Millions of vehicles recalled due to quality problems, multiple lawsuits, government investigations and a very public apology from the company’s president have seriously damaged Toyota’s once-unassailable reputation. What do these problems say about the famed Toyota Production System? What will these problems and the wider economic crisis bring for the country’s automotive industry more generally? These authors recently visited Toyota and a number of automotive systems suppliers in Japan. Their observations and assessments of how the industry will fare in the years ahead are the basis for this article.
In the late 1980s and early 1990s one could not open a business or management publication without reading about Japanese corporations, their management practices and the competitive advantages that they bestowed. There was tremendous interest in the so-called ‘Three Pillars’ of Japan’s major corporations – lifetime employment, seniority-based pay and promotion, and company trade unions. These were seen to provide the secure employment relationships and mutual commitment between employer and employees (at least those employed in the ‘core’ of the corporation) that meant managers and workers joined together both to work productively and also to share ideas in order to continually improve the firm’s systems and performance. But in the early 1990s Japan’s economic bubble burst, the economy stagnated. While individual Japanese corporations have continued to perform well, interest in the country, its management practices and employment systems has waned. While Japanese industry is stirring, most companies today are still struggling to climb out of the trough of recession. We thought it would be an appropriate time to discover just how firms have coped with an economic downturn that has lasted nearly 20 years.
Japan’s past successes and current challenges are most apparent in the country’s automotive industry and, in particular, its leading manufacturer and corporate icon, Toyota. In 1990, the book The Machine that Changed the World (Womack, Jones & Roos) introduced the term “lean production” and cemented the reputation of Toyota as the world’s best car assembler. Interest had been growing in Japan’s major corporations through the 1980s, and this book advanced lean production (also described at the time as ‘Toyotaism’) as a new and superior system of management practices that would displace Fordist mass production and rigid bureaucracy throughout the world of business. The book and the “lean revolution” it heralded were to prove extremely influential, particularly with regard to the management of manufacturing operations. Terms such as just-in-time, quality circles and continuous improvement would go on to become part of the management lexicon, and even Japanese words such kaizen and kanban are now heard in factories across the world. Toyota’s performance and relative competitive position more than matched the influence of its management systems. Before long the company overtook the North American giants of the industry – Ford and General Motors – to become the biggest and most profitable carmaker.
Figure 1: Annual production volumes of passenger cars by Toyota, Ford & GM (2000-2009)
OICA production statistics (http://oica.net/category/production-statistics/)
Figure 2: Net profit to consolidated sales ratios for Toyota, Ford & GM (1989-2009)
Calculations based on data from car assemblers
The performance of Toyota, particularly during the 2000s and up to the global economic crisis of 2008, is even more impressive when one considers that this rise to the top was achieved against a backdrop of long-term economic problems in Japan.
Figure 3: Japan’s economic growth rate (year-on-year change in Japanese GDP)
Source: Cabinet Office, Government of Japan “SNA Statistics”
Internationalization of Japan’s motor industry
Part of the story of Toyota’s success has been its ability to successfully transfer production overseas. Since it entered into a joint venture with General Motors to form NUMMI and turned around the fortunes of a brownfield site in California in the 1980s, Toyota has established manufacturing operations across the world (NUMMI is New United Motor Manufacturing Inc., which became Tesla last October). In the process, it also transferred the essence of its lean production system – efficiency, quality and teamwork. This has been vital in allowing the company to continue to grow despite the contraction of its home market.
Figure 4: Toyota’s production by location: Japan and overseas
OICA production statistic (http://oica.net/category/production-statistics/)
This pattern of internationalization has been repeated throughout Japan’s car assemblers. Indeed, in the last two years the number of vehicles produced by Japanese assemblers overseas has exceeded the number produced at home.
Figure 5: Japanese assemblers’ production by location
OICA production statistic (http://oica.net/category/production-statistics/)
The ability of Japanese firms’ to transfer their manufacturing practices overseas was the subject of considerable attention during the 1990s (Oliver & Wilkinson, 1992; Abo, 1994). Amongst the conclusions drawn from this research was that the unique historical, socio-cultural and economic circumstances of post-war Japan had produced a very specific set of institutions and practices, which were not to be found or reproduced elsewhere. This meant that varying degrees of adaptation were required when firms established factories overseas. Given the experiences firms have gained from these “transplanted operations,” it seems reasonable to ask how the fundamentals of the Japanese system changed at home. Moreover, to what extent do Toyota’s recent difficulties call into question the lean production model? And more broadly, have the changing economic circumstances of Japan undermined the Three Pillars of Japan’s major corporations – lifetime employment, seniority-based pay and promotion, and company trade unions?
