The Toyota Recall Crisis: Causes, Contexts, and
the Impact on the Global Auto Industry
DR. JUN ZHAO
ASSOCIATE PROFESSOR OF MANAGEMENT
COLLEGE OF BUSINESS AND PUBLIC
ADMINISTRATION
GOVERNORS STATE UNIVERSITY
P R E S E N T E D A T T H E 3 0 TH I A S E T A N N U A L
SPRING CONFERENCE
The Toyota Recall Crisis
 Toyota Recall Crisis Timeline
 August 28, 2009: Crash of a Lexus in San Diego that killed four people. Cause identified
as pedal stuck under the floor mat
 Nov. 25th, 2009: Recall of 4 million vehicles by Toyota, for “unintended acceleration
problems”
 Jan. 26, 2010: Toyota temporarily suspends production of several of its vehicles in the
north America
 May 2010: Toyota pays $16.4 million fine to US regulators for being too slow to recall
vehicles with defective gas pedals
 February 2011, NASA released its highly anticipated report about the Sudden
Unintended Acceleration charge in Toyota vehicles, finding “no evidence that a
malfunction in electronics caused large unintended acceleration”
(www.nasa.gov/topics/nasalife/features/nesc-toyota-study.html)
 The question remains
 How did a company that’s known for superior quality, efficiency, and customer
responsiveness, find itself in such a mess?
 To what extent the “fate” of Toyota reflect the challenges facing Japanese manufacturing
industry today?
US Market Share of the Top 5 Auto Producers and Crisis
Timeline
Source: Andrews, Simon, Tian and Zhao (2011)
Toyota’s Global Expansion
 Toyota successfully entered the US market in the late 1960s, taking market
share from its American rivals largely due to the fuel efficiency of its vehicles

By 1984, exports accounted for 52.5% of Toyota’s sales, up from mere 19% in 1967.
 In 1983, Toyota entered into a 50/50 joint venture with GM under the name
New United Motor Manufacturing Inc (NUMMI), a 250,000 capacity facility
in Fremont, CA; By 2008, it had 10 assembly plants in the US producing 1.3
million vehicles per year (more than 50% of all Toyota vehicles sold in the
US were locally produced)
 In 1989 Toyota moved to set up production in Europe; By 2008 it has four
plants in Europe, with total production capacity of 800,000 vehicles a year
 Toyota expanded to the rest of Asia, adding three assembly plants in China
by 2008 with capacity over 440,000 vehicles a year, and 10 other plants in
Southeast Asia with annual capacity of over 1 million vehicles
 There are also significant assembly plants in South Africa, Australia and
South America
 However, compared to its Japanese rivals, Toyota still has the highest
percentage of production at home (38% versus 25% at Honda and Nissan)
Toyota’s Lean Production System
 Toyota changed the “mass production” method pioneered
by Ford, and introduced the “lean production system”
which features short production runs, low inventory
levels, and high product variety
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Ohno Taiichi, the creator of the TPS, successfully reduced the time
required to change dies on stamping equipment from a full day to
15 minutes by 1962, and to as little as 3 minutes by 1971. By
comparison, even in the early 1980s, many American and
European plants required between 2 and 6 hours to change dies
The significantly reduced setup time made small production runs
economical, and also had the added benefit of reducing inventories
and improving product quality
Small production runs made it possible to increase product variety
while still keeping the cost low
 The role of “Just-in-Time” supply network in TPS
Toyota’s Product Portfolio
Toyota’s Unique Supplier System
 Assembly of components into final vehicle accounts for only 15% of the total
manufacturing process in automobile manufacturing. The remaining 85%
involves manufacturing more than 10,000 individual parts and assembling
them into about 100 major components, such as engines and suspension
systems
 Historical approach used by GM and Ford was to coordinate this process
by vertical integration – even in the mid 1990s, GM made 68% of its own
components in house, while Ford made 50%.
 Toyota only produced about 25% of its major components in house, the
rest were contracted to independent suppliers; It is of vital importance to
make sure these suppliers are integrated parts of Toyota’s manufacturing
system

