In spring of 2008, with the distant rumbling of financial crisis still far off, Toyota Motor (TM, news, msgs) could be forgiven for complacency. It had just taken the title of world’s largest automaker from longtime rival General Motors (MTLQQ, news, msgs). To most observers, this was no surprise. It had been clear for a decade that Toyota wanted to be No. 1, and that it could beat GM in just about every market, except full-size pickup trucks in the United States.
What a difference a year makes.
Toyota is now reeling after historic financial losses, a change of leadership, several lawsuits and a string of recalls. These culminated last week in the humiliating announcement that the firm whose stated goal is perfection would need to service 3.8 million vehicles due to a poorly designed and potentially deadly flaw in a floor mat.
This is a company that operated according to the almost mythical Toyota Way, a set of management principles intended to inspire continual improvement. But the Toyota Way is at the root of Toyota’s current woes: Perfectionism is great when you’re on the way up and your main rival is extremely imperfect. But once you’re there, staying flawless can become an ordeal, as CEO Akio Toyoda as much as admitted last week.
Toyota became No. 1 because it made cars that didn’t have to be distinctive. Instead, they fulfilled customer needs better than the competition. This was the result of Toyota Way, along with the much-envied Toyota Production System. Toyota became a contender for the top spot in the early 2000s, when it began to threaten then-No. 2 Ford Motor (F, news, msgs).
During the ’00s, this wasn’t lost on GM. Inside the company’s headquarters, at the Renaissance Center in Detroit, there were times when it seemed as if the colossus of American manufacturing had Toyota on the brain. Toyota could do small cars, it could do family sedans, it could do SUVs. And with the arrival of the Prius in 2001, it proved it could do the future. The Japanese carmaker wasn’t just capable of building better cars than GM could, it was also prepared to mercilessly out-innovate the market leader.
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This was Toyota’s moment, but opportunity also brought the start of its problems. Creative destruction had finally crippled its rival, leaving Toyota poised to dominate the global auto industry, with both its reliable, satisfying vehicles and its distinctive corporate culture.
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But just as Toyota’s destiny arrived, it began to experience unanticipated karmic blowback. At the end of 2008, it reported its first loss since 1938. No one panicked, because the consensus was that almost no automakers would be spared in the downturn that was sweeping the industry. But the yen was rising, making the cars that Toyota exported more expensive. And its attempt to enter the full-size pickup market was foundering -- a classic example of a company on the rise hubristically overextending itself.
To be sure, Toyota knows how to do big. But does it really know how to be biggest?
Toyota, by contrast, wanted to be huge while projecting a flawless image -- a tricky proposition when you’re operating a business that deals in complex, expensive machines made of thousands of parts and sold in dozens of countries.
With its frequently awkward divisional structure, GM was also accustomed to internal chaos and infighting. Toyota presented itself as monolithic and reassuringly calm. Bad things wouldn’t happen to it because it would use the Toyota Way to eradicate problems before they had a chance to become truly disastrous. When you’re No. 1, you have to accept that every day will be a struggle, because there’s no place to go but down. Every failure is magnified.
GM embraced this challenge by accepting periodic defeat. This did it in eventually, but its reign was long.
The gap between being No. 1 and No. 2 globally might be only 10,000 to 20,000 vehicles a quarter, but psychologically, it’s much wider. When the auto market recovers, Toyota will still find itself on top and growing. But how it handles its current crisis will determine whether the Toyota Way can survive its own success.
This article was reported by Matthew DeBord for The Big Money.
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