Reinventing Japan Inc.

Dec. 21, 2004
Toyota's president calls for change.

Toyota Motor Corp. is in trouble in its home market and in Asia. Only the booming American market and the ever-weakening yen are keeping the company profitable. And for Toyota's problems, and for Japan's worsening economic decline, Toyota's president, Hiroshi Okuda, has only one key management prescription: time.

Time for Japan to remake itself, time for Asia to work out its problems, and time for Toyota to grab 40% of the domestic market. Toyota's mixed fortunes mirror the traumas facing Japan and many of its world-class enterprises. Sales in Asia -- of almost anything, but especially autos -- continue to clock record declines.

Japan's economy is ill, suffering from record unemployment, falling profits, a banking sector plagued by bad debts, and manufacturers sapped by rising inventories. And Okuda's oft-repeated goal of gaining 40% of the Japanese auto market is slipping away as consumption tightens. Yet, Okuda barely blinks at any of these problems. Time and patience are the keys, he says, and Toyota is committed to implementing what it believes is right "without being influenced or without being swayed" by external factors. During this period of change, as he calls it, "We will just continue what we have been doing as an automaker -- producing good cars, introducing new technology, and making contributions to society. Indeed, Toyota's way of doing business can accommodate [change]," Okuda says. In Asia, Toyota has invested widely to ensure market leadership as the Asian nations move through the industrialization process. And while Okuda admits Toyota's "harvest season" in Asia will be delayed for two to four years by the economic meltdown, his strategy is to hold the ground and prepare for the harvest he is sure will come. Okuda speaks firmly, albeit sometimes cautiously, of his goals. He has a wry sense of humor and strong opinions. He is committed to sticking to Toyota's long-term plan, even if a little short-term flexibility is essential. In Japan, Okuda maintains his determination to achieve 40% market share, even if that also takes a few years longer. The company will achieve this by improving technological capability and product competitiveness, Okuda says. And while Toyota will be challenged to meet this target, it will focus the company. Moreover, says Okuda, "I don't believe the automobile will flourish forever. There is a life cycle to each industry." Okuda is pushing Toyota's diversification into housing and telecommunications, despite some guffaws from the galleries. Not that he believes Toyota should become a telephone company. In the future, he says, these are three industries that could, and probably will, converge. "The housing or telecommunication sector will somehow one day integrate with the auto industry, and that will bring about a new mode of transportation," Okuda says. Okuda plans for Toyota to be there. In Japan, the 65-year-old Okuda has another role. He is one of two men considered to be new-generation leaders. The other is Sony Corp.'s co-CEO Nobuyuki Idei. The paucity of candidates deemed capable of finding solutions for Japan's headaches speaks volumes about the problems facing the nation and why they are taking so long to fix. Okuda won his new-generation-leader title when he took over as president at Toyota in 1995 and turned the automaker around. Okuda's willingness to speak out and offer reasoned explanations for Japan's problems and tangible solutions has burnished this reputation, especially in a nation where leaders rarely state such ideas clearly or publicly. Okuda is a leader who is, as he says, "always interested in changing the systems -- in destroying." Even so, it has taken some time for leaders like Okuda to publicly declare the need for Japan to change -- surprising, perhaps, given that Toyota's fortunes and its future are so intimately linked with Japan's, no matter how global the automaker becomes. It has been more than seven years since Japan's "economic bubble" burst, bringing the country's traditional leaders crashing back to earth for a sorely needed reality check. Government stimulus packages since then have kept the economy kicking, but in the last few years the bureaucrats have been trying to rein in spending to prepare for the crisis facing Japan as its population ages. It's a reasonable policy, but so are the demands that Japan stimulate its economy, beef up domestic demand, and help the rest of Asia export itself out of trouble. Instead, domestic consumption in Japan is falling month after month and the government is flailing -- first tightening, then loosening, and then tightening up on the economy. Most economists are predicting zero, if not negative, growth for Japan in fiscal 1998, despite new economic-stimulus measures. Acceptance of the idea that Japan is facing systemic crisis is growing. "I think it started in 1990," says Kenneth S. Courtis, chief economist and strategist for Deutsche Bank Group (Asia-Pacific), who notes that historically a crisis of this size in Japan "takes 10 to 15 years to work out." Okuda agrees that Japan is undergoing a systemic change, but he would argue that the process has been underway for only two or three years, perhaps a little more. "I think a new system will emerge that will be better," Okuda says at his most optimistic. "Looking back in history, Japan was in turmoil at the time of the Meiji Restoration [1868] or at the time of World War II, but a new system emerged. "It is only for [the last] three or four years that we [have been] talking about a review of the system that started around 1945," Okuda adds, predicting that it will take another two or three more years to settle on a fix. In all, he says, it will probably take 10 years. "In the case of the Meiji Revolution I think it took almost 17 years and then after World War II almost 20 years, and 10 years is needed now." 