor shape: goods and materials of all kinds were in short supply, inflation was rampant, and people in the cities were forced to trade their clothing and home furnishings for rice or potatoes to survive. That year the Japanese government took measures to control runaway inflation in ways that severely reduced consumer purchasing power and worsened the already severely depressed domestic automotive market. Japanese auto manufacturers found themselves unable to raise the funds needed to support their recovery efforts, for the new governmental policy had discontinued all financing from city banks and the Reconstruction Finance Corporation.
Under these conditions the company’s financial situation deteriorated rapidly. In some months, for example, the company produced vehicles worth a total of ¥350 million while income from sales reached only ¥250 million. In the absence of credit sources to bridge the imbalance, Toyota soon was facing a severe liquidity crisis. In large part because of wartime regulations and controls, Toyota had come to place strong emphasis on the production end of the business, so that in the early postwar years not enough attention had been paid to the proper balance between production and sales. The Japanese economy at that time was suffering from a severe depression, and because the Toyota dealers were unable to sell cars in sufficient quantities, these dealers had no choice but to pay Toyota in long-term promissory notes as inventories kept accumulating.
Finally, Toyota was unable to meet its regular payroll. Delayed payments were followed by actual salary reductions and then by plans for large-scale layoffs–until April 1949, when the Toyota Labor Union went on strike. Negotiations between labor and management dragged on with the union leaders bitterly opposed to any layoffs. As a result, Toyota was compelled to reduce both production and overhead. Workers staged demonstrations to press their demands, and all the while Toyota kept falling further into debt, until the company finally found itself on the verge of bankruptcy.
Production dropped to 992 vehicles in March 1949, to 619 in April, and to 304 in May. Crucial restructuring efforts included a proposal to incorporate Toyota’s sales division as a separate company, leading eventually to the formation of Toyota Motor Sales Company Ltd. in April 1950. Toyota Motor Sales Company handled all domestic and worldwide marketing of Toyota’s automotive products until July 1982, when it merged with Toyota Motor Company.
In the meantime, discussions between labor and management finally focused on whether to admit failure, declare bankruptcy, and dissolve the company, or to agree on the dismissal of some employees and embark upon a rebuilding program. In the end management and labor agreed to reduce the total workforce from 8,000 to 6,000 employees, primarily by asking for voluntary resignations. At the management level, President Kiichiro Toyoda and all of his executive staff resigned. Kiichiro, Toyota’s founder and a pioneer of the Japanese automotive industry, died less than two years later.
Not long after the strike was settled in 1950, two of the company’s new executives, Eiji Toyoda (now chairman of Toyota Motor Corporation) and Shoichi Saito (later chairman of Toyota Motor Company), visited the United States. Seeking new ideas for Toyota’s anticipated growth, they toured Ford Motor Company’s factories and observed the latest automobile production technology. One especially useful idea they brought home from their visit to Ford resulted in Toyota’s suggestion system, in which every employee was encouraged to make suggestions for improvements of any kind. On their return to Japan, however, the two men inaugurated an even more vital policy that remained in force at Toyota through the 1990s: the continuing commitment to invest in only the most modern production facilities as the key to advances in productivity and quality. Toyota moved quickly and aggressively in the 1950s, making capital investments in new equipment for all of the company’s production facilities. Not surprisingly, the company began to benefit from the increased efficiency almost immediately.
Along with improvements in its production facilities, Toyota also worked to develop a more comprehensive line of vehicles to contribute toward the growing motorization of Japanese society. During 1951, for example, Toyota introduced the first four-wheel-drive Land Cruiser. Moreover, as the domestic demand for taxis rapidly increased, production of passenger cars also rose quickly, from 50 units per month to 250 units per month by 1953.
In production control, Toyota introduced the ‘Kanban’ (or ‘synchronized delivery’) system during 1954. The idea was derived from the supermarket system, where ‘consumers’ (those in the later production stages) took ‘products’ (parts) from the stock shelves, and the ‘storekeepers’ (those in the earlier production stages) replenished the stock to the degree that it was depleted. The Kanban system became the basis for Toyota’s entire production system.
