March 4, 2010

Toyota and Japan: Making Way for Tigers and Eagles?

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It’s been hard to avoid bad news about Toyota recently. Even late-night TV is getting into the act. One guy asked, If it can’t steer, accelerate or brake, is it a car? That’s a pretty good question.

But, joking aside, how did this happen to a company whose process was once called “the machine that changed the world?” How could Toyota follow a pattern that in some ways mirrors that of its once-biggest competitor, General Motors? And do these cases tell us more broadly about their respective countries and roles in the world’s economy?

Not long ago people were concerned that Japan, Inc. was going to buy the United States and annex it. Recall some Japanese purchases: Rockefeller Center (1989) and Pebble Beach (1990). Imported auto brands were dominating U.S. markets. The transplants were invented—Japanese and European auto manufacturers built factories in the U.S. with no degradation of quality or cost competitiveness. Toyota and others were embarking on share gains that reduced the U.S. auto industry from the Big Three to the small and bankrupt one or two, depending on how you look at it.

So what went wrong? Let’s look first at company valuations. Since they’re easy to obtain, I compared the Nikkei 225 to the Dow Industrials and used them as proxies for the broader environments they represent. The Nikkei peaked at around 39,000 in late 1989. At that time the Dow was about 2,700. At the Dow’s maximum, 14,100, in 2007, the Nikkei had fallen to 18,300. At the end of February 2010, the Dow had fallen to 10,340, about 27% from its high. The Nikkei closed the month about the same, 10,100. That represents a decline of 45% from its pre-recession high, but 74% from the 1989 peak.

Obviously, the market was placing extremely optimistic values on Japanese companies in the ‘80s, but to assess them at only a quarter of that value today is striking. And, even if one believes the bubble concept, it’s been two decades since the bubble. One would think that values would have recovered at least to some extent. That they have not is probably an indicator of the future—and it’s not good news for Japan.

Over that same period—the lost decade, or two decades by my count—Toyota bucked the Nikkei’s trend. On the NYSE, Toyota shares were about $31 in April 1993, and rose strongly (excluding the dot com boom and bust) to about $134 early in 2007. Even today, having been punished during the current debacle, the shares are around $74. Contrast this with GM that was around $40 in April 1993, and fell to about $30 early in 2007. Now, as a ward of the state, it sells for less than $1 per share.

These numbers tell us that although Toyota has been harmed, you’d much rather be Toyota than GM. But what about the direction—where doesJa the company go from here? To discern this, one has to look at subjective information. Before it began its long decline, GM was the envy of the auto world, and maybe manufacturing in general. They commanded over half the U.S. market. They were the style leaders and had customers who grew with GM products, re-purchasing many times over a lifetime.

In my view, the things that brought them down are very similar to the issues facing Toyota today:
Lack of sensitivity to the customer.
Living off prior good quality performance.
Denial that anything has changed.
Overwhelming corporate arrogance.
Emperor-has-no-clothes syndrome within the company—don’t give anyone upstairs bad news.
Multiple agendas between operations and HQ.
Bureaucratic walls hampering decision-making.
Consensus taken to a level of inability to execute.
Mistreatment of vendors (see excellent article in New York Times, Feb. 24, Toyota Sees Growing Anger from Suppliers in Japan).

Where does all this leave Toyota and Japan? I think Toyota has reached a critical point. If they do the right things from here forward, they can probably recover their losses and continue to shine in the world auto markets.

If they don’t realize the depth of their problems and continue to assume customers are dummies, the slippery slope will steepen for them. For the U.S. industry, this is an opportunity to rush in and fill a vacuum. Even if Toyota gets back on their game, it will probably take awhile. Now is time for GM, Ford and Chrysler to hit the gas on their own product development and quality systems. The champ has stumbled; take advantage of the moment.

As for the broader picture of Japan’s role in the world, I am concerned that their structural problems will persist. It won’t be long before they are eclipsed by China as the economic powerhouse of Asia. Toyota was probably Japan’s best example of industrial might—and they have been proven fallible. This could make way for China in the Year of the Tiger. Or maybe even the American Eagle.

--Jeff Cosman