Japan’s Motor Industry Today
In addressing these questions, this paper summarises some findings from the authors’ visits to Toyota and five suppliers of automotive systems in October and November, 2010. In themselves, these factory visits – involving a factory tour, interviews with managers and the completion of a questionnaire detailing management practices and plant performance – offer a small but focused insight into much bigger developments across the industry and the country. Since the first two authors have been studying Japan’s motor industry for over a decade (Delbridge first visited each of the companies in this study in the early 1990s), we are also able to provide some wider historical context to these findings.
The initial employer response to the post-bubble economic decline was that change to the established employment system was needed. During the 1990s, the transition to a low-growth economy resulted in a shift from tight labour market conditions to a relative surplus of labour. This resulted in strong calls from employers’ groups (most notably the Japan Federation of Employers’ Associations, who produced a report entitled “Japanese-style management in the New Era”) for a move towards the deregulation of employment and freer markets. These developments called into question the viability of both the seniority-based pay-and-promotion system (nenko) and the commitment to lifetime employment (though not formally stated in contracts) that large firms offered their core employees.
The advocacy of a fundamental change from the established corporate employment system to a market-based approach can be clearly seen in the actions of the Liberal Democratic Party government in Japan up to 2009. The government had actively promoted the relaxation of regulations on employment and compensation systems in order to realize the vision provided by the Japan Federation of Employers’ Associations. With regard to employment specifically, while recognizing the importance of the country’s lifetime employment system, the government promoted a combination of the continuation of the long-term system for a decreasing number of core employees and the adoption of more flexible forms of employment system for the rest of the workforce. This proposed a three-way segmentation of employees between core long-term employment, fixed-term specialists and flexible short-term contract labour, with further implications for the pay-and-promotion systems to be followed in each case. The government advocated the necessity of revising seniority-based payment systems such as periodic salary increases, the need to implement an evaluation of occupational ability and job performance, and to relate the annual salary system to qualification. To these ends, there were a series of legislative changes since the burst of the bubble economy that relaxed employment regulation and promoted a more flexible, market-based approach.
Across the Japanese economy these developments had variable effects. With regard to non-regular employment, the evidence at the national level is clear. A combination of the economic downturn and subsequent demand reduction has meant there has been a significant increase in the proportion of employees not in regular full-time employment.
Figure 6: The ratio of non-regular employees to regular employees
Source: Ministry of Internal Affairs and Communications in Japan
On the other hand, the data available suggest that moves toward individualized payment systems (seika-shugi) that developed during the post-bubble period stalled at first but have recently been reversed. There is mixed evidence of the experiences of firms that have moved in that direction. For example, the problems of Fujitsu were widely reported in Japan. Its move to individualised payment led to a series of difficulties (Joe, 2004), including a diminution in the team ethos, heightened conflict between older and younger employees, and greater cross-functional tension as company-wide objectives were supplanted by departmental performance targets.
Table 1: The percentage of firms that take into account individuals’ performance and results for determining their salary
Source: Ministry of Health, Labour and Welfare
We will briefly consider the evidence on each of these two issues in the factories that we visited.
Increasing use of non-regular employees
All of the plants that we visited had suffered from fluctuating and/or declining volumes over the last few years, and the impact was felt in two ways. Most of the plants had increased their reliance on temporary workers from the early 2000s, though they were diverging in their current approach. In some cases, management had reduced the number of non-regular employees working in the factory in order to preserve the jobs of the regular workers. But in others they had continued to employ large numbers of temporary workers (either directly or through agencies) to cover work demands and had thus seen (in some cases) dramatic increases in the proportion of workers on temporary contracts. Individual plants thus reported quite different pictures: Since the worldwide economic decline in 2008, two plants had reduced the proportion of non-regular employees to less than 10 percent while two others continued to employ a high percentage of non-regular employees. As a result, temporary workers now accounted for more than half of shop floor workers.
These issues were made more complex by the variety of ways temporary workers were employed. Two of the plants with significant numbers were using agencies to provide them with labour; one-third had moved away from using agencies, reduced the percentage of non-regular employees from 60 percent to between 20 and 30 percent, and was now employing these workers directly.
