Too Good To Be True: How Toyota's Success Caused Killer Decontenting

Edward Niedermeyer
by Edward Niedermeyer

The ongoing kerfluffle over Toyota’s recall of over 2m vehicles for a gas pedal defect which (allegedly) caused unintended acceleration has caught much of the automotive media flat-footed. How could it be, many have wondered, that the automaker most associated in the US market with the concept of quality has slipped so badly? As TTAC’s Steve Lang recently discussed, Toyota has been on a decontenting binge since the mid-to-late-1990s, putting profit above the quality obsession that had defined its operations up to that point. As a result, the current generation of decontented Toyotas and accompanying quality issues and recalls can be seen as the culmination of a long-term trend. But why did that transition take place? Though it’s easy to blame greed and mismanagement for the decline in Toyota’s quality, the decline in standards was actually a natural progression of Toyota’s constantly-evolving, efficiency-obsessed production system.

Since the 50s, Toyota had been introducing management techniques such as kanban (just-in-time inventory management), shusa (heavyweight product managers), and kaizen (continuous improvement at all levels of production, including assembly-line problem solving). In the 1960s, what is now known as the “Toyota Production System” came into its own, as Toyota integrated suppliers into its product development and established Total Quality Control over every area of its operation. These developments led to huge efficiency gains, allowing Toyota to launch its full-scale assault on the US market in the 1970s.

By the 1980s, the principles of the Toyota Production System were well-established, and the global auto industry began to take notice of Toyota as the automaker made increasing gains in the US market and elsewhere. The first half of the 80s saw the introduction of export limits in the US, which limited production expansion but kept Toyota’s profitability high thanks to artificially inflated prices. In 1985 however, a sharp jump in the value of the yen put major pressure on the Toyota system and reduced its competitive advantage relative to US manufacturers.

In the short term, this challenge was masked by bubble-driven Japanese economy, which added another 2m units of annual demand in the late 80s, but as Takahiro Fujimoto writes in The Evolution Of A Manufacturing System At Toyota,

as appreciation of the yen eroded their cost competitiveness, Japanese firms had to increasingly rely on the quality side of their strength. Real-term productivity growth had been slowing since the early 1980s, but total quality continued to increase.

The Japanese market took back its volume gains in the early 1990s as it entered recession, and the yen rose again in 1993-94, putting even more pressure on Toyota’s Japanese production. Though the rise of transplant production is the best-known result of these challenges, it’s no coincidence that Toyota made major changes to its product development philosophy in this turbulent period.

These changes were a response to the emerging concept of “fat product design,” a term that consciously clashes with the “lean” ideals of the Toyota system. The “fat product” critique held that Toyota’s increasing reliance on quality advantages resulted in product “overquality” in terms of design “overquality,” relatively lower component sharing, frequent model changes and product variety run amok. In short, a weakening Japanese market and upward pressure on the yen created conditions in which Toyotas strengths with its customers were systematically turned into a concept that was anathema to the Toyota system: the “problem” of “fat product.”

Fujimoto explains the subtle rise of the “fat product problem” thusly:

…these problems didn’t emerge because the Japanese makers built a wrong set of capabilities in the first place. To the contrary… “overbuilding” of the same capability that created new competitive advantages in the 1980s has been the source of new problems in the 1990s. Overall, the dilemma of fat product designs provides us with new insights about the subtle nature of the capability-building dynamics: effective manufacturing routines are difficult for a firm to acquire, but once it gains momentum to build them, it is also difficult to avoid overrun.

Fujimoto illustrates this dynamic in a number of areas. First, he argues that high product development efficiency aided by supplier integration into the design process (heretofore a competitive advantage) resulted in too much product variety. This efficiency was also measured in terms of shortened development lead times as facilitated by standardized development processes, a phenomenon that Fujimoto maintains was a contributing factor in fat product design as it prevented improvements in design efficiency by emphasizing routine practice. “Heavyweight product managers,” another Toyota innovation that allowed high levels of product integrity (and therefore success in the market) also became overemphasized, creating more unique components and requiring an accompanying increase in prices that could not be sustained when the Yen’s value took off in the mid-80s and early-90s.

Another area of product development “fatness” that is especially resonant in light of recent developments, is Toyota’s emphasis on the consumer satisfaction index (CSI) as a measure of customer satisfaction. The use of CSI results in product development was problematic in the sense that it emphasized the elimination of points of customer dissatisfaction. Fujimoto writes:

elimination of customer dissatisfaction does not automatically mean higher customer satisfaction, as the two are often different dimensions. As a result, the pursuit of the CS technique based on the dissatisfaction list may create high-cost [i.e. “fat”] products that have no problems– but no fun built in, either.