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Toyota has 200-300 Tier one suppliers, and thousands of Tier 2 and Tier 3 parts
suppliers.
Toyota establishes long term relationships with its suppliers via crossownership, sending engineers to work with suppliers, and other strategies
Globalizing the Supplier System: The Challenges and Responses
 To facilitate the JIT system and integrate deeper into the local economy,
Toyota has been moving its supplier network from Japan to the hosting
countries
 By mid-2000s, the local content of cars produced in North America was
more than 70%
 But maintaining the quality and efficiency levels for the foreign suppliers
have been challenging
 In 1990, Toyota reports that the defect ratio for parts produced by 75
North American and European suppliers was 100 times higher than their
147 counterparts in Japan (1000 defects per million parts versus 10
defects per million parts)
 Toyota also reports that parts manufactured by North American and
European suppliers tended to be significantly more expensive than
comparable parts manufactured in Japan
 To improve the efficiency of its American based suppliers, Toyota
established an aggressive supplier education process by creating the Toyota
Supplier Support Center in 1992
Toyota’s Recent Moves to Reduce Costs
 CCC21 (Construction of Cost Competitiveness for the 21st Century)
Launched in 2000, targeted 170 key parts/components for 30%
price cut cross board
 Saved Toyota nearly $10 billion over the next 5 years
 Value Innovation
 Launched in 2005, lower cost by another 30%, and save more than
$2.5 B annually
 Benchmark parts’ prices with Chinese suppliers
 Buying more from non keiretsu suppliers
 Cut number of components by half
 Cutting number of steel parts from 610 to 500 to deal with
soaring steel price

The Growing Pain
 Average 26 abrupt acceleration reported annually in 1999
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2001 Camry and Lexus ES model
In 2002-2004 models, this number soared to 132, almost
400% higher.
Oct. 2007, Toyota lost the automatic recommendation from
Consumer Reports
Apr. 2008, Consumer Reports dropped 3 Toyota models
from its 2008 recommendation list
2009, 2010, Toyota and Lexus slid in 2 consecutive years in
J.D.Power’s vehicle dependability report
Jan. 2010, Consumer Reports withdraw 8 Toyota models
from its recommendation list due to the massive recall
June 2010, Toyota dropped to 21st in J.D.Power’s IQS
report
99-09 NHTSA Unintended Acceleration Complaint Rate
Per 100,000 Vehicles
Recent Expansion of Toyota: Spread Out Too Thin?
Table 3: Toyota vs. GM in World Presence
Unit Auto Sales (2008)
Total Revenue (2008)
Net Income (2008)
No. of Models
No. of Overseas Plants
No. of Foreign Countries with plants
No. of countries with vehicle sales
Toyota
7.5 M
$202 B
$-4 B
60 +
52 in 2006
28 in 2006
170
GM
6M
$148 B
-$30 B
80+
42
31
157
(Source: compiled with data from company websites by the authors)
The Context of Toyota’s Aggressive Expansion in the Global Market (I)
 The “super endaka” post Plaza Accord
 The strong yen forced Japanese firms to further cut costs, lower prices, and
reinvent themselves through transplants or other innovations
 The Japanese firms benefited from the massive drop in the prices of their raw
materials imports, which offset the negative impact on its exports
 As the trade surplus actually soared to more than $90 billion annually after
1985, the Japanese invested in their stock market, foreign equities, real estate,
and foreign debt
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As the Bank of Japan lowered interest rates to 2.5% by 2/87, real investment skyrocketed
from 27% to 32% of GDP by 1991 – an unprecedented level for a developed country
Land prices in Tokyo and Osaka more than tripled, and the Nikkei stock market average
rose from 11,000 to 39,000 points in a few years
Japanese banks and investment funds bought US Treasury bills, and Japanese
businesses bought nearly $140 billion of U.S. equities and real estate such as
Columbia Pictures, Pebble Beach Golf, and New York’s Rockefeller Center
Japanese manufacturers built plants in the US, Europe, and southeast Asia to
gain market access and avoid protectionism, to gain access to technology, or to
lower labor costs – Toyota was one of them
Selected Exchange Rates to the US Dollar Over Time
The Context of Toyota’s Aggressive Expansion in the Global Market (II)
 Eventually, endaka caught up with Japan. Under the pressure of asset
speculation and a threat of inflation in 1989, interest rates were
increased to cool off the economy. Rates rose further in 1990, and by
1991, Japan was in recession --The “lost decade” began.
 Challenges facing Japan and Japanese companies
 Problems with economic structure
 Has the surge in outward Japanese FDI over the 1990s created the
“hollowing out” effect on Japanese economy?
 BY 1993, the stock of outward Japanese FDI stood at $422
billion, almost 15 times the stock of FDI in Japan of $29 billion
 How has the relocation of Japanese production abroad led to
changes in Japan’s trade structure?
 Institutional concerns
 Labor markets
 Capital markets: The role of “kereitzu” and cross-holding of shares
within corporate families resulted in lack of transparency and
flexibility
FDI Inflow and Outflow in Japan
Source: IMF Working Paper, Bayoumi & Lipworth (1997)
Japan’s FDI Outflow and Trade Structure
FDI outflows from Japan imply a movement of production capacity away from Japan
to other countries, a structural change that is often linked to recent changes in the
pattern of Japanese trade
 In the 1980s, Japanese FDI investments were mostly in the North America; Since the
1990s, investment in Asia has grown most rapidly
 The share of FDI outflows in manufacturing has also increased significantly during the
1980s; Even though the share of manufacturing sectors declined somewhat in the
early 1990s, it became more dominant in recent years
 Since mid 1990s, Japanese FDI in North America has come to be dominated again
by the manufacturing sector (electrical machinery, transport equipment and
chemical industries), while in Europe it is still concentrated in the service sector
(particularly, in finance & insurance and trade).
 In Asia, on the other hand, the service sector domination of Japan’s FDI during the
late eighties’ bubble period, has since dropped steadily and by 2001, Japan’s FDI in
Asia was dominated by manufacturing sector to the extent of some 65%. Of this,
the electrical machinery industry continues to be the single largest recipient
industry in Asia, followed by chemical and transport equipment and metal
industries.