By the early 1950s, just as Toyota had anticipated, the Japanese market was crowded with vehicles from the United States and Europe. It soon became apparent that to be competitive at home and abroad, Toyota would not only have to make additional investments in manufacturing facilities and equipment, but also undertake a major new research and development effort. This was the reasoning behind Toyota’s decision in 1958 to build a full-scale research center for the development of new automobiles (which also was to become Japan’s first factory devoted entirely to passenger-car production). Toyota also began to offer a more complete line of products. Beginning with the Crown model, introduced in 1955, Toyota quickly expanded its passenger-car line to include the 1,000-cubic-centimeter Corona, then added the Toyo-Ace (Japan’s first cab-over truck) and a large-sized diesel truck.
Throughout these years Toyota also was working hard on another important, if less conventional, approach to adapting itself to the rapid motorization of Japan, brought about by a remarkable increase in national income. When, for example, Toyota Motor Sales was capitalized at ¥1 billion, 40 percent of that amount (¥400 million) was immediately invested to establish an automobile driving school in an effort to help citizens acquire driver’s licenses. Through this and similar efforts, Toyota made a major contribution to Japan’s growing motorization in the years following 1965, a trend that was to lead to a mass domestic market for automobiles.
In 1955, ten years after its defeat in World War II, Japan became a member of the General Agreement on Tariffs and Trade (GATT); but automobiles remained one of Japan’s least competitive industries in the international arena. Toyota, foreseeing the coming age of large-scale international trade and capital liberalization in Japan, decided to focus on lowering its production costs and developing even more sophisticated cars, while at the same time attempting to achieve the highest possible level of quality in production. This was a joint effort conducted with Toyota’s many independent parts suppliers and one that proved so successful that ten years later, in 1965, Toyota was awarded the coveted Deming Prize for its quality-control achievements. That was also the year that the Japanese government liberalized imports of foreign passenger cars. Now Toyota was ready to compete with its overseas competitors–both in price and quality.
In subsequent years Japan’s gross national product expanded rapidly, contributing to the impressive growth in auto sales to the Japanese public. The Toyota Corolla, which went on sale in 1966, quickly became Japan’s most popular family car and led the market for autos of its compact size. Toyota continued to make major investments in new plants and equipment to prepare for what it believed would be a higher market demand. In 1971 the government removed controls on capital investment. In the wake of this move, several Japanese automakers formed joint ventures or affiliations with U.S. automakers.
Two years later, the 1973 Middle East War erupted and the world’s economy was shaken by the first international oil crisis. Japan, wholly dependent upon imports for its oil supply, was especially affected. The rate of inflation increased and demand for automobiles fell drastically. Yet, in the face of the overall pessimism that gripped the industry and the nation, Toyota’s chairman Eiji Toyoda proposed a highly aggressive corporate strategy. His conviction was that the automobile, far from being a “luxury,” had become and would remain a necessity for people at all levels of society. As a result, Toyota decided to move forward by expanding the company’s operations.
The 1973 oil crisis and its aftermath were valuable lessons for Toyota. The crisis demonstrated the necessity for a flexible production system that could easily be adapted to changes in consumer preferences. For example, Toyota did away with facilities designed exclusively for the production of specific models and shifted instead to general-purpose facilities that could be operated according to changes in market demand for the company’s various models.
Environmental Awareness in the 1970s
In December 1970 the U.S. Congress passed the Muskie Act, which set limits on automobile engine emissions. In the United States the enforcement of this law was eventually postponed, but in Japan even stricter laws were promulgated during the same time with no postponement of enforcement deadlines. When the Muskie Act was first proposed, automakers all over the world were opposed to it. They argued that it would actually prohibit the use of all internal combustion engines currently used, and they requested that the enforcement of the law be postponed until new technology, able to meet the law’s requirements, could be developed.
Notwithstanding these developments, Toyota moved forward on its own to develop a new generation of cleaner and more fuel-efficient engines. After studying all the feasible alternatives–including catalytic systems, rarefied combustion, rotary engines, gas turbine and battery-powered cars–Toyota settled on the catalytic converter as the most flexible and most promising and succeeded in producing automobiles that conformed to the world’s toughest emissions-control standards. (Meanwhile, imported cars were given a three-year grace period to conform to Japan’s strict emissions-control standards.)
