Toyota’s Epic Phail

Toyota Motor Corp, the world’s most dominant and profitable automaker, was not accustomed to outsiders telling it what to do, let alone some obscure bureaucrat from the United States, whose own car industry was on taxpayer-funded life support.

But in the middle of December, on a cloudy day in the middle of the Japanese archipelago’s main island, Ron Medford, the acting head of the US agency that regulates auto safety, was reading Toyota executives the riot act.

Medford had been quietly dispatched by the Obama administration to deliver a firm message: Toyota, he told them, had better get its act together, according to US regulators. By the time Medford arrived in Japan, Toyota was working through a recall that would involve over 5 million vehicles in the United States. The problem was mundane but potentially lethal: floor mats were trapping the accelerator pedal.

In a closed-door meeting in Nagoya, Medford told four Toyota executives that the automaker was moving too slowly in addressing safety defects under investigation by US authorities. He said he wanted changes, and he wanted them fast.

One of the Toyota officials in the room, Chris Santucci, had spent two days the week before in a deposition room being grilled by lawyers for the family of a 77-year-old Michigan woman who was killed in 2008 when her Camry took off uncontrollably and slammed into a tree just four blocks from her home.

Medford’s warnings went unheeded. By late January, Toyota’s safety problems would explode into a crisis that has battered its finances and shaken consumer confidence in one of the world’s best-known brands and an icon of Japan’s spectacular post-war economic success.

Since the American team’s visit, an additional 4.7 million Toyota cars have been recalled globally, the largest safety action ever for the automaker. Reported problems with acceleration now shadow the Camry, the plain-vanilla sedan that powered Toyota’s success in the 1990s, and braking glitches threaten to unplug the Prius, Toyota’s green “halo car” for a new era.

In a sense, insiders say, Toyota has become a victim of its own dizzying success. Consultants, suppliers, dealers and analysts say fast growth strained the company’s resources to breaking point. The additional stress of achieving near constant cost reductions in parts added to the pressure.

Others say a hint of complacency crept into dealings with outsiders as Toyota moved toward taking over the industry’s top spot by sales in 2008 from General Motors. The protracted back-and-forth with US safety regulators on the acceleration complaints also suggests an organization hunkering down against change, critics say.

When crisis hit in late January, Toyota stumbled to provide a clear message to consumers and investors. The company’s secrecy and tendency to centralise decision-making in Japan contributed to the public relations debacle, experts say.

After three months of busy and sometimes frustrated exchanges with Toyota’s US staff on safety issues, the US Department of Transportation decided last December to try a very Toyota tactic to get the automaker’s attention. Medford got his boots on and headed to Japan.

In a crowded meeting hall in Toyota’s headquarters on Dec. 15, Medford and two other senior NHTSA officials first delivered what amounted to a remedial lesson in US safety regulation for about 100 Toyota engineers and executives, a primer in how the system is supposed to work.

Then the Americans retired to a conference room to hammer home the no-nonsense warning to a smaller group. Across the table was Toyota’s top officer in charge of quality, Hiroyuki Yokoyama, and the head of the engineering team that handled consumer complaints, Shinji Miyamoto. In a company that built its reputation on an almost paranoid obsession with quality, Yokoyama and Miyamoto were the keepers of the flame.

Toyota officials in the room with Medford suggested that perhaps the placement of floormats was responsible for the unintended acceleration cases that had drawn tougher scrutiny from the US side.

The irony of the moment was rich. This was a little-known US official in an arm of the government most Americans could not identify lecturing Toyota about quality. The same US government that had bailed out General Motors and Chrysler just four months earlier was excoriating Toyota for falling short.

But this was Toyota. This was the auto company that revolutionised factory production in the 1960s, launched a luxury brand in the Lexus against the odds in the late 1980s, and then confounded skeptics again in the 1990s by delivering the Prius and turning itself into a byword for environmental stewardship.

By 2009, Toyota had become an economic powerhouse with over 300,000 employees. In the United States, where it employed over 35,000, it stood at the centre of a web estimated at over 380,000 auto sector jobs including dealers and suppliers.

For all the company’s success, Toyota workers were still being rallied to achieve the impossible. Toyota president Katsuaki Watanabe, who held the top job until June 2009, would tell them to build a car that can go from New York to California on a single tank of gas. Build a car that makes the air cleaner or one that makes the driver healthier, he would say.

Fast-forward a few months and the picture could not be more different. By February, Toyota was in full retreat. After two weeks largely out of the spotlight, Toyoda called a hasty press conference in Nagoya to apologise.

Toyota knew how to run a textbook recall. When Toyota launched its Lexus brand in 1989, the long-awaited LS400 was hit by a series of glitches, including a tail lamp prone to overheating. The recall threatened to kill the luxury brand in its cradle. Toyota suspended production and ramped up output of replacement parts. Its California-based sales arm sent representatives out to pick up every one of the 8,000 LS400s that had been sold and provide owners with a free loaner while repairs were under way. The cars were returned washed and with a full tank of gas.

Lexus dealers and customers were impressed by the attention and the brand went on to outsell BMW and Daimler AG in the US market over the next two decades.That record of success made Toyota dealers deeply loyal and rich. It also drew investment from listed dealership groups that bet Toyota franchises would continue to outsell and out-service the rest of a wildly cyclical industry. In part because Toyota had kept a tight lid on the number of its dealerships, the franchises remained far more profitable than US car dealerships. In 2008, during a recession, the average Toyota dealership sold four cars a day. The average Ford dealer sold one

The problem here was the CTS-built accelerator which essentially was a US$15 (RM51.41) part which had the problem of becoming stuck in some cases due to wear and moisture, Toyota had found. The bigger problem: the flaw affected over 2 million vehicles and the automaker had not yet fully figured out a way to fix it quickly.

The announcement on Thursday, Jan. 21 looked bad for Toyota. But the situation turned dire the next Monday. US safety regulators told Toyota it would have to take the unprecedented step of suspending sales of eight models while it rushed to find a fix. In one stroke, Washington stranded US$2.5 billion in unsold inventories of cars and trucks at the automaker’s dealerships. Worse, the negative publicity was driving away shoppers in the last week of the month, typically the peak for showroom traffic. Toyota rushed to keep dealers informed with daily updates and conference calls. But frustrations were starting to boil over.

Elsewhere, Toyota insiders and rivals had also begun to note other signs of distress in an organisation that had started the decade with a goal to double its global market to 15 per cent. The implicit outcome was understood by everyone in the industry which was to overtake GM as No. 1.

On the cusp of hitting that benchmark, some insiders at Toyota began to worry. To their minds, the goal had always been intended as one of Toyota’s audacious stretch targets, like Watanabe’s vision of a car that would clean the air. Toyota had even dropped it as a target, but now it was happening. By 2007, Toyota’s US sales had rocketed by 80 per cent from the start of the decade. Market share had almost doubled from just under 9 per cent to 16 per cent. In unit sales terms, it was as though Toyota had absorbed a second automaker the size of Honda and the bulge was still moving through the snake.

The inspiration for Toyota’s just-in-time production system was a post-war visit to the American grocery chain Piggly Wiggly, where self-taught engineer Taiichi Ohno watched shelves restocked as soon as consumers emptied them.

Five decades later, The Toyota Way became a culture unto itself, deeply Japanese but even more deeply Toyota. By 2007, the company ran a Toyota University in California and a Toyota Institute in Japan to teach Toyota how to be Toyota.

Back in Toyota City, there was evidence of the quiet resolve the automaker will need a lot more of in the weeks ahead.

About the author: Kavinash Vikna