Akio Toyoda Vows Quality Before Quantity

Volkswagen may be much closer to its goal of surpassing Toyota as the world’s largest automaker. In an exclusive interview with The Nikkei [sub], Akio Toyoda said, Toyota will make its top priority the quality, not the number of the cars it makes.

So far, VW wanted to subjugate Toyota by 2018. But Toyota has decided to go slow. Said Toyoda-san:

“Instead of aiming to sell 10 million cars, I think the sounder approach is to provide in a timely way high-quality cars that 10 million people want to buy. When our annual output surpassed 6 million units, we started moving so fast that we didn’t have time to bring up our workers the right way. The result is that we got swept up in a current that was more about making money than making cars.”

When asked about cost cutting, Toyoda made a very valid point:

“The essential point is that raising quality lowers costs. The two can’t be thought of separately. You have to make progress on safety, quality, volume and costs together, not individually.”

The “raising quality lowers cost” part is little understood in the industry. Quality by inspection is a very costly and wasteful process. Once a faulty car escapes the factory, warranty costs can be and often are a huge drag on profitability. However, beyond postulating “do it right the first time,” the matter is not as easy as it sounds. And a focus on cost cutting may be one of the reasons for Toyota’s current problems.

Akio Toyoda took over in 2008 after Toyota registered its first postwar loss. Says the Nikkei: “Toyota returned to the black in the July-September period of the current fiscal year and booked a profit of nearly 200 billion yen in the following quarter. A regime of cost cutting that included suppliers has sustained the recovery. Toyota officials say the firm was on track to a certain full-year operating profit before the recalls.”

That was before the recalls. This is now. According to Associated Press, lawyers involved in class action suits “have estimated Toyota could have to cough up more than $3 billion, assuming a conservative $500-per-owner payment.” However, there is a push underway for fraud claims under the federal Racketeering Influenced and Corrupt Organizations or RICO law. If successful, this could “push total Toyota class-action damages above $10 billion,” said Northeastern University law professor Tim Howard, coordinator of the Attorneys Toyota Action Consortium, or ATAC.

According to the Wall Street Journal, J.P. Morgan estimates that Toyota’s total, one-time recall related costs could total $4b, plus an additional $1b for settling litigation-related costs (Morgan obviously doesn’t take Howard seriously.) As Toyota’s current fiscal year ends March 31, there will not be a huge impact on 2009 profits. Toyota is still expected to report a net profit in the neighborhood of $900 million. The new year will be far more challenging.