International Growth in the 1980s
In 1980 Japan’s aggregate automobile production was actually better than that of the United States. In the same year, Toyota ranked second only to General Motors in total number of cars produced. Although Toyota made efforts over the years to improve the international cooperation between automakers, in such ways as procuring parts and materials from overseas manufacturers, Japan’s successes in the world auto market nonetheless resulted in the Japanese automobile industry becoming a target of criticism.
Shoichiro Toyoda, president of Toyota during the middle and late 1980s, possessed a solid understanding of American culture. Toyoda reportedly believed that Toyota’s future success depended in part on the way it handled public relations with the United States, a nation that he perceived to be extremely bitter about losing trade battles with Japanese industry. By means of intense advertising and controlled public relations under Toyoda’s direction, Toyota tried to elevate the principle of free competition in the minds of the American people. At the same time, Toyoda carefully committed his company to greater international cooperation in both technological and managerial areas.
In 1984, for example, Toyota entered into a joint manufacturing venture with American giant General Motors called New United Motor Manufacturing, Inc. (NUMMI). This state-of-the-art facility allowed Toyota to begin production in the United States cautiously at a time of increasing protectionism, as well as learn about American labor practices. At the same time, it provided General Motors with insight into Japanese production methods and management styles. The plant was slated to build up to 50,000 vehicles a year. In the fall of 1985, moreover, Toyota announced that it would build an $800,000 production facility near Lexington, Kentucky. The plant, which was expected to begin assembling 200,000 cars per year by 1988, created approximately 3,000 jobs.
By the end of the 1980s, Toyota’s position as a powerful, exceptionally well-run car company was nearly unassailable. After a decade of prodigious growth, the company stood atop the Japanese automobile industry and ranked number three worldwide, a position it had held since 1978 and strengthened in the ensuing years. By the beginning of the 1990s, Toyota commanded an overwhelming 43 percent of the Japanese car market, and in the United States it sold, for the first time, more than one million cars and trucks. Aside from these two mainstay markets, Toyota was solidifying its global operations, particularly in Southeast Asia, and carving new markets in Latin America, where the burgeoning demand for cars promised much growth. Toyota also spearheaded the Japanese automobile industry’s foray into the luxury car market, leading the way with its Lexus LS400 luxury sedan, which by the mid-1990s was outselling market veterans BMW, Mercedes-Benz, and Jaguar.
Despite these favorable developments, all of which pointed toward further growth and underscored the car company’s vitality, Toyota’s management continued to strive for improvements. In 1990, for example, when the company was posting enviable financial results and its manufacturing processes provided a model for other companies to follow, Shoichiro Toyoda eliminated two layers of middle management, effected substantial cuts in the company’s executive staff, and reorganized Toyota’s product development. With the highest operating margin of any carmaker in the world, Toyota was a formidable competitor.
Toyota had little control over external forces, however, and as the 1990s progressed, a global economic downturn brought the prolific growth of Japan’s largest car manufacturer to a halt. The recession stifled economic growth throughout the world, while a rising yen made Japanese products relatively more expensive in overseas markets. Toyota’s profits declined for four consecutive years between 1991 and 1994, falling to the lowest level in more than a decade. Midway through Toyota’s net income slide, the company gained new leadership when Totsuro Toyoda succeeded his brother in September 1992. Under Totsuro Toyoda’s stewardship, a cost-cutting program was enacted that reduced expense account budgets 50 percent, limited travel expenditures, and eliminated white-collar overtime. Toyoda also continued the trend toward moving production to less expensive overseas markets by ordering the construction or expansion of six assembly plants in Great Britain, Pakistan, Thailand, Turkey, the United States, and Japan.
