Sunday, March 21, 2010

March 2010: Toyota, Ford & GM – Where to from here?

Everyone is talking about Toyota. It is amazing to me that the car company most known for quality, reliability, low cost of maintenance, and hence long term value has such significant and serious quality problems. Think about it. Cars exist to safely get people from point A to point B. That is their main purpose. Secondary to this, and probably now primary, is to get people from point A to point B comfortably. There has been a long history of innovations from power assisted steering and braking, to automatic climate control, window defoggers, and sound systems.

The recent problems with Toyota are fundamental. Some cars accelerate on their own. Other cars do not stop soon enough. The starting and stopping are fundamental to getting safely from point A to point B. Drivers need to be able to do both reliably. That Toyota is having problems at this basic level, albeit at very low incident rates, is quite concerning to me.

No one ever accused Toyota of producing exciting cars. In fact, that has always been a rap against the company. “Sure they are reliable and effectively do what they are supposed to do. But where is the ‘wow’?” I have heard and read some variation of this many times over the years.

This was especially true when Toyotas were compared against cars from Germany. The German cars, especially Mercedes, BMW, Audi, and Volkswagon have that special excitement that connects the driver to the road and the driving experience… so I had been told. I was not really sure what that meant until I had the chance to drive a company car of my choosing. Having always wanted to have a German car, I selected the VW Passat. I opted for the 3.5 liter engine. And I basically experienced that “wow” and the connection with the road and a different driving experience.

Here is my assessment of the difference. Toyota was designing and making cars for the masses that would serve their basic everyday needs reliably and with low cost of ownership. No one did it better. The Germans on the other hand were designing cars that could be taken on the Autobahns where there is essentially no speed limit. These cars have to hug the road and handle well at 110 mph. The windshield wipers have to stay glued to the windshield at those speeds and not flap and vibrate like most other cars would do.

The Passat did all this. It was a screamer and a road hugger. It growled and responded. I could beat most cars from a standstill with no issues. Even more impressively, I could be cruising at 80 mph and if I decided to pass another car, it was like they were standing still. It was an impressive car for the money. I can only imagine the performance of the high end BMWs and Mercedes. Yet, because of the over engineering, the German cars require expensive maintenance. The cost of ownership is higher than say my 2002 Toyota 4Runner.

My 4Runner is a great little truck. It has 65,000 miles and I know with basic maintenance it can last until over 200,000 miles. I may well need it to do that. It has given me no problems and already outlasted the 1995 and 2001 Chevy Blazers that we owned. It is fine on the highway but in no way compares to the excitement of the Passat. I just keep repeating 200,000 miles and smile to myself as cars pass by while I am cruising along at 80 mph.

My appreciation for Toyota Motors go back a long way. It goes back to well before I began buying them.

When Toyota was really emerging in the US, I began working at Ford Motor Company. It was my first job and Ford was an exalted company within our family. My grandfather worked there and many Armenians of my parent’s generation worked there in various engineering and management capacities.

I had a great opportunity to make a trip to dealerships that sold both Fords and Toyotas. Our mission was to create a quality database on Toyotas so we could really and truly compare their quality to ours. We wanted to see if the anecdotal quality reputation was deserved or not. It was an eye opening trip. Simply stated, the reputation was real and most deserved. I quickly realized that I could just open a drawer containing maintenance records in a dealership and quickly tell which folders were Ford vehicles and which were Toyota. The Toyota folders were visibly thinner than the Ford folders. There were little to no warranty repairs compared to the Fords and thus way less paper in the folders. It was very sobering. The model had changed dramatically.

Back in the mid-1980s I had a great opportunity to take a trip to Japan. It was a study mission sponsored by the American Supplier Institute in conjunction with the Japanese Union of Scientists and Engineers (JUSE). I was then an employee of Rockwell Automotive who paid for the trip.

The American Supplier Institute was a spin-off from Ford Motor Company. Larry Sullivan was a manager at the Automotive Assembly Division of Ford. He was responsible for Warranty Analysis. I was a Warranty Analyst at the Body and Electric Product Engineering Division at Ford in the late 1970s and early 1980s and knew Larry by name. When the Quality Revolution revved up in the early 1980s, Larry really took the bull by the horns and became a fanatic advocate of Statistical Process Control and then the Taguchi Method of Designed Experiments. In short order, he became an advisor to senior management and in charge of quality training, benchmarking, and study missions to Japan to learn even more.

Larry made great connections in Japan and created such a little fiefdom within Ford that he had influence beyond his rank. He parlayed that into spinning off what he did for Ford as a separate business, American Supplier Institute (ASI), with Ford as its main client. Soon ASIs business expanded to Ford’s supply base. Ford used ASI to mandate quality training and methods to their suppliers. It was very successful and through the mid-1990s ASIs influence was huge in the Auto Industry. General Motors and Chrysler even became customers of ASI.