Japan’s Restructuring Efforts to Increase Corporate Competitiveness
 In mid 1990s, a comprehensive reform program dubbed the “Big Bang” was
introduced, encompassing reforms in banking, capital markets, insurance, and
accounting standards.
 In April 1996, the Japan Investment Council's statement on M&A espoused a new
willingness on the part of Japanese corporate sector to embrace M&As as part of
the market-oriented approach to corporate restructuring
 The key FDI targets include finance, insurance, the telecommunications
industries, and automobile and machinery
 Previously, Japanese corporate law was full of restrictions that prevented
companies from changing their corporate structure. Restructuring moves such as
spin-offs of underperforming units were not allowed. Such bans were lifted in
late 1990s, giving corporations more freedom in restructuring their organizations
 As a result of both the “push” of global FDI increase and the “pull” of domestic
policy changes, FDI inflows in Japan experienced a surge in the late 1990s. The
cumulative total from 1998 to 2002 together amounted to $97.0 billion – almost
twice the $49.8 billion registered during the period 1970 to 1997

However, even at this level, Japan’s FDI inflow accounts only 1.5-2% of global FDI
inflows; In contrast, US accounted for 26% of global FDI inflows in 1999
Contribution of Cross-Border M&As to FDI Inflow to Japan
1. Cross-border
M&A sales by
Japan*
1995
1996
1997
1998
1999
2000 2001
541
1719
3083
4022
16431
15541
15183
218%
79%
30%
309%
-5.4%
-2.3%
Growth rate in
cross-border M&A
sales by Japan
FDI Inflows*
3930
7084
5605
10240
21062
28998
17921
Cross-border M&A
sales as % of FDI
inflows
13.8%
24.3%
55%
39.3%
78%
54%
85%
* In Millions of US Dollars (notification basis)
Source: Japanese Ministry of Finance
The Impact of the Restructuring on Japan’s Auto Industry
 Since the revision of the cross-border M&A regulation, two major
Japanese automakers have been targets of foreign acquisition
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Renault acquired controlling stakes in Nissan, and DaimlerChrysler did the same
for Mitsubishi
As a result of the Nissan and Mitsubishi Motors deals, only two of Japan’s twelve
car makers, Toyota and Honda, remain independent, while eight now have foreign
partners. Toyota holds stakes in the remaining two, Daihatsu and Hino
While Renault’s acquisition of Nissan proved to be successful, the Mitsubishi deal
turned out to be a failure. In 2004, DaimlerChrysler decided to abandon its
Japanese partner after Mitsubishi’s finances spiraled out of control
 How competitive are Japanese manufacturing industries today?
 What are Japan’s top exported goods currently?
The Global Auto Market: Post-Toyota Crisis
 The Toyota crisis will also have significant implications for the global auto
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industry as a whole, at both operational and strategic levels
In early 2010, GM announced that all its new vehicles will have brake override
system installed, as a precaution to prevent possible problems Toyota vehicles
had experienced
Both GM and Chrysler also introduced sales incentives for Toyota owners to
trade their cars with GM and Chrysler brands, which to some extent led to sales
increase for both manufacturers
European automakers will continue to build market share worldwide by
emphasizing on the quality and safety features of their products
In the meantime, the emerging automakers from China and India are making
inroads to the global auto market through aggressive acquisitions of leading
brands such as Jaguar, Land Rover and Volvo Cars, signaling intensified
competition from previously insignificant players from these regions
The million dollar question: Will Toyota continue its rise to the No. 1 automaker
in the world, despite the setbacks caused by the massive recall?
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The 3/11 earthquake and Tsunami have led to setback in Toyota’s production in
Japan. It’s predicted that Toyota will fall behind GM and even Volkswagen in
global vehicle sales this year
Quarterly report released on May 11th 2011 shows sharp decline of profit and
uncertainty of earnings future