As Toyota’s profit decline continued, however, the mounting losses persuaded Toyoda to intensify his cost-cutting measures. Design changes in the company’s vehicles coupled with reductions in manufacturing and distribution costs saved Toyota ¥150 billion in 1993, and another ¥100 billion in savings was expected to be realized in 1994. That same year, the fourth consecutive year of negative net income growth, Toyota recorded ¥125.8 billion in consolidated net income, a little more than a quarter of the total posted in 1990, when the company earned ¥441.3 billion.
“The New Global Business Plan”: 1995 and Beyond
When Hiroshi Okuda was promoted to company president in 1995 his chief ambition was to revitalize Toyota’s standing in the global marketplace. In June he unveiled Toyota’s New Global Business Plan, which placed renewed focus on innovation and international expansion. Okuda’s targets were clearly defined: to raise production to six million vehicles a year; to increase Toyota’s international market share to 10 percent; and to increase its share of the domestic market to 40 percent. He believed the first two goals would be achieved through the construction of new manufacturing plants in foreign markets, along with an increased emphasis on the “localization” of parts production. The purpose of localization was to reduce the time and expense involved with shipping components across great distances, enabling Toyota to increase its overall automobile production and devote greater resources to research and development. By widening the scope of operations in Toyota’s overseas locations, Okuda envisioned a more streamlined, cost-effective manufacturing process. Furthermore, the stimulation of local economies was an effective public relations tool, enhancing the value of the Toyota brand name in foreign markets.
Okuda wasted no time putting his vision into practice. In 1995 Toyota announced its intention to set up a manufacturing operation in Indiana, in the hope of becoming a major participant in North America’s highly competitive large truck market. In 1997 the company opened new plants in Canada and India, and in December it announced plans to build a second European plant in Valenciennes, France, to begin production of a new line of cars specifically designed for the European consumer. The year 1997 also saw increased production in Toyota’s Thailand operations, with a total output of 240,000 vehicles. In 1998 the company also raised its export levels from the Thailand plants to 20,000 units, with most of the vehicles destined for the Australian and New Zealand markets. That same year, the company opened a new operation in Brazil, and in 1999 it began construction of a transmission production plant in the Walbrzych Special Economic Zone in Poland, which would begin exporting the parts to Toyota’s manufacturing centers in France, Turkey, and the United Kingdom by 2002.
One of the most promising automobile markets to open up in the late 1990s was in China. By March 1998 Toyota already had stakes in four Chinese parts manufacturing plants, one of them a wholly owned subsidiary. The company took a more significant step in November 1998, when it established the Sichuan Toyota Motor Co., Ltd., Toyota’s first vehicle production plant in China. A joint venture with the Sichuan Station Wagon Factory and Toyota Tsusho Corp., the new plant was scheduled to begin manufacturing coaster-class buses by 2001.
Okuda also assumed an aggressive approach to Toyota’s role in the domestic market. In late 1996 he made drastic cuts to Toyota’s vehicle prices in Japan, a move that incensed the competition. In August 1998 Toyota extended its hold over the domestic market with the purchase of a majority stake in Daihatsu. The company also implemented a number of environmental initiatives during this period, both at home and abroad. In July 1999 it inaugurated an initiative that aimed to eliminate all landfill waste by 2003, and in 2000 it introduced stricter environmental regulations in its U.S. manufacturing plants, which actually went beyond the current EPA standards.
One of the most radical innovations to arise from Okuda’s revolution was the Prius, Toyota’s first hybrid car. Launched in October 1997, the Prius combined a highly efficient gas engine with a self-regenerating electric motor, reducing carbon dioxide emissions by half. Although initial estimates showed that production would have to surpass 200,000 vehicles a year for the Prius to turn a profit, by March 1998 demand was already surpassing supply, and the future of the eco-car on the domestic market looked promising. Prius finally hit the U.S. and European markets in late 2000, amid increased fuel prices and mounting concerns over global warming.
Although a weakened euro caused Toyota to suffer losses in Europe toward the end of the 1990s, the new operation in France, scheduled to begin production in 2001 at a rate of 150,000 vehicles a year, was expected to reverse this trend. The company also experienced strong sales in the United States and Japan during this time, and in 2000 Toyota’s total worldwide production exceeded five million vehicles for the first time ever.