Our director of Quality at Rockwell, Jim Warren, was associated with ASI on a board of advisors. He participated on these study missions and I was delighted when it became my turn to go. I had been a great student of Quality and Reliability for over five years. In those days, a trip to Japan was like a trip to Graceland for an Elvis fan. It was a special opportunity and I was very excited.

Jim is a reader of this letter and I guess this is my way of thanking him once more for allowing me the opportunity to participate in that study mission. It certainly accelerated my Quality education and made me a lifelong devotee to the fields of quality assurance and process improvement.

The trip started and ended in Nagoya, the hometown of Toyota. We were lectured to by the JUSE hosts and toured many Toyota and Toyota suppliers all connected to Toyota via the Keiretsu structure unique to Japan. It was a fascinating trip on both business and cultural levels.

It was during this trip that I developed a true passion for quality and learned about Total Quality. I truly began to understand that it was a system of management and not simply the application of any specific tool. Many people on our trip were looking for some kind of “magic bullet” or “magic formula,” a missing piece of the puzzle that would enable them to go back and immediately begin to compete with the Japanese. One fellow even got up at the end of the study mission when we all took a turn thanking our hosts. He thanked the JUSE and Toyota hosts, he mentioned that it was his fifth study mission to Japan, and then asked, “When I come back next year what new tool will you show us?” Five study mission and he had missed the whole point. It was not Quality Circles, Statistical Quality Control, Taguchi Experimental Design, Quality Function Deployment or any specific tool. It was how a business, a management team, approached quality and used it to design and produce products that met or exceeded customer needs. They wanted to meet and exceed customer needs at the time of purchase in terms of features and prices. But, more importantly, they wanted a customer’s satisfaction with their purchase to increase over the entire time they owned the car. You do not get this kind of satisfaction by having Quality Circles or mandating that every department do two Taguchi Experiments in the next fiscal year.

Yet, silly mandates like this did have an impact. Ford learned from the American Supplier Institute study missions. They did do silly things like mandating the that each engineering department conduct at least two Taguchi Experiments in the next year. They embraced Quality Function Deployment and eventually put it all together and designed the first Taurus in the 1980s. The realized that they had to design and build cars that customers would value and appreciate. The Taurus was that car. Ford did it right and were rewarded for it. It was the bestselling car in the US for a few years. It was the first Ford to achieve that honor in many years and it was probably the last Big Three car to achieve that honor.

When Ford went to redesign the Taurus, they forgot the prime message of Total Quality which was to find the Voice of the Customer and develop and produce products that meet or exceed customer expectations. They returned to allowing the Voice of the Engineer and Designer reign. The second generation Taurus did not come close to the success of the first. Ford lost their leadership to the Toyota Camry which was the bestselling car in the US in most of the 1990s and early 2000s. Ford learned the lesson and then forgot it.

The same was true for General Motors. After Deming spent time at Ford, General Motors hired him. He provided his tough love and quality message to them. He worked with them to improve their two seat sports car, the Pontiac Fiero. The Fiero was a great looking car and had initial success based the look of the car and, I believe, pricing. It did not deliver in terms of quality and reliability. Deming helped them get this right. It was, however, too little too late. Sales had dropped to the point that General Motors pulled the plug on the car. More than one General Motors employee told me what a shame this was because they had finally gotten the Fiero right just before it was discontinued.

The General Motors story fascinates me. They were the dominant car company in the world, in terms of number of vehicles sold and profits, for decades. Their dominance peaked in the post-World War II years. In the 1950s, they seemed invincible. They felt they were invincible. The head of the company was quoted as saying “What is good for General Motors was good the country.” I am not sure how that attitude was viewed when it was stated. But by the time I was in college in the early 1970s, most of us looked at it a sign of incredible arrogance and lack of corporate conscience.

The arrogance of General Motors seemed very real to me. I saw it in their employees and it never waned even as their market share eroded steadily over the next thirty years. At the beginning of the Japanese onslaught, they truly felt they could turn it around with the next model of vehicles. Most everyone thought that the Japanese had just awoken the giant and now that they were focused… watch out. It became painfully obvious to everyone not working for General Motors that their entire business organization and philosophy was flawed and could not deliver the kinds of cars that could compete with Toyota and Honda.

The American car companies were saved when SUVs and mini-vans took over the market. The US companies were better prepared to own and profit from this trend than the Japanese and Germans. While they owned these markets, they did profit immensely and it gave a false sense of security and a return to dominance. It lasted only until the foreign competitors began to catch up and produce these kinds of vehicles that were equal to or better than the Big Three offerings. It all came tumbling down with oil price increases and tougher competition caused SUV sales to sag. It all came to a head in early 2008 when the unthinkable actually happened and General Motors declared bankruptcy. No one would have even conceived of such a thing in the 1950s or even early 2000s. General Motors declared bankruptcy. Wow.

My good friend, my best man, Jack Hachigian and I talk often. He began working for General Motors shortly after graduating from Michigan State University. It is the only company he has worked for. He brother Levon works there as did his Father Onnig. They are a General Motors family. Over the past few years, Jack and I have talked a lot about this and he has two very good points and I paraphrase:
1. Deming was right. It is simple. We just need to make good quality cars that appeal to customers.