Decisions about which approach to take were wrapped up in assessments of demand stability, cost and quality. Temporary, and in particular agency, workers are cheaper to employ (they typically earn similar basic wages but do not qualify for the various bonus elements that make up a regular worker’s salary) and readily laid-off should demand turn down. On the other hand, all of the plants with significant numbers of non-regular workers reported that the dynamic of kaizen (continuous improvement) that is central to the Japanese manufacturing system was very difficult to maintain under such circumstances, and that the temporary workers generally possessed neither the skills nor the motivation to participate fully and productively in shop floor problem-solving activities.
Of even greater concern to the managers interviewed than the inability to participate in kaizen were the product quality issues created by employing large numbers of agency workers. One plant manager told us:
‘I’d like to increase the ratio of regular workers because this would make it possible to provide more quality products. It is needed to get a higher percentage of regular workers… [but] the decision is made at the top of the headquarters. Gradually, headquarters has recognized the necessity to increase the ratio of regular workers so now this plant is trying to employ good temporary workers who might become regular workers. But it is difficult to find good temporary workers’.
The challenges brought by having large numbers of non-regular employees bring also included high turnover. The plants typically reported extremely low levels of labour turnover for core employees, but they often had difficulty with temporary workers, who left after very short periods and well before the end of their three-month contracts.
Toyota seems to have concluded that the problems created by temporary workers may outweigh the cost advantages. As Table 2 below shows, though the ratio of non-regular to regular employees in Toyota has grown, it peaked in 2006 and has been declining rapidly in the last two years in both actual and relative terms. Before 2004, this ratio was less than 10 percent and thus not reported separately in Toyota’s annual security reports.
Table 2: Ratio of non-regular to regular workers in Toyota
|Year (March)||Regular employees||Non-regular employees||Ratio of non-regular to regular|
Part of this picture is explained by the fact that some temporary workers are offered regular employment opportunities. Both the component suppliers and Toyota reported having taken on non-regular employees. In fact, press reports suggest Toyota has done so in significant numbers, with Toyota Kyusyu re-employing more than 1,000 agency workers as regular workers (Nihon Keizai Shinbun, 16th August 2007).
The adoption of individual performance-related payment systems
There was a more consistent pattern across the plants with regard to compensation systems. In each case the plants employed a form of the traditional nenko system, which rewards employees based on a combination of seniority, capability and performance. Table 3 below gives an example of Toyota’s system from a few years ago.
Table 3: Toyota’s payment system in 2003
|Regular payment||Basic ability-based pay||Payment amount is decided by job grade||14.4%|
|Individual ability-based pay||Payment amount is decided by individual ability||21.3%|
|Productivity-based pay||Basic grade-based payment x plant performance rate||8.4%|
|Age-based pay||Payment amount is decided by age||8.7%|
|Other benefits||Dependent family allowance and others||2.1%|
|Irregular payment||Overtime pay||10.1%|
|Other pay||Night shift pay, specific working pay and others||4.4%|
|Bonus||Basic bonus||Monthly regular payment x 2.207 in summer and 1.885 in winter||18.4%|
|Additional amount||Payment amount is decided by individual performance|
This table was created by the authors based on Sugiyama (2004).
All of the automotive systems suppliers reported some individual performance-related component to the salary of their regular shop floor workers, but this was typically still a fairly small percentage of the total. That said, two of the plants had increased this proportion to 20 per cent in recent times, and another reported that it would have increased the individual performance-related bonus had the company’s trade union been willing to accept the change.
Company unions, the third pillar of Japan’s post-war employment system, remain important in understanding developments; all five components suppliers had company unions. Toyota’s trade union negotiates both the amount of bonus and the regular salary on an annual basis. Every January the union requests increases in each item in the Table and there is a wage determination process in March through the spring wage negotiation. As in other plants, any changes in the payment system at Toyota require negotiation between management and union.
The resilience of the lifetime employment system
While the plants were all struggling in varying degrees with drops in market demand and the movement of more car assembly overseas, they all reported that they were committed to the concept of lifetime employment for their core employees. As noted above, labour turnover was generally negligible and the average length of service was between eight and 20 years across the five plants. The deployment or managed reduction of agency workers was a deliberate strategy in each case, driven, at least in part, by the desire to preserve core-worker employment. In at least one case, the company had brought back in-house work it had previously sub-contracted out to local Japanese second-tier suppliers. This enhanced their negotiating power with regard to parts prices and increased the amount of value-added work undertaken; another benefit for the firm was that there was work for its regular employees.
