Tough times in '90s force Toyota to slash costs, reinvent itself
Yen soars, Japan's bubble bursts -- and Toyota adapts
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And those tumultuous events triggered a reinvention of the company that set the stage for Toyota Motor North America to be more than a colonial outpost of the Japanese company.
Clouds began to form with the Plaza Accord of 1985. The agreement — reached by finance and treasury officials from around the world at New York's Plaza Hotel — was designed to weaken the dollar and thus make it possible for South American nations to repay their crushing dollar-denominated debt.
But weakening the dollar strengthened the yen. The exchange rate swooned from 120 yen to the dollar to 80. That created a phenomenon — endaka — that transformed the export business, which had become Toyota's lifeline, into a liability.
Then the Japanese real estate bubble burst in 1990, bringing down the stock market and the economy and pulverizing the domestic auto market. Jarred from a Roaring '20s mode of exuberant, excessive spending, Japanese shoppers suddenly were looking for greater value in their auto purchases.
SQUEEZE PLAY
Toyota already was famous for its ability to squeeze costs out of products and processes that seemed to have none left to give. But now the cost-cutting blades were honed even finer.
From 1990 to 1992, two layers of management were eliminated, along with part of the executive staff. Expense account budgets were cut in half.
John McGovern made several trips to Japan during those years while he was senior vice president of finance at Toyota Motor Sales U.S.A. He saw the companywide scramble for cost savings.
"It was amazing what the assembly line workers were coming up with," says McGovern, now 67. "They were standardizing all the fastening screws. At headquarters in Japan, they took the paper towels out of the bathroom. You would use your handkerchief instead."
The company developed less expensive parts, shared more parts among models and slashed its parts catalog. Subassemblies were simplified. Vehicles shared platforms. Slow-selling models got the ax.
One way Toyota saved money was by taking content from vehicles. The company stripped some models of their expensive features to make them cost less.
CUTTING COROLLA COSTS
Take the Corolla. Traditionally basic transportation, it had gotten more spiffy as Japanese consumers increasingly felt wealthy in the late 1980s. When Japan's economic bubble, based on outrageous land prices, burst in 1990, Toyota was developing an upscale and by then relatively expensive Corolla. It debuted in 1991 and immediately was out of synch with consumers.
So with the model that came out in 1995, Toyota took out a lot of fancy features and upscale interior materials. It sharply increased the amount of parts shared with other nameplates.
But the company took out too much. People who bought a new Corolla every four years could plainly see that the new one looked cheaper and offered a lower-level audio system. They rebelled, and sales tanked. After 39 straight years as Japan's top-selling nameplate, the Corolla lost the crown to the Suzuki Wagon R in 1997.
Adding costs to cars had been a mistake. Taking them out too ruthlessly hadn't worked either. On the cover of the company's 1994 annual report were the words: "How We Saved $1.5 Billion." Still, it was the fourth straight year of declining profits.
Fortunately, Toyota had a source of inexpensive cars to offset the expensive, yen-based cars built in Japan. Its factory in Georgetown, Ky., built cars whose costs were largely in dollars, not yen. Toyota suddenly discovered that there was a market in Japan for less-expensive Camrys built in Kentucky. It began exports of the Sceptre, the Japan-market name for the Camry station wagon, on July 24, 1992.
EXPORTS TO, NOT JUST FROM
That option was a revelation to Toyota. It could export to, not just import from, Japan.
Assembly plants in the United States initially had been a way to defuse protectionist pressure in Congress. Now, though, Toyota realized that those factories were not just settlements. They had transformed Toyota into a truly international company, able to use its manufacturing footprint in whatever ways made the most sense in a rapidly changing world.
Toyota reinvented itself as a global automaker, not a Japanese one. Plans for more factories in North America took on a new urgency.
The yen retreated in 1996. Toyota's exports of cars from the United States to Japan peaked and then halted that year.
Between 2000 and 2003, Toyota shipped Avalons from Kentucky to Japan. The large sedan, known as the Pronard in Japan, filled a gap in its Japan-market lineup. But with the dollar having strengthened to the 110- or 120-yen range, volumes of those exports were more limited.
Toyota benefited greatly from its urgent cost-cutting drive. The vehicles it had designed to be profitable in the endaka environment became even more profitable in the growing U.S. market. But more important, the company had reinvented itself.
Now it was not just a Japanese carmaker with prodigious cost-cutting skills. It had gained an international perspective that would serve it well in the future. By 2007, for example, Toyota was shipping cars from Thailand and South Africa to Europe.
MOST ADMIRED
And it was rapidly becoming more American. Toyota's U.S. market share would almost double over the next decade. Its clout in Congress grew with each plant it built. It plunged deeply into corporate philanthropy.
Toyota is now so embedded in the United States that business leaders surveyed by Fortune magazine have placed it third for two years in a row — behind General Electric and Starbucks — among America's most admired companies.
Now, when the world turns over, an aphorism that predates Sparky Anderson comes to mind: The sun never sets on the Toyota empire.
You can reach Jeff Mortimer at (Unknown address).
