The Toyota Way: Japanese Management in the Global Economy -- Up Close and Personal
Katsuhiro Nakagawa
Vice ChairmanToyota Motor Corporation
September 27, 2004
Thank you, Dean Cowhey. And thank you all for this opportunity to talk with you. I like California. And I welcome the chance to talk with people up close and personal.
I especially welcome this chance to return to La Jolla. I spent a couple of months here as a guest scholar. And that was one of the happiest times of my life. I am always recalling the deep blues of the sky and sea here and the greenery everywhere. I am also grateful for this invitation for another reason. Let me tell you a secret: I love wine.
One of the nicest things about coming to California is the chance to stock up on your distinctive Zinfandels, your fragrant Pinots, and your solid Cabernets. I know that a glass of red wine each night is good for the circulation. And I assume that two glasses are even better. My wife has doubts about my calculation. But I keep assuring her that wine is good medicine. And with this trip I hope to convince her that California wine is the best medicine of all. Speaking of medicine, a lot of people once believed that Japanese management would be good medicine for American industry. That was back when the Japanese economy was growing year after year.
Then came Japan's "lost decade" of the nineteen nineties, when the Japanese economy basically stopped growing. People began to question the viability of some of the basic principles of traditional Japanese management. For example, lifetime employment had been standard practice at large Japanese corporations. But some of those corporations had to trim their workforces in painful restructurings. Meanwhile, U.S. industry regained its growth momentum. However, the new growth formula lacked a guarantee of stable employment for most of the working population. So we need to be careful about over-simplifying the benefits of traditional Japanese practices or "new-economy" American practices in business management.
In any case, I have come here to talk to you about Japanese management. So let me begin by noting two basic principles that continue to characterize our management philosophy at Toyota, which we call the Toyota Way. Those principles are human respect and continuous improvement. Toyota has built a corporate culture that is unique, even among Japanese companies. Today, I will focus on two elements of Toyota management that have been especially instrumental in our continuing growth.
The most definitive element of management at Toyota is our absolute commitment to the workplace. "The workplace" can mean the factory floor. It can mean the showroom. It can mean the lab or the proving ground. For us, "the workplace" means anyplace where we generate value for customers.
The workplace is where things are happening. It is where problems arise. It is where opportunities arise. Management needs to be in close touch with the workplace. That is the only way to keep up with fast-changing markets. It is the only way to cope with ever-escalating competition. The founder of the Toyota Group was an inventor named Sakichi Toyoda. His most famous invention was a mechanical loom that stopped automatically if any of the threads snapped.
Toyoda's invention eliminated the need for assigning an employee to monitor each machine. As you can imagine, that raised productivity greatly. And it prevented defects from progressing into the following process in the production sequence. The invention contributed immensely to Japan's early industrialization. Toyoda always said that any engineer who didn't get his hands dirty at least three times a day was no engineer. At Toyota, we get our hands dirty. Executives responsible for production spend a lot of time at the plant. Executives responsible for marketing keep one foot in the marketplace. At Toyota, promotions don't distance managers from the workplace. No one ever moves into an ivory tower. We don't manage anything by remote control. We manage everything up close-and personal.
Our focus on the workplace has shaped our globalization. We worked long and hard to develop business in the United States. The United States is the world's largest market for automobiles. But our business here didn't really take off until the mid-nineteen-seventies. That was after the first oil crisis. Gasoline prices had skyrocketed. Our time had come at last. American consumers were ready for the fuel efficiency of the compact, quality cars from Toyota and other Japanese automakers.
By the end of the decade, exports had become a large and growing facet of our business model. And surging imports of Japanese cars had become a political issue. We managed our growing U.S. business through a sales company based here in southern California. Our U.S. sales headquarters is just up the road from here in Torrance.
Our colleagues in California were doing a great job of winning over American customers. But we were reluctant to shift production here. Quality and cost-competitiveness were crucial to the appeal of our products. We felt that the best way to maintain that appeal was to keep making our cars in Japan. As I have already explained, we don't believe in managing by remote control. We like to keep things up close and personal.
