February 6, 2010
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2010 Toyota Prius hybrid cars. Bloomberg/Getty Images
Toyota's botched response to its escalating problems has deep roots in Japan's legal system and corporate tradition. What the company's troubles mean for the country.
In Japan there is a proverb, "If it stinks, put a lid on it." Alas, this seems to have been Toyota's approach to its burgeoning safety crisis, initially denying, minimizing and mitigating the problems involving brakes that don't brake and accelerators that have a mind of their own. President Akio Toyoda, grandson of the founder, was MIA for two weeks and the company has appeared less than forthcoming about critical safety issues, risking the trust of its customers world-wide.
This has been a public-relations nightmare for Toyota, as its brand name has been synonymous with quality and reliability. Crisis management does not get any more woeful than this and the cost of this bungling so far—the initial $2 billion recall and the loss of 17% of share value since Jan. 21, when the gas-pedal recall was announced—is only a down payment on the final tally. The recall will surely expand, including cars produced in Japan. Lawsuits are being filed and an expensive settlement looms. And then there are the idle factories and empty showrooms to account for.
It is not surprising that Toyota's response has been dilatory and inept, because crisis management in Japan is grossly undeveloped. Over the past two decades, I cannot think of one instance where a Japanese company has done a good job managing a crisis. The pattern is all too familiar, typically involving slow initial response, minimizing the problem, foot dragging on the product recall, poor communication with the public about the problem and too little compassion and concern for consumers adversely affected by the product. Whether it's exploding televisions, fire-prone appliances, tainted milk or false labeling, in case after case companies have shortchanged their customers by shirking responsibility until the accumulated evidence forces belated disclosure and recognition of culpability. The costs of such negligence are low in Japan where compensation for product liability claims is mostly derisory or non-existent.
One glowing exception to this parsimonious record is the saga involving pharmaceutical companies that kept selling tainted blood products to hemophiliacs that left many of them infected with HIV in the 1980s. The government was aware of the issue and failed to stop this avoidable public health crisis. After years of denial, the current finance minister, Naoto Kan, who was health minister in 1994, revealed documents showing that the government allowed the companies to continue selling the bad blood so that they would not lose market share to foreign companies selling safe blood products. In doing so he paved the way for a relatively generous settlement and an abject apology by drug company executives, collectively on hands and knees touching their noses to the floor in demonstrating their contrition to victims.
Usually, however, producer interests trump consumer safety.
Japanese firms often seek to cover up or fudge the facts and the people communicating with the media and public often do not have the information they need to do their job. The absence of a structure to quickly get accurate information to top management hampers an accurate and adequate response. That leaves management unprepared to deal with media questioning and conveys an image of stonewalling and indifference.
There is a cultural element to this penchant for mismanaging crisis. The shame and embarrassment of owning up to product defects in a nation obsessed with craftsmanship and quality raises the bar on disclosure and assuming responsibility. And a high-status company like Toyota has much to lose since its corporate face is at stake. The shame of producing defective cars is supposed to be other firms' problems, not Toyota's, and the ongoing PR disaster reveals just how unprepared the company is for crisis management and how embarrassed it is. In addition, employees' identities are closely tied to their company's image, and loyalty to the firm overrides concerns about consumers.
There is also a culture of deference inside corporations that makes it hard for those lower in the hierarchy to question their superiors or inform them about problems. The focus on consensus and group is an asset in building teamwork, but also can make it hard to challenge what has been decided or designed. Such cultural inclinations are not unknown elsewhere around the world, but they are exceptionally powerful within Japanese corporate culture and constitute significant impediments to averting and responding to a crisis.
This crisis offers an opportunity to reform Toyota's corporate culture and improve quality assurance. This can be done by becoming more focused on the customer, using two-way flow of information and feedback; improving corporate governance by appointing independent outside directors; and making risk management more than an afterthought. It is not too late to turn the situation around, but this means shedding the constraints of a fusty corporate culture and wowing customers with a recall and above-and-beyond after-sales service and care. Yet early signs are that Toyota is no longer the nimble company that took the world by storm over the past half-century.
When Mr. Toyoda took the helm in mid-2009 he was unable to express a reassuring sense of how he would deal with his company's problems of overcapacity as well as the need to diversify away from reliance on the U.S. market and build its presence in China, India and Brazil. A string of successes, most notably the Prius, may have made the juggernaut a bit complacent, losing the edge that helped it surge since the 1970s by being ahead of the curve on fuel efficiency and top of the class on reliability. Regaining that edge and repositioning the company to tap into growing markets promises to be a difficult transition.
Akio Toyoda, president of Toyota Motor Corp., bows as he arrives for a news conference in Japan on Friday. Bloomberg
The Japan Inc. model of cooperative and collusive relations between the business and the government delivered the economic miracle, but has run out of steam. Japan's Lost Decade of the 1990s is entering its third decade, discrediting the powers that be.
Voters threw the long-ruling conservative Liberal Democratic Party out of office last year and have warmed to the Democratic Party of Japan's attacks on those in power and their extensive influence. The public wants fresh thinking about Japan's staggering problems ranging from its rapidly growing disparities, high poverty rate (above 15%), youth unemployment and marginal employment, and a low birthrate attributed to a family-unfriendly environment. But the DPJ has lost traction, caught up in money scandals reminiscent of the venal era of LDP rule. Prime Minister Yukio Hatoyama faces demands for more transparency and accountability, a yearning that also extends to the corporate world.
With Japan Airlines filing for bankruptcy, a public debt-to-GDP ratio reaching 200%, troubles brewing with the U.S. alliance, and even the sumo world sullied by the controversial retirement of a Mongolian grand champion, Toyota's woes add to the staggering 2010 misery index.
National self-confidence has been flagging for some time, but amidst the prolonged malaise, people could still bask in the success of national champions such as Toyota. No other company better represented manufacturing prowess than Toyota and its troubles are an unpleasant surprise.
Americans used to say that what is good for General Motors is good for the country and what is good for the country is good for GM, highlighting the prominence of American car culture and how public and private interests were conflated. Now that Toyota has many factories, employees, suppliers and dealers in the U.S., it's worth recalling that mutual interests are at stake in rectifying these safety problems and putting Toyota back on track.
In Japan, the media has taken something of a minimalist approach to this story. Here on its home turf, Toyota seems to have been much more successful in managing the news than it has been in the U.S. and both the media and government have been more circumspect. On Friday, however, the outspoken transport minister, Seiji Maehara, pointedly said that Toyota had denied there is a problem and in his view the company was insufficiently sensitive to consumer complaints. Yet unlike his American counterparts, he has not authorized an inquiry into the safety defects.
Also on Friday, Mr. Toyoda finally held a press conference, two long weeks since the U.S. gas pedal safety recall was announced. At the conference, Mr. Toyoda tried to rescue the situation by apologizing for the inconvenience to customers around the world. The company ascribes the alleged brake problems to customers misunderstanