Toyota’s outgoing CEO, Koji Sato, has delivered a sobering message to the company’s vast network of suppliers, warning that the automotive industry is in a battle for survival. He urged immediate and significant changes to ensure the longevity of the world’s largest automaker by sales.
A Call for Urgent Transformation
Speaking at a recent supplier summit attended by 484 companies, Sato articulated a sense of crisis, stating, “Unless things change, we will not survive. I want everyone to acknowledge this sense of crisis.” He emphasized that the entire automotive sector is currently “battling for our very survival.”
This stark warning from Toyota, a company historically renowned for its robust production system and lean manufacturing principles like Kaizen, signals a profound shift in the industry landscape. If Toyota feels threatened, it suggests that the foundations of the automotive market are indeed unstable.
Multiple Pressures Facing Automakers
The challenges confronting the auto industry are multifaceted and interconnected. Sato pointed to several key areas of concern:
- Rapid advancements and increasing cost competitiveness of Chinese automakers.
- The growing importance of software as a core component in modern vehicles.
- The ongoing impact of trade tariffs.
The automotive sector has experienced more rapid upheaval in recent years than in several decades prior. Sato acknowledged this, stating, “A difficult battle lies ahead. We must work together as one and strengthen our ability to prevail.” He added, “To do that, we need to improve productivity across the board.”
“Both as individual companies and as an industry, let’s transform how we fight to ensure our survival,” Sato urged the assembled executives.
Revisiting Stringent Quality Standards
A significant part of Toyota’s strategy for adaptation involves a re-evaluation of its famously strict quality control measures. Historically, Toyota has been known to reject parts for even minor cosmetic imperfections that might not be noticeable to the average consumer.
To address costs and efficiency, Toyota is implementing a new initiative called “Smart Standard Activity.” This program aims to relax overly strict production standards and reduce costs associated with component manufacturing and waste.
According to Automotive News, the implications of this shift are substantial:
Under Toyota’s previous quality standards, suppliers were often forced to scrap components because they had cosmetic flaws, even though they had no functional defect.
Examples cited include headliner boards being rejected for occasional black spots or steering wheels for subtle wrinkles in the molded resin. In one instance, Toyota’s standards for wire harnesses led suppliers to discard 10,000 units monthly due to discolored plastic.
“The average customer doesn’t even see these parts,” noted Shoji Nishihara, a purchasing manager in Toyota’s vehicle development department, highlighting the potential for cost savings by focusing standards on functional and visible aspects.
Consequently, Toyota is relaxing its specifications for parts that are not visible to customers, aiming to reduce waste and production costs.
Focus on Reducing Break-Even Point
Kenta Kon, who is set to transition from Chief Financial Officer to CEO on April 1, echoed Sato’s sentiment at the same event. Kon cautioned suppliers that despite Toyota’s impressive annual sales volume of 11 million vehicles and strong profitability, the company is not in a “secure and comfortable position.”
One of Kon’s primary objectives will be to reduce the company’s break-even point, a critical measure of financial resilience. He stressed the symbiotic relationship between Toyota and its suppliers, stating, “Each side drives the other to grow stronger.”
Kon believes the path forward requires a fundamental rebuilding of competitive foundations to restore Toyota’s overall strength. “The only way to achieve this, I believe, is to rebuild our weakened competitive foundations and restore Toyota’s strength,” he told suppliers.
The automotive industry’s dynamic evolution, driven by technological innovation, global economic factors, and shifting consumer preferences, demands agility and a willingness to adapt from all players, including established giants like Toyota.