2. Our quality has gotten better. The public just doesn’t know how much better we have gotten. We are as good or better than the Japanese.
There is a great graphic in an article in the Sunday, March 7, 2010 New York Times: Channeling Toyota to Best Toyota. The graphic shows two trends relating to the performance of Ford, General Motors and Toyota thus far in the century. First, is that the number of consumer complaints about the Ford and General Motor cars has declined dramatically in the past ten years to levels below Toyota which has remained low but flat over the same period of time. Secondly, there is a bar chart showing the steady growth in Toyota’s US market share in the US while Ford and General Motors have steadily declined in the same period. The graphic at the beginning of this posting can be found there.

I am not sure about long term reliability but we could definitely conclude from the graphic that initial quality has certainly improved at Ford and General Motors. Is it sustainable? Will it change their fortunes moving forward? Only time will tell. I certainly hope so. In my years of Quality Management, I have long held a belief. The belief is that companies get stuck in their ways. This is especially true for successful companies. If a company is successful, why change the formula away from something that worked and brought great reward to executives and shareholders alike. “If it ain’t broke, don’t fix it” may be the colloquial way of stating this. Executives get promoted for adhering to and excelling in the proven formula. There is such momentum around this that the company cannot change, and may not even realize it has to change, until it is too late. People outside the company can see this and wonder why the leadership does not do something. Sears was not able to change and adapt to the Wal-Mart model. Zenith, RCA, and General Electric were not able to change and adapt to the Sony and Panasonic approach to consumer electronics. Sony later stumbled when Apple changed the model dramatically with the iPod.

The question I have regarding Toyota is twofold. One, is the Toyota model for success outmoded? Have Ford and General Motors gotten leaner and passed them in Quality? The second part of the question assumes that the first part is true. Can Toyota adapt and return to Quality and Reliability dominance in the automotive industry? I cannot believe I am even asking these questions. But, then I never ever would have guessed that General Motors would lose half of their market share in thirty years and declare bankruptcy.

I do not profess to know the answers to these questions. I think it is too early to tell. But it is a something I am definitely going to follow with great interest.
I lived through the emergence of the Japanese Auto Companies. At the time, we were still equating Made in Japan with the poor quality reputation that was established in the years right after World War II. We did not take them seriously. When the 1970s oil crisis hit and sales of their smaller more fuel efficient cars took off, we all still assumed that all they had done was wake up the sleeping giants who would crush these foreign upstarts with their next models. It became painfully clear this was not the case and that the market had profoundly changed. Ford and General Motors could not and did not adapt quickly culminating in the eventual bankruptcy last year.

The question I end this letter with is whether Toyota is, now, in the same position that General Motors was in 1975? People will say NO! Toyota is the Quality and Reliability Company. They set the standard. They are the standard. They are the company of Taiichi Ohno and the renowned Toyota Production system. All that has happened is that the sleeping giant has awoken… watch out what happens next when they put their minds to it and fix things. They will crush the competition again.

It all sounds eerily familiar.

Indeed I will watch because I have no idea where all of this is heading. It is still too early to tell. I do believe it will be most interesting to watch unfold. No matter, it should bode well for consumers.

1 comment:

  1. Interesting viewpoint but I do not think that you considered some compelling information: The American car companies abandoned the automobile in the 80's in favor minivans. Then, due to the CAFE requirements, they got very cutesy and morphed into SUVs and more importantly, pushing pickup trucks.

    Last year, 6 of the top 10 sellers in the US were pickups or SUVs and none of the cars were US brands, although they were made here. Ford could not even do trucks right, they had multiple recalls on their cruise control and everyone remembers how they threw Firestone(Bridgestone) under the bus on the rollovers due to undersize tires on a overweight pickup truck frame.

    There is an old Polish proverb- "the fish smells from the head" and I believe that this totally describes why the US auto industry is it such a sad state of disarray. Just think of why GM was so big in the 60's- appliances, locomotives, big trucks, Delco etc. In effect, they were diversified

    A bigger and more basic issue might well be when the business model changed (perpetuated by the grad schools?) in which management was directed by the been counters and made their "calculated judgments" to cut pennies that added up to dollars. When combined with bloated compensation packages, short term profits resulted in options and a "forget about the future" attitude.

    I'm not positive when it changed (if it has) but as recent as 3 years ago, cars were money losers and pickups and SUVs were big profits. Gas prices did to the industry what the phony politicians and unions never did, kill demand, however temporary, for trucks and SUVs.

    Unfortunately, the auto industry is not the only area affected. When we lived in Rochester, NY in the late 70's, I witnessed the start of the decline of Xerox, Kodak and Bausch & Lomb.

    It's somewhat ironic that same people who got paid for giving advice on both sides of the buying and selling of corporations and their units, are the same wall street operations who need the bailout, with our money.

    Ken (old neighbor & good friend in CT)