Toyota's Troubles: Money, Metal and Memogate

toyotas troubles money metal and memogate

For decades, Toyota has balanced superb management, impeccable quality, exemplary financial discipline and flawless product planning. As other manufacturers chased market trends and neglected core models, Toyota made incremental improvements to existing models and introduced new models slowly and carefully. Their perseverance has paid off; they’ve elbowed Ford aside and are nipping at GM’s heels. But as Toyota prepares to replace The General as the world’s largest automaker, they’re finding out that getting to the top is one thing; staying there is something else altogether.

No doubt about it: Toyota’s on a roll. They posted a record $3.6b third quarter corporate earnings and hope to exceed $13b profits for this fiscal year. In spite of growing profits worldwide, the picture isn’t so rosy on this side of the globe. Although their revenues in North America were up 17.3 percent, their North American operating profits were down 22.4 percent in the third quarter.

Part of Toyota’s American problem relates to federal contract-sized cost overruns on their new truck plant in Texas. When ToMoCo started the project, they budgeted $850m to git ‘er done. To date, the company’s sunk almost $1.3b on the plant– and they’re still spending. The expenditure seems manageable enough, until you tote-up the cash they’re also shelling out to build another Canadian facility and modify the Subaru plant in Indiana to build Camrys.

Perhaps Toyota should be putting some more of their resources into making sure their products live up to their reputation for quality. As production numbers rise, their recall rate is keeping pace. The latest recall– involving faulty ball joints in the previous generation Tundra and Sequoia– could end up costing Toyota more than $600m.

And then there are the high hundreds of millions of dollars Toyota may need to settle the class-action suit for oil sludge (affecting about 3.5m Toyotas and Lexi). All in all, we’re talking about a serious chunk of change coming directly off the bottom line.

Meanwhile and in any case, sales of the [s]Pious[/s] Prius are down. Whereas the automaker once measured the model’s supply in hours, there’s now a 30-day supply sitting on dealers’ lots. Though it’s nothing like the 80 day supply of GM product lingering on their dealers’ lots, the growing Prii glut is definitely trending in the wrong direction.

The extra inventory is attributable to a combination of factors which, uncharacteristically, Toyota didn’t read correctly. They increased production just as gas prices started going down, the hybrid tax credits started going away and those buying hybrids to make a social statement had bought them. So, for the first time in the model’s short lifetime, Toyota’s offering incentives. They’re nothing on the scale of The Big 2.5’s spiffs of course, but it’s cash on the hood nonetheless.

These issues pale in comparison to one problem that could make or break Toyota’s North American operations: their relationship with their hourly workers. In a confidential memo that accidentally ended up in workers’ hands, Seiichi Sudo, president of Engineering and Manufacturing in North America, discussed the cost of American labor and the steps they need to take to control those costs.

The memo, which was inadvertently stored on a shared computer drive, states the US auto industry pays some of the highest manufacturing wages in the world. It compares American wages to those in France and Japan (50 percent higher) and Mexico (500 percent higher). They project their American labor costs will increase by $900m over the next four years.

Toyota’s concerned that even though their profit margin is increasing, it’s not growing as fast as their labor costs. Their strategy: “base our Hourly Wages more closely with the State Manufacturing Wages where each plant is located, and not tie ourselves so closely to the US Auto Industry, or other competitors.” Their “challenge”: how they’ll tell the workers “so that they can understand and accept change.”

The bottom line: “Human Resources is developing strategies which will reduce Labor Cost (and increase Profits) by $300 Million by Fiscal 2011 by focusing on: Headcount and Rate (Wages and Benefits).” This isn’t exactly what you want the rank and file to hear.

This memo could do more to damage Toyota’s future than any other factor. Toyota got a lot of press when the (non-union) workers at their Kentucky plant made more than union workers on average last year. Now they want the same workers to take a pay and benefit cut. Is that the UAW I hear knocking at the back door?

Ironically enough, Toyota is in the roughly the same position (re: its labor relations) as GM during the ‘70’s. Of course, GM basically rolled over and played dead for the UAW, burdening itself with an unwieldy labor force and an unsustainable cost structure. Will Toyota make the same mistake? It’s not likely. But it is possible.

[Read the Toyota memo here ]

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  • CSJohnston CSJohnston on Feb 12, 2007

    Sorry I'm late to the party but the article brings up some interesting points. Is Toyota in trouble today? No way. Will it be in trouble half a decade from now if it continues to have quality concerns and is hell-bent for leather on being number one? Undoubtedly. Toyota already has one of the oldest customer bases in the industry, it stands to reason that if it gets a rep as a company that makes a decent car...BUT then it may face a similar problem that plagues the domestics, attracting enough new buyers to replace the old. CJ

  • Rcolayco Rcolayco on Feb 18, 2007

    On top of all the strategic and tactical issues Toyota faces in their new position at the top in the North American market, the company must be very concerned about their future in the China market. That market will become the largest one of all within the next couple of decades. The Chinese clearly have issues with Japanese over what has happened between them during the last century. Oh well, uneasy lies the crown . . .

  • ScarecrowRepair The 1907 Panic had several causes of increased demand for money:[list][*]The semi-annual shift of money between farms and cities (to buy for planting and selling harvests)[/*][*]Britain and Germany borrowing for their naval arms race[/*][*]San Francisco reconstruction borrowing after the 1906 earthquake and fire[/*][/list]Two things made it worse:[list][*]Idiotic bans on branch banking, which prevented urban, rural, and other state branches from shifting funds to match demands. This same problem made the Great Depression far worse. Canada, which allowed branch banking, had no bank failures; the US had 9000 failures.[/*][*]Idiotic reserve requirements left over from the Civil War which prevented banks from loaning money; they eventually started honoring IOUs illegally and started the recovery.[/*][/list]Been a while since I read up on it, so I may have some of the details wrong. But it was an amazing clusterfart which could have been avoided or at least tamed sooner if states and the feds hadn't been so ham handed.
  • FreedMike Maybe this explains all the “Idiots wrecking exotic cars” YouTube videos.
  • FreedMike Good article! And I salute the author for not using the classic “Lucas - prince of darkness” trope, well earned as it may be. We all know the rap on BL cars, but on the flip side, they’re apparently pretty easy to work on (at least that’s the impression I’ve picked up). On the other hand, check the panel fits on the driver’s and passenger’s doors. Clearly, BL wasn’t much concerned with things like structural integrity when it chopped the roof off a car designed as a coupe.
  • Mongo312 Had an 89SE, 92SE and an 03SE all with stick. The 03 took almost 3 months to find because there were so few produced with a manual transmission and dealers didn't want to give them up. Ended up buying one from a dealership in San Antonio and having it shipped here to St Louis.
  • Bullnuke About 15 years before the TR-8 my brother-in-law put a 301 Chevy small block in a TR-3A. Needed a U-joint in the steering to clear the headers, a modified '59 Pontiac radiator, and a drive shaft that was basically two U-joints end-to-end. It was a scream to drive, basically a small block Chevy with 3-deuces on wheels. 142mph in the quarter - we learned that the original wire wheels were a no-go on this thing at the drags...