Toyota for the first time overtook GM as the largest automaker in the world ending GM’s 70 years dominance in 2008. It entered the North American auto industry in 1957 but from 1985 to 2005 its share in the North American industry grew substantially at the expense of the ‘big three’ American car manufacturers. One of the prime reasons why Toyota has been so successful is because of its highly efficient production system and its ability to anticipate external forces affecting and shaping the industry and come up with strategies to convert the threats of those forces into opportunities. This short essay analyzes some of these external forces and sheds light on how Toyota strategized to overcome them.
In the 1950s Toyota’s automobile production factories went back to full operation after the devastations of World War II, and to gain competitiveness the company began a thorough study of American automobile manufacturers, due to perceived U.S. technical and economic superiority. Toyota executives explored the production facilities of corporations, including the Ford Motor Company, to witness the latest automobile manufacturing technology and in turn designed and incorporated these technologies in their own facilities, resulting in a nearly instantaneous increase in efficiency.
Incorporating the latest technological advancement in their product and production processes has also affected Toyota’s business strategies. Toyota uses the concept of ‘Kaizen’ or continuous improvement to manufacture its lowest cost and highest quality cars. Toyota has attained a sustainable competitive edge over its rivals because of using ‘Kaizen.’ Toyota also groups its workers on the assembly line in teams and provides them individual responsibility to correct mistakes before the cars reach the end of the production line (Housley and Brandwood 2011). It has also started manufacturing electric cars – the car of the future – to keep up with the recent technological advances.
In 1957 Toyota established Toyota Motor Sales, U.S.A., Inc., to market its vehicles in the US, and the following year the company released its Toyopet sedan, the first model to be marketed in the US; but it recorded poor sales because of its high price and lack of horsepower. The Land Cruiser, a 4 × 4 utility vehicle was released in 1958, which became more successful. In 1965 the Toyopet was totally redesigned for the American market and was re-released as the Toyota Corona, becoming the company’s first major success in the United States (T. Editors of Encyclopaedia. 2020). From 1985 to 2005 Japan’s share of the US auto market has grown to 43%, at the expense of the big three US motor manufacturers, who have suffered a 23% share loss (Housley and Brandwood 2011).
One of the biggest economic forces affecting the auto industry was the oil crisis of 1973. Due to increased competition from foreign manufacturers, the North American automakers closed their old factories and moved to countries with low wages. Furthermore, foreign-manufactured, fuel-efficient Japanese and German cars gained a solid foothold in the American market during and after the 1973 oil embargo and the resultant rise in oil prices because of the Arab-Israeli war. American firms Ford, GM, and Chrysler followed the foreign firms by manufacturing new lines of smaller, more fuel-efficient cars. Toyota was able to tap into the market by anticipating the consumer trend of buying smaller cars with better fuel economy due to the economic downturn and recession before the American firms. As a result, Toyota took over the market with its smaller, cheaper, high-quality cars. The company continually thrived in the American market, attaining a reputation for its low-cost, fuel-efficient, and reliable vehicles such as the Corolla, released in the United States in 1968 (T. Editors of Encyclopaedia. 2020).
In addition, after the global financial crisis of 2007–08, also, new car sales declined precipitately, reflecting the overall decrease in consumer spending. With the onset of the worldwide energy crisis of 2002-2008 caused the Automotive industry crisis (2008-2010) and resulted in the largest bailout package in history from the US government for the ‘big three’ automakers. Those three were criticized for primarily focusing on SUVs and Pickup trucks with higher profit margins but lower fuel economy which was deemed irresponsible in the light of rising fuel prices and falling sales. Toyota came up with its own strategy by offering substantial discounts to entice customers. North Americans switched to smaller, cheaper, more fuel-efficient cars from Toyota which helped boost Toyota’s sales compared with the ‘big three’ automakers.
Although Ford had a cash reserve of 25 billion as a hedge against these uncertain times, other automakers like General Motors (GM) and Chrysler filed for bankruptcy, and the United States government had to assist them with bailout money from the Troubled Asset Relief Program (TARP) to rescue the sinking firms. Although Ford celebrated the 100th anniversary of its establishment, the same was not the case for GM to celebrate. The automobile giant saw an annual loss of $39 billion for 2007, the largest loss ever recorded for any automaker. This massive failure was due to the recession in the U.S. economy, and the capture of market share to foreign brands, primarily the Japanese Toyota (Davis 2019).