But that also means keeping things up close and personal in the marketplace. Our business here continued to expand. We finally recognized, that keeping up with demand here would require a comprehensive commitment to local production, to local purchasing, to local design, and to local development. Appropriately, we started in California. Twenty years ago, we set up a joint venture with General Motors to make cars in Fremont, near San Francisco. That joint venture was beneficial for both partners. For Toyota, it was a chance to learn about working with American workers and American suppliers. For GM, it was a chance to learn about making small cars efficiently. Our California joint venture is still going strong. And over the past two decades, we have built wholly owned vehicle plants in Kentucky, in Ontario, Canada, in Indiana, and in Mexico. And we are building one more, in Texas. We have also built North American plants to make engines, transmissions, and other crucial components.
Here in California, we make truck beds at a plant in Long Beach. That plant will soon begin assembling trucks for our subsidiary Hino Motors, which specializes in large trucks and buses. Another Toyota operation in California is our Calty Design Research studio in Newport Beach. We continue to manage our North American marketing through Toyota Motor Sales in Torrance. Our new Mexican plant is just across the border from here in Baja California. And our biggest proving ground in the world is next door in Arizona.
Toyota was once notorious for what some people considered an overly cautious approach to business. In recent years, we have learned to sprint. Toyota has become extremely fast in reaching decisions and in putting those decisions into practice. As I have noted, our North American operations have grown especially fast. Our first vehicle plant in North America soon became five, which are about to become six. Altogether, we have invested more than fourteen billion dollars in manufacturing facilities in the United States alone. Our U.S. plants employ thirty-one thousand Americans, and they purchase parts and materials worth more than 20 billion dollars a year from American suppliers. Today, some sixty percent of the vehicles that we sell in the United States come from North American plants. Underlying our American presence is our traditional commitment to the workplace. We have brought that commitment to North America. And we have put it to work at all of our operations here.
Here is a good example. In the Toyota Production System, any employee can call attention to any problem that they notice. They can do that by tugging on an overhead line. This line-stop capability is extremely important in keeping defects from moving from one process into the next process. That is the same principle that I mentioned earlier, which our founder incorporated in an automatic loom. But it invests employees in the workplace with tremendous authority. And that was a new concept for our American line workers. At first, they thought that pulling the line-stop cord was like admitting a mistake. And they were hesitant. But we taught them that stopping the line is better than passing defects on to the following process. They learned the Toyota approach of fixing problems when and where they occur rather than catching them later in some inspection process. In fact, our American line workers --our American team members-have learned the Toyota Production System extremely well. They have made the system work.
And they have demonstrated impressive teamwork. Here is an example. A snowstorm blocked roads around our Kentucky plant one day a few years after the plant opened. The president of our Kentucky subsidiary then was Fujio Cho, who is now president of Toyota. He simply assumed that a temporary shutdown would be inevitable. The team members on the first shift would need to leave early to get home at a reasonable hour. The team members of the second shift would arrive late because of the snow. To his happy surprise, the team members took the initiative to keep the plant running. Members of the first shift stayed overtime voluntarily until their colleagues arrived for the next shift. And some members of the next shift arrived early to beat the snow. I began this talk by noting a traditional emphasis on human respect and continuous improvement at Toyota. And I have showed you how that emphasis takes shape in an absolute commitment to the workplace.
Meanwhile, another kind of commitment has also become clear in my remarks. That is our relentless commitment to eliminating waste. Eliminating waste is a core concept in the Toyota Production System. We define waste as any expenditure of time, money, material, effort, or other resources that does not generate perceptible value for the customer.
A moment ago, I discussed Sakichi Toyoda's automatic loom in terms of raising efficiency and preventing defects. At Toyota, we tend to speak of raising efficiency in terms of eliminating waste. Building fail-safe features into our production processes is one way to eliminate waste and to ensure high quality. Another way is something we call just-in-time production. I assume that you have heard of just-in-time production. But I wonder if you have heard of its American origins.
The man most responsible for creating the Toyota Production System was an engineer named Taiichi Ohno. Ohno traveled to the United States in the nineteen-fifties. He toured automobile plants here. But his most important discovery was the humble supermarket. Ohno was amazed that American consumers could wander through the store and pick and choose as they pleased. Please understand that Japan did not yet have any supermarkets. Back in Japan, Ohno imitated the American supermarket to create a lean production system. In Ohno's system, each process became the customer for the preceding process. And each process became the store for the following process. Like a shopper, each process withdrew parts and materials from the previous process. It withdrew only the items that it needed, only when it needed them, and only in the amounts that it needed. Conversely, each process produced new items only to replace the items withdrawn by the following process.
