Would the Toyota system work in U.S.? NUMMI was a test run

For Toyota in 1983, the question wasn't whether to build cars in America. The question was how.

How can a system as delicate, precise and intuitively managed as the Toyota Production System be uprooted from Japan and replicated in the rowdy business culture of the United States?

Toyota had tiptoed into U.S. manufacturing with a small truck bed plant near Los Angeles in the 1970s. But now Toyota knew the time had come to mass produce complete vehicles in the United States.

Japan's biggest automaker was starting to look bad. In the face of economic recession in the United States, widespread U.S. plant closings, auto worker layoffs and public anger, the Reagan administration was pressing Japan's government to restrain vehicle exports to the United States in the early 1980s.

Japanese government and trade officials, in turn, were asking their automakers to consider building auto assembly plants in the United States. Upstart Honda Motor Co. was the first to oblige in 1980. Nissan Motor Co. followed suit with a construction plan a year later.

But mighty Toyota appeared to sit idly by, oblivious to the brewing political crisis.

But it was not a time of obliviousness for Toyota management. It was a time of enormous contemplation.

"We didn't know how to make it all work," says Nate Furuta, who would be the first Japanese manager sent to the United States to open what would be Toyota's first U.S. auto plant — New United Motor Manufacturing Inc. — in Fremont, Calif. "How do you make the Toyota Production System work outside of Japan? For us, it was a very big question. Very big."

WHERE IT BEGAN

A quarter of a century later, Furuta recalls the various milestones of Toyota's expansion in North America in which he was involved. In the mid-1990s, it would be Furuta who would champion the idea of creating a central manufacturing headquarters in Erlanger, Ky. Today, still youthful-looking at 60, Furuta is CEO of Toyota Boshoku America Inc., an affiliated Toyota interiors supplier with its own U.S. expansion plans. Boshoku already employs 6,000 people here. Toyota itself now employs 30,000 people here in manufacturing.

But it all stemmed from NUMMI, the venture by the San Francisco Bay where Toyota rolled the dice and entered the business in the 1980s.

It could have happened differently.

Originally, Toyota hoped to enter U.S. manufacturing with its old friend, Ford Motor Co. (see story on Page 86). With a partner, Toyota could learn how U.S. labor worked, how regulations are handled and how logistics worked in a country that is 3,000 miles wide. Like Toyota, Ford was a family-controlled automaker. And Ford had helped Toyota relearn automaking after Toyota's quality debacle in the 1950s.

In 1981, a 31-year-old former U.S. Justice Department antitrust lawyer named Dennis Cuneo, then in private practice in Washington, was asked by his senior partner to help Toyota steer clear of antitrust missteps as it negotiated with Ford on a U.S. joint venture. Ford was proposing putting the joint venture into its St. Paul, Minn., truck plant.

But their talks fell through. And when they did, the news traveled immediately to General Motors Chairman Roger Smith. Smith quickly invited Toyota's senior executives to pursue their plans with GM.

SECRET WEAPON

Smith was steering GM into the 1980s with big visions. GM was spending tens of billions of dollars modernizing its North American factories. A finance man by background, Smith also grasped the fact that Toyota's cost advantages over GM and the rest of the Big 3 were due not simply to lower Japanese assembly labor costs. There was a finer aspect of Toyota's operating methods that could become GM's secret weapon in America. Linking up with Toyota would enable GM managers to learn what it was.

"GM really wanted this to be big," Cuneo says. "They initially came to us and made a big presentation that we would create a joint venture that would consist of not one but two auto plants, the GM plant in South Gate, near Los Angeles, and the one outside of Oakland, in Fremont. Toyota was a little overwhelmed. They really were trying to do something more modest to start off."

Instead, the sides agreed that they would focus on the Fremont plant, then a 20-year-old factory that wasn't even open. GM had just closed the plant and furloughed its entire work force.

Fremont was arguably GM's worst plant in America. Its often radical UAW workers had been hard to manage while it was open. There had been wildcat strikes. Absenteeism ran as high as 20 percent on Mondays and Fridays, when local college kids had to be retained to fill in on short notice. A plant practice called tag relief made it difficult for managers to be certain who was actually working. Worker grievances numbered in the thousands, and even after the plant shut down, an estimated one quarter of the force was involved in workers' compensation claims against GM.

Toyota liked the geography. It was a shorter flight from Japan than the American Midwest. Being on the West Coast shortened the supply line for most of the parts, which would be arriving from Japan. And the San Francisco Bay offered the nervous Japanese a hospitable point of entry with a thriving Asian demographic. A Japanese-American served on the Fremont city council. The GM plant itself had been built 20 years earlier on the site of an apricot farm that was owned by a Japanese-American farmer.

NEVER WORK

But the venture was so beset with challenges that it is a wonder it ever went forward, reflects Cuneo, 57, who retired from Toyota last year to begin working as a consultant. Gray-haired and ever smiling, the fast moving, rapid-talking Cuneo has been involved in two decades of site selections for Toyota's North American expansion. Three of the site selections occurred just this year in Mississippi — a Toyota SUV plant in Tupelo, a Toyota Boshoku supplier plant and another affiliated supplier factory, totaling $1.6 billion in investment there.

"When you look back on it," Cuneo says of NUMMI today, "it probably didn't make a lot of sense on paper. You had a small group of Japanese guys who, except for one, had never even lived in America, working with a small group of GM guys who had never worked with the Japanese, joining with a couple of other people, like me, who were from outside the auto industry, relying on a difficult UAW force in one of GM's most inefficient plants, all because it was important for Toyota and GM to learn from each other."

Once the decision was made to go ahead, the challenges began in earnest. The idea of the largest U.S. automaker and the largest Japanese automaker joining forces to build small cars for the United States lit the fuse of competitors in Detroit. Chrysler Chairman Lee Iacocca testified on Capitol Hill that it represented unfair trade. Chrysler later would file suit to block the venture, with consumer advocate Ralph Nader joining in.

The Federal Trade Commission launched an investigation that held up the project for a year. FTC investigators traveled to Japan to take depositions from Toyota executives and examine Toyota plants for themselves.

When regulatory approval finally came, it limited the venture to a 12-year existence. It capped GM's allotment of vehicles from the venture at just 250,000 a year. And it tightly restricted communication between GM and Toyota. The partners were forbidden to talk about pricing or market plans, and logbooks had to be maintained that chronicled what conversations had taken place when. FTC examiners would visit Fremont regularly over the coming decade to peruse the logbooks.

AMERICAN-THINK

Toyota could live with all that. What worried it most was the work force. Toyota knew it needed Americans on staff in Japan who understood its unique methods of operating. The first American ever hired for that purpose in 1983 had been a young college graduate from east Tennessee named John Shook. Lanky and soft-spoken, and just vaguely Japanese-looking with his high cheekbones, Shook had left Tennessee for Japan. Many Japanese didn't know what to make of foreigners, and some Toyota-ites hadn't known what to make of one walking freely through their building.

Shook immersed himself in the language and culture of Japan and Toyota. He became highly versed in the Toyota Production System — "You don't use the word 'expert' in discussing TPS," he says now. "The philosophy is that once you believe you are an expert, you cease to learn. And TPS is predicated on continuous improvement. So you can't stand still.

"That was going to be our biggest challenge — explaining this enormous philosophy of how Toyota operated to people who had no idea what we were talking about," Shook says. Like many other Americans who studied Toyota from the inside, Shook, 55, now consults with U.S. firms on adopting Toyota's lean manufacturing principles. His current client: Starbucks.

"When Toyota began sending us from Japan to California to explain the production system, we really didn't know how it would go over. Would the UAW agree to continuous improvement? Would they agree to standardized work, to job rotation? Would they have so much hostility to the Japanese that the whole effort would fail?"