Chrysler was also hit with huge losses, and together with GM, both of which declared bankruptcy, received a total of $63.5 billion in “bailout” money in loans from TARP, financed by the US government to help big businesses which suffered losses due to the recession. Ford, however, did not apply for the bailout funds because it had set aside a reserve fund of nearly $25 billion to help it through the difficult period (T. Editors of Encyclopaedia. 2020).
As of February 2012, however, news reports showed that the multi-billion dollar U.S. automotive industry was back on track to enjoying a fast recovery due to the bailout, and both GM and Chrysler were able to pay back the government bailout loans. Big profits were recorded again in GM, Ford, and Chrysler, Detroit’s so-called “Big Three,” were booming again. US auto-making industry reigned worldwide in 2012 as the biggest and most profitable year. Few could have foretold this colossal rise and turnaround of the industry from the recession after its inauspicious beginnings more than a century earlier. In early 2012, the U.S. economy showed modest signs of a recovery with the unemployment rate declining to 8.3%, according to the government’s Bureau of Labor Statistics.
However, Toyota also faced several significant financial challenges: plummeting sales as a result of the global financial crisis of 2008, as well as a global safety recall of more than eight million vehicles in 2010, which briefly paused the production and sales of some of its top models. Beginning in 2014, millions of vehicles manufactured by Toyota and some other car companies were recalled by regulators in the US because of probable malfunctioning airbags manufactured by a Japanese automotive parts supplier. This recall became the largest and most difficult safety recall in U.S. history (T. Editors of Encyclopaedia. 2020).
Toyota also focused early on in producing environmentally friendly and reliable cars tapping into the environmentally ‘green’ trend in consumers. With the high fuel costs nowadays, consumers are not buying large cars in the numbers they used to. Toyota’s smaller cars are more fuel-efficient and are better for the environment. Currently, Toyota is the global market leader in sales of hybrid electric vehicles and has been one of the major companies to encourage the mass-market adoption of hybrid vehicles across the world. Toyota is also the market leader in hydrogen fuel-cell vehicles. Cumulative global sales of Toyota and Lexus hybrid car models reached the 15 million milestone in January 2020 ( Wikipedia 2020). But it is facing increasing competition in this market segment from Tesla as it became the biggest US automaker in history with its market capitalization of valued at $81.4 billion on January 6, 2020, even beating Ford’s peak market value of $80.8 billion. Tesla’s toppling of US auto giants in the electric automobiles can come as a surprise to many, but Bloomberg had already predicted it in 2014, saying that Tesla can topple the car-dealer monopoly and Elon Musk’s revolution not just only about electric cars, but also breaking the monopoly of car-franchise owners dominated by the big three (Papadopolous 2020).
In conclusion, although the controversies surrounding recent Toyota recalls have tarnished the Company’s reputation to some extent, Toyota so far has been able to strategize successfully to offset the external forces affecting the industry. The danger, however, is that it may undermine the very values that are at the core of the company’s success if it focuses too narrowly on achieving the objective of becoming the number one automaker of the world. As such, Toyota needs to refocus on setting a new and more sustainable, and customer-friendly objective with emphasis on providing the highest efficiency and customer satisfaction. Evidently, Toyota’s sales in its home market are going through a phase of stagnation due to a weakness in the Japanese yen providing a competitive advantage to Toyota’s overseas businesses. Consequently, the company’s margins from overseas operations are highly dependent on the depreciation of the Japanese yen against major currencies, including the US dollar and the euro. In spite of being an Asian automobile manufacturer, Toyota is falling behind GM in the Chinese market. Finally, with increasing environmental awareness across the world, a delay in Toyota’s capacity to deliver conventional eco-friendly vehicles may restrict its future growth prospects behind Tesla’s (Parashar 2016).
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Housley, Jon Zuloaga, and Jonathan Brandwood. 2011. “Changes in the Car Industry.” Barcelona Field Studies Centre S.L. October 2. Accessed June 05, 2021. https://geographyfieldwork.com/CarIndustryChanges.htm.
Papadopolous, Loukia. 2020. “Tesla becomes the biggest US automaker in history.” Interesting Engineering. January 8. Accessed June 2, 2020. https://interestingengineering.com/tesla-becomes-the-biggest-us-automaker-in-history.
Parashar, Jitendra. 2016. “How Does Toyota Plan to Deal with Its Challenges? .” Market Realist:. May 27. Accessed June 2, 2020. https://marketrealist.com/2016/05/toyota-plan-deal-challenges/.
T. Editors of Encyclopaedia. 2020. “Toyota Motor Corporation.” Encyclopedia Britannica. May 22. Accessed August 6, 2021. https://www.britannica.com/topic/Toyota-Motor-Corporation.