Toyota's Troubles: Money, Metal and Memogate

Frank Williams
by Frank Williams

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 Pious 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 ]

Frank Williams
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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 . . .

  • ToolGuy Personally I have no idea what anyone in this video is talking about, perhaps someone can explain it to me.
  • ToolGuy Friendly reminder of two indisputable facts: A) Winners buy new vehicles (only losers buy used), and B) New vehicle buyers are geniuses (their vehicle choices prove it):
  • Groza George Stellantis live off the back of cheap V8 cars with old technology and suffers from lack of new product development. Now that regulations killed this market, they have to ditch the outdated overhead.They are not ready to face the tsunami of cheap Chinese EVs or ready to even go hybrid and will be left in the dust. I expect most of their US offerings to be made in Mexico in the future for good tariff protection and lower costs of labor instead of overpriced and inflexible union labor.
  • MaintenanceCosts This is delaying an oil change for my Highlander by a couple of weeks, as it prevented me from getting an appointment before a business trip out of town. Oh well, much worse things have happened.I also just got a dealership oil change for my BMW (thanks, loss-leader prepaid plans!) and this didn't seem to affect them at all.
  • Kwik_Shift_Pro4X Gonna need more EV fuel.