'We forgot ourselves' Sony's 60-year-old Idei is, in contrast, relatively optimistic about the future. Idei thinks the six-month period beginning in March this year is the "emergency" period (particularly in Asia) when care must be taken that one major disaster does not lead to more. Okuda thinks the problem is much more structural and one that he directly attributes to a man usually seen as a leading light of Japan's economic miracle. Hayato Ikeda, Japan's prime minister from 1960 to 1964, is to blame for Japan's current mess, says Okuda. Ikeda presided over Japan's rapidly expanding economy of the early 1960s, an era marked by Ikeda's plan to double national income in 10 years. In Okuda's opinion, Ikeda's era was "when the Japanese mind was guided to making money only -- so that is how we trained, educated the people," says Okuda. "And that is how I think we forgot ourselves. That is why we have to change now." Japan's educational system is harshly criticized for being incapable of creating technological innovators (the system emphasizes rote learning and "groupism" over creativity and individuality) -- an observation that makes Okuda laugh. His response is hedged, nonetheless. "It is often said a Japanese person is very good at refining existing technology but not very good at creating new technology -- and that this is because of the social or education system," says Okuda. "The Japanese government as well as companies keenly recognize the need to review the existing educational system and in-company training programs. They are making efforts to improve the programs, to highlight and stress more the creative aspects of Japanese education, but it takes time." Meanwhile, Asia is left in a vacuum. Having mimicked Japan's rapid development, it can no longer find answers among the debris of the Japan model. But Okuda believes the "disturbing factors will not last a long time." These include: (1) the currency collapses -- Indonesia's rupiah lost 80% of its value against the dollar at one point, and currencies in Malaysia, Thailand, and the Philippines have fallen by up to 50%; (2) the highlighting of once-hidden economic failings in these nations such as cronyism and excess investment and capacity; (3) subsequent bankruptcies and belt tightening. "Maybe they will last two or three more years, but they will gradually subside. So for the coming two or three years [Toyota] will continue doing what we believe is right." Indeed, "I am rather optimistic," Okuda says. "In the past those countries like Indonesia and the Philippines underwent currency devaluations many times. If they withstand the situation there for two or three years they will survive quite well." Toyota "needs patience in terms of cash flow and profitability" in these other Asian nations, says Okuda. (Toyota's 1998 sales forecasts in Indonesia, Thailand, Malaysia, and the Philippines have been cut by up to 70%.) "We might scale down facilities or train local employees," he adds. "Toyota will turn this around to its advantage," says Courtis, adding that the company has a globally integrated production system and knows what it is doing. It will increase domestic content and exports of Asian-made cars and will refocus on the U.S., Europe, and Latin America, Courtis notes. Domestic demand may be constrained, but costs are way down, especially if local content can be boosted. "So how can we [the Japanese] help these countries?" asks Okuda. "That is also one of the issues." Asked if Japan is likely to help Asia by showing leadership of any kind, Okuda grins. "Do you think so?" he asks, referring to Japan's reputation of being unable to show leadership in crisis. "What they need now is money," Okuda says, asking once more: "Do you think the Japanese have any hope of showing leadership? "It is 30 or 40 years [since Ikeda's era] so we must adjust again," he adds. Japan, Okuda implies, will have to step off the world stage while it recreates itself. Maybe we can "try and come back in another 50 years," he says. Fifty years downtime? And how will Japan recreate itself? "Perhaps we will need so-called gaiatsu," says Okuda, laughing. Gaiatsu means "pressure from outside" and is most often used to describe the pressure that comes from the U.S. urging Japan to open up its system. Cynics often say the Japanese use gaiatsu for their own purposes, forcing the U.S. to play the fall guy when changes need to be made and when the Japanese market is ready for them -- but when no one in Japan wants to take the responsibility for changing the rules. 'Too many layers' Okuda says that during the transitional period Japan -- and Toyota -- must fall back on a time-honored practice: hiring foreigners to pick up the slack, pass on the skills, and then leave. "On a midterm and long-term basis we have to change the [Japanese] system, but until there are changes, which is a transitional period, we can make use of the resources, the human resources, from abroad." "It will take 50 years for the Japanese to gain [these skills]," says Okuda, laughing as he realizes he is overemphasizing the time needed -- perhaps. But, he adds, "the Japanese people will not change in 10 years or 20 years." Toyota has not been immune from the problems plaguing Japan, particularly in the whitecollar arena, where technology inroads have been very slow. Both government and industry suffer from a top-heavy management structure. Companies can have up to 12 layers of managers. Okuda agrees this is a problem but adds, "In the case of Toyota, since I became president, the custom of nemuwashi [endless meetings, many of which are merely to inform other executives what occurred at the last meeting] or the bureaucratic style of management are gradually fading away. If there are too many layers in the organization or whitecollar efficiency is too low, it is often due to the lack of a very efficient information system or information network," says Okuda. "Therefore Toyota is now spending 20 billion to 30 billion yen [$151 million to $227 million] per year to improve our information-network system -- ranging from our offices to our factories," he says. "If this system is completed, the efficiency of our whitecollar workers will increase." In addition, Toyota "must hire good people -- perhaps from Europe -- or hire more contract workers," says Okuda. "Besides, we are working on a plan to build a training center for both Japanese and those abroad to give them an opportunity to learn how to cope in the age of global management," Okuda says. "In Toyota the number of foreign experts is increasing in car design and car development, those creative areas of our operation. More and more of our new models have been designed in the United States or Europe." And Toyota is sending Japanese employees overseas to give them the opportunity to learn about creativity in the hope of improving productivity and originality in Japanese people, "but so far foreign people have more creative minds than Japanese." Will Okuda's style of management change to match the times? Okuda points to an increasing number of foreign executives at Toyota's subsidiaries and bases overseas and says in the future "we will have foreign executives at our headquarters." Such a statement leads to an obvious question: Will the foreign executives at Toyota's headquarters have any power? "Yes," says Okuda firmly. "Responsibility is assigned to an executive whether he or she is a Japanese or a non-Japanese." Nevertheless, there is little tradition of foreigners having executive power in a traditional Japanese company. "It is the decision of the president whether we do this or not," Okuda responds defensively, strongly implying that his Japanese staff will have to fall into line. Additionally, he says, many people are telling the company that "Toyota has changed -- although we have a long way to go." "Okuda has taken over a tough company and made it tougher," says Deutsche Bank's Courtis of the first nonfamily member to run Toyota in three decades. Appointed president in August 1995 to succeed Tatsuo Toyoda, Okuda needed to snap the automaker back into shape. "Toyota lost focus under Toyoda," explains Peter Boardman, an auto analyst with UBS Securities Ltd., Tokyo. Okuda has succeeded. Design-to-market time has sped up -- so much so that a newly designed auto can be on the market within 18 months. "Okuda has . . . set targets for employees and the company," says Boardman. "Now Toyota has the most motivated employees. Okuda is trying to give them more responsibility, including giving stock options to upper management, while telling them to get returns." Okuda has been with Toyota since 1955, when he finished a business degree at Tokyo's Hitotsubashi University. He first spent time in the accounting division, went to Manila to oversee operations in the Philippines in 1973, and became general manager for the Asia and Oceania division back in Tokyo in 1979. He was promoted to company director in 1982, supervising international operations including plant construction in Taiwan and North America, before moving up to managing director in 1987, senior managing director in 1988, and executive vice president in 1992. Okuda often jokes about having tried his hand at most jobs in Toyota. The list now includes a hand in the development of the first commercially marketed electric car, the Toyota Prius. The Prius hybrid starts up on battery power (a nickel-metal hydride battery) and then uses a continuously variable combination of gasoline and electric power. Okuda is keen to promote the Prius, which he singles out as a clear sign of Toyota's emphasis on technology and creativity. The hybrid "is one of the results of our commitment, and in the future such results will come out more quickly and more practically," he says. He predicts Toyota will create a huge change in the "field of engine production and driving equipment production." Asked to define his own personality, Okuda looks around as he answers. "Destructive, isn't it?" he asks. "Because I am always destroying the existing order or existing systems. I don't want to stay in the same place. That applies to myself and to Toyota."

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