The final process in this system is the customer in the marketplace. The customer "pulls" production through each process. Each process mobilizes resources only to replace cars and trucks that customers have actually purchased. In other words, this linkage connects all activity at Toyota to actual demand in the marketplace. And the linkage continues throughout the supply chain to all of our principal suppliers. This linkage prevents us from wasting any resources on anything that customers are not actually buying. It gives us an essentially order-based response to ever-changing demand. It keeps us up close and personal with customers around the world.
So two defining traits of Toyota management are an absolute commitment to the workplace and an obsession with eliminating waste. These traits are shared values for everyone at Toyota. People in the workplace take the initiative in proposing ideas for improvements. Management respects their input, and acts on their suggestions. These values transcend borders. They shape our activity in nations worldwide.
Please understand that these values also transcend business. Our commitment to the workplace is also a commitment to the community wherever we operate. And we operate all over the world. Toyota distributors market our cars and trucks in fully one hundred forty nations. And Toyota plants produce those vehicles in twenty-six nations. I have already mentioned some key figures that illustrate Toyota's economic contribution to the United States. And we shape our operations in every nation to maximize our economic and social contribution to the local community.
We are especially committed to safeguarding the environment in our operations and in our products. A notably successful example of that commitment has been the Prius hybrid car. The Prius is another example of pulling out all the stops. Toyota and other automakers had been working on hybrid systems for several years. We had even exhibited some of those systems at motor shows. But everyone was reluctant to put a hybrid car into mass production. In nineteen ninety-seven, Toyota became the first automaker to mass-produce a fully configured passenger car powered with a gasoline-electric hybrid system. That was the Prius. The Prius maximizes power and comfort while minimizing fuel consumption and exhaust emissions. The latest version of the Prius gets fifty-five miles per gallon. And it also wins high marks for its superior highway performance.
Forgive me if I sound like a car salesman. Please understand that I am genuinely excited about this car. Demand for the Prius has exceeded our production capacity. And I am sorry to say that Americans have needed to wait five months for delivery. Californians have been especially receptive to the Prius. It is heart-warming to see all the Prius cars on the road here. It was doubly heart-warming to see the famous movies stars pulling up proudly in their Prius cars at the Academy Awards ceremony.
This spring, we expanded our production capacity for the Prius to one hundred twenty thousand vehicles a year. And next year, we will increase that capacity another fifty percent, to one hundred eighty thousand a year. Meanwhile, we are expanding our line of hybrid models. Next spring, we will launch hybrid versions of two popular sport-utility vehicles, the Lexus RX and the Toyota Highlander, here in North America. Our commitment to hybrid power is more than business. We have a sense of mission in promoting this clean technology. So we have agreed to provide the technology to our traditional rival, Nissan Motor.
Let me end my remarks with a word about the future. Toyota is, first and foremost, a growth company. Our commitment to the workplace and our obsession with eliminating waste are part of our larger commitment to lasting growth. Fortunately, the global automobile market is a growth market. U.S. demand for automobiles remains strong as the economic recovery gains momentum. And we anticipate structural growth in the U.S. market as immigration adds to the population. We expect the market here to grow to twenty million vehicles a year, from less than seventeen million today.
Elsewhere, the most promising market is of course China. We expect the market there to reach ten million vehicles a year by two thousand ten. China is another example of Toyota moving rapidly when the time was right. We have enlisted excellent partners in China. And we have mobilized the entire Toyota Group in support of our operations there. We and our subsidiaries have established some forty companies in China. As we did here in North America, we are building our Chinese operations on a solid foundation of shared Toyota values. Our Chinese plants are alive with the same commitment to the workplace and the same obsession with eliminating waste that characterize our plants in Japan, in the United States, and in other nations.
I hope that my remarks have provided some useful insight into our approach to management at Toyota. I hope you will see that we are working hard to ensure that growth in vehicle ownership is clean growth and green growth. I also want you to know that we are working equally hard to ensure safe growth in motor transport worldwide. To repeat, I am grateful for opportunities like this- up close and personal-to explain what our company is all about. And I look forward to answering your questions. Thank you.