What did “fat product” mean in real terms? Around 1990 Toyota’s global output was about 300k units per month, comprised of no fewer than 60k product variations, 25k of which were assembled only once per month. The worst-selling half of these variations made up only five percent of total sales. This variation proliferation was caused by Toyota’s ability to respond to the market’s demand for product differentiation, but in the cutthroat global car business, this was not a sustainable state of affairs.

In addition to overbuilding variety in response to consumer demand, there is evidence that Japanese firms also overbuilt for quality in this period as well (although this is often difficult to objectively quantify). Fujimoto notes:

When I interviewed a product engineer at a German car maker in the late 1980s, he commented that one of the leading Japanese models was about $500 more expensive that the equivalent German model owing to overquality and excessive designs, other things being equal.

Whether this phenomenon existed across Toyota’s product range is nearly impossible to prove, but one thing is certain: in the early to mid 1990s, Toyota’s managers clearly believed that it suffered from “fat product” and moved aggressively to limit its effects.

In 1993-94, Toyota lost about 100b yen due to currency fluctuation alone, making lean product design a jarring necessity. Over those two years, Toyota saved about the same amount in cost-cutting alone, preventing the need for right-sizing capacity or cutting jobs. Instead, Toyota reduced product varieties, increased component-sharing and generally introduced more “value engineering” into its designs. Again, this was not obviously a product of cynicism on the part of Toyota’s management, but a realization that reforming Toyota’s super-lean manufacturing system would not yield the kind of savings the firm needed. In Fujimoto’s words, the focus of competition had changed, and Toyota’s response was to de-emphasize individual, product-focused development in favor of multiple project development which would allow greater component-sharing across models, and fewer variations of each individual model.

In theory, this sea change in Toyota’s culture could have been effectively managed to prevent the steady decontenting of products and declining quality. And, in the interest of fairness, it could also have led to even more dramatic drops in quality and content. Fujimoto’s analysis of Toyota was published in 1999, when Toyota was still (if only by reputation) the king of quality in the automotive world, a fact that at the time was still attributed to its manufacturing, rather than its product-development system. However, Fujimoto does leave the reader with a warning that should probably have been posted on every bulletin board in Toyota City:

Achieving product integrity and product simplicity at the same time is not an easy job. As of the mid-1990s, there have been some cases in which excessive simplification of the Japanese new models, which apparently resulted in loss of product integrity, lack of product differentiation and perceived deterioration of design quality, have created customer dissatisfaction and loss in market share, despite their competitive prices. This seems to indicate that lean designs actually involve a subtle balancing and that there is always a risk of overshooting– or oversimplifying product design.

Obviously, we need to know a lot more about the specifics of Toyota’s recent quality woes before we can establish causal links between the rise of lean product design in the 1990s and the current rash of bad news. The fact that Denso-built pedals do not appear to suffer from the same problem as CTS-supplied pedals indicates that this might be a supplier-specific problem, rather than the result of a systemic de-emphasis on quality at Toyota. Still, the Toyota practice of working closely with suppliers in the development process indicates that there’s more than enough blame to go around.

The real extent of this cost-cutting, decontenting and “design leaning” won’t be easy to quantify, but the fact that it’s been taking place since the early nineties and is only now yielding negative effects suggests that it’s been relatively well-managed. But Toyota’s reputation was built on those “fat” products of the mid-80s to early-90s, and it won’t be returning to the old practices that created them anytime soon due to their competitive disadvantages. This seems to suggest that, once damaged, Toyota is unlikely to ever recover its former quality halo.

Edward Niedermeyer
Edward Niedermeyer

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  • Duomax26 Duomax26 on Feb 09, 2010

    With Toyota's supplier integration, I would say 100% of the fault lands at their feet. Clearly Toyota chose to put a cheaper part into American Toyotas, and did not sufficiently test integration and longevity. If it were a batch of 100,000 parts with a misapplied coating of some sort, sure, we would all be forgiving -- but that imply isn't the case.

  • Duomax26 Duomax26 on Feb 09, 2010

    With Toyota's supplier integration, I would say 100% of the fault lands at their feet. Clearly Toyota chose to put a cheaper part into American Toyotas, and did not sufficiently test integration and longevity. If it were a batch of 100,000 parts with a misapplied coating of some sort, sure, we would all be forgiving -- but that simply isn't the case.

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