Figure 7: Unemployment rate in Japan
Source: World Development Indicators by the World Bank
This commitment to what is seen as a cultural and institutional symbol of Japan’s corporate ethos can be seen in the figures for unemployment. Given the economic problems of the country over such an extended period, the unemployment figure has remained remarkably stable and relatively low. Of course, as discussed above, Japan has a segmented labour market, and the ageing demographic profile of the country has also contributed to these figures.
In summary, the tendency amongst Toyota and the supplier companies has been to draw back from experiments with more individualized HR systems and to concentrate on sustaining the established mutual commitment between core employees and employer. That said, dealing with expanding internationalization and the global economic crisis has led some firms to increasingly rely on temporary employees, thus heralding a deepening difference between core and periphery in labour markets. This has created some difficulties for firms, especially in maintaining the kaizen system. In at least one case, the company had needed to redouble its internal kaizen training efforts. A manager of this company said, “Our kaizen capability had weakened without realizing it with the increase of global production volume and also temporary workers.”
Some comments on Toyota’s recent travails
Let us conclude with some final observations on Toyota’s recent recall problems. The consensus amongst Japanese experts is that the root cause of these problems lies with a combination of the speed of growth and internationalization, and some specific problems with new product development and testing. There is continuing confidence in the efficacy and competitive advantage afforded by the Toyota Production System when it comes to manufacturing the products. For instance, the big recall related to problems with clutch pedals in the U.S. was mainly caused by the design and development, not the manufacturing system. And Akio Toyoda, the President of Toyota, publicly acknowledged that Toyota might have grown too rapid for it to retain the degree of control and quality that has been the company’s hallmark. As Figure 4 shows, Toyota trebled overseas production in less than a decade.
During this period of significant growth and internationalization, Toyota also changed its HR approach and introduced some more individualistic characteristics around 2000. From this time, individual expertise and performance began to be more highly prized in the company; the company also began to delayer, in order to reduce the number of hierarchical positions. Furthermore, as mentioned before, the rapid increase in the number of temporary workers started in 2004. But it did not take long for the company to identify some negative consequences caused by such changes. A director of Toyota’s HR department noted, “Toyota’s traditional culture in which employees coach each other has decreased” (Nihon Keizai Shinbun, 25th December 2007), and the company decided to restore the positions of leader and associate leader to its administrative career track. Overall then, in Toyota as with other companies in Japan’s motor industry and more widely across its main industries, the last few years have seen a return to the Three Pillars of the employment system that was closely associated with the country’s post-war economic rise.
The developments reported here may have some significance for countries well beyond Japan. The experimentation with, and subsequent rejection of, a number of management practices associated with the free-market, liberal economic approach of Western corporations indicates the limitations of universal best practice and confounds expectations of a global convergence around a (Western) corporate model. Indeed, there may be some prospect for a sort of reverse convergence, from Japan to the West, first muted many years ago by Ronald Dore (1973). The way that Japanese firms have sought to preserve employment for core employees, and their experiences with the negative impact that an increasing reliance on non-regular workers can have on quality and continuous improvement, may prove to be salutary lessons for corporations in other countries trying to deal with the global economic crisis. The message here seems clear: In response to major shifts in the corporate environment (such as economic crises) managers need to develop practices and systems that are consistent with their corporation’s underlying norms and conventions. In turn, these new practices need to be aligned with the societal expectations and values of the company’s home country. This is not to suggest that individual corporations are ‘entrapped’ by their societal context; there is clearly scope for strategic development and competitive advantage. Indeed, the case of Toyota represents just such an example. For this company, continuing to build on its strengths in manufacturing systems and the network level performance advantages these offer will be crucial as it recovers from the damaging series of problems it has experienced.
Looking further ahead, it will be fascinating to see how Japan’s corporate systems and employment relations continue to develop. The move back towards traditional seniority-based HR systems and lifetime employment that we have identified is interesting, but that same move may prove to be short-lived if economic circumstances continue to deteriorate. Either way, the competitive pressure from developing countries such as China and India will continue to intensify in the future. This may force firms to again adopt more market-based HR practices, such as the increased use of temporary workers. What seems likely, however, is that Japanese firms will need to adapt to such approaches, so that they mesh with wider company and societal values. This may provide a dynamic for innovation much like that found in the immediate post-war period in Japan, which heralded the emergence of Japan’s traditional Three Pillars in the first place.
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