FISH FOR BREAKFAST

Because of such fears, Toyota originally had asked to hire a different work force from GM's. But when GM labor managers explained that such a move would cause the venture years of trouble, Toyota agreed to rehire a majority of the laid-off UAW workers. By startup in December 1985, 85 percent would be rehired. Most of the remaining 15 percent had been skilled tradesmen, and many of those had left California to take assignments at GM plants back east.

To staff its skilled ranks, the Toyota-GM plant would end up hiring large numbers of Ford skilled tradesmen who had been laid off in California.

The first 300 rehired Fremont workers had been sent to Japan to work on the line in Toyota plants for a month. They would themselves become trainers upon returning to California.

Shook shared their dormitory residences with them, where they created an after-hours "Fremont Bar" to ward off homesickness. The lack of American cuisine revealed how isolated Japanese society remained from the world in the early 1980s.

"They wanted to serve these guys fish for breakfast," Shook grimaces. "I said no, that won't do for Americans. We had to teach the cooks how to fry bacon."

Many remained skeptical. Once, after several venture managers had gone through a detailed afternoon-long discussion of the Toyota Production System to the leaders, emphasizing that the core idea was to make ongoing cost and quality improvements by identifying and eliminating waste, but never eliminating jobs, a union committeeman raised his hand and observed, "It still sounds like a line speed-up to me."

COURTING THE UNION

Furuta waged his own cultural battles in California. He sensed that the local union leadership resented Toyota's presence. And he attributed the resentment not to xenophobia among the friendly middle-aged American labor leaders, but to their lack of information. If they could only hear more about how Toyota's methods worked on the factory floor, they would be supportive, Furuta concluded.

Most nights, Furuta, a lawyer by training, would pop into the local union hall to spend the evening socializing with the UAW leaders. They drank beer. Furuta extolled the virtues of the Toyota Production System. And occasionally the two forces found agreement.

But the union representatives recoiled at contract-signing time, when, as human resources negotiator, Furuta asked them to agree to only three job classifications. Fremont previously had more than 100 classifications.

"They refused. They said, 'This doesn't sound like what we agreed to,' " Furuta says of the tense confrontation. "I said, 'But it's what we have been saying all along. It has to work this way for all of it to work.' In the end, they agreed."

Eventually the leadership warmly endorsed the ideas. To build rapport, NUMMI would be more egalitarian than a typical GM plant. NUMMI dispensed with executive dining rooms in favor of a common cafeteria. There would be no reserved executive parking. Managers would abandon their neckties to wear the same uniforms as the assembly workers.

WE'RE READY

The day-to-day details slowly would get worked out. Production would launch at the excruciating speed of one car a day. But as GM's ex-workers gathered enthusiasm for their new power to pull the andon cord to question quality, and for keeping production volumes constant and predictable, and for signaling for parts deliveries with small colored cards, Toyota knew it had accomplished its mission.

"Almost immediately after we started, the announcement came down that Toyota was going to build a plant of its own in Kentucky," Shook says. Cuneo, who had left his law firm to join NUMMI's management ranks and begin a lifelong executive path through the automaker, admits he was as surprised as anyone when the Kentucky announcement came so quickly.

"They were eager to move forward," Cuneo says. "At first the question was will this work? When it became clear that it would — that even this old UAW work force can get their arms around the Toyota Production System and do a good job with it — then it was time for Toyota to take off in America.

"On the other hand, had it not worked — had the training failed, had the union been treated badly and the project not succeeded — I really don't think Toyota would have gone forward like it did. Toyota would be a smaller company in America today."

As for what GM got out of the venture, that is less clear. The production system insight that Roger Smith hungered for in 1982 has proved difficult to spread through GM, as it has been for many other U.S. companies.

"I'm absolutely astounded," reflects Shook of his consulting business, "that in 2007, I'm still explaining to people what Toyota taught me almost 25 years ago."

You can reach Lindsay Chappell at lchappell@crain.com.