Biggest by Default: Toyota May Be Number One, But It Still Faces Challenges

ARTICLE ON STRATEGIC MANAGEMENT: SUMMARY
Published: February 04, 2009 in Knowledge@Wharton


Last year, Toyota officially eclipsed General Motors as the world's largest automaker by sales. After years of conservative growth, Toyota accelerated its expansion over the past decade, making it harder to put on the brakes in the current downturn. Toyota and other Japanese firms operate on a business model that emphasizes protecting employees' jobs at all costs And don’t prefer laying off, but it was forced to. Toyota employs about 70,000 full-time workers, the company cut part of its temporary workforce. In the United States, it laid off temporary workers at a pickup truck plant in Texas.
During its expansion, Toyota developed a global roster of independent, more self-sufficient subsidiaries that can offer credit and financing to those customers who venture into showrooms, also it has enough cash to fuel development of innovative products, and its cars typically maintain their resale value longer than its competitors. Since Toyota grew rapidly, except few production problems. Toyota, which built market share on a reputation for top-quality products, has experienced recalls and quality problems with its vehicles of late. Recently, it announced a recall of 1.3 million vehicles worldwide to fix defects in seatbelts and exhaust systems.
Another problem for Toyota is the rising strength of the yen, as investors around the world pour money into Japanese securities seeking safety in a tumultuous global economy. The yen is a big headache for the Japanese. It's a tremendous burden. There is a dramatic shift in exchange rates that made products more expensive for consumers but now consumers are to be persuaded to pay more when they are still not buying cars. Drastic declines in demand are very much on cards & its a very tough challenge.
Bad Bet on Trucks
Toyota, like General Motors and other U.S. competitors, has the wrong product mix for the current market. Despite its roots as a producer of small cars, Toyota now relies heavily on larger vehicles, including trucks that are no longer the sales and profit leaders in the U.S. Toyota's mix is not as bad as General Motors', he adds, because it does have some sedans and fuel-efficient vehicles, but it is not as oriented toward popular small cars as Honda.
On the other hand, Toyota is better positioned to readjust its product mix than its competitors. While General Motors carries inventory for 70 to 75 days, Toyota, with better management of its supply chain and production system, typically has 35 to 45 days' worth of inventory. If General Motors could attain the same efficiencies, the company would save about $4 billion.If GM had been able to reduce inventories in the past, they wouldn't be caught in the downwind and would have had more working capital ... to ride out the storm.
General Motors is also hampered by a need to feed a large network of dealers that tend to be located in older, slow-growth areas, Cachon adds. Toyota, which built its dealer network decades after General Motors, has fewer dealers, but they are generally in areas with stronger population growth.
Toyota may be ahead on the issue of fuel-efficiency because Japanese companies, in general, tend to be more environmentally aware. The Japanese corporate model, which puts greater weight on long-term results than U.S. firms, may be another reason Toyota is faring relatively well in the current crisis. The U.S. car companies completely missed the signals and took a very short-term view.
Not the Acquisitive Type
In many industries, an economic downturn typically becomes an opportunity for strong companies to make opportune merger and acquisition plays at the expense of weaker competitors. While Toyota is a survivor, there is no reason to expect it will attempt to consolidate the industry. Toyota has always been very clear in wanting to grow organically, not through acquisition. It has a strong culture and it is not easy to bring in other firms.
Toyota faced a similar economic downdraft in the 1950s when it almost went bankrupt. Since then, the company has maintained a relatively conservative financial posture. Toyota shall never request its government for bailouts. Hence it has more staying power than many of their competitors.
Of course, Toyota's U.S.-based competitors are running to their own government for taxpayer-financed bailouts. Kimberly notes that Toyota, too, would benefit if GM, Ford and perhaps even Chrysler receive bailouts that allowed them to survive the current crisis. This is because Toyota relies on many of the same supplier networks that feed the Detroit Big Three. If any of the U.S. firms fold, many suppliers would also go under, leaving Toyota with fewer options for partners in its signature production system that encourages supplier participation in innovation, product development and efficient operations.
Beyond thatstrong competition keeps Toyota sharp. They're part of this ecosystem of manufacturers of autos and trucks, and they need the competition to keep them on their game as a premier player.... They derive a lot of strength and a lot of their incredible resiliency from competition. If GM or Ford were to fail, it would take a little of the pressure off, but ultimately given who they are as a company, that might come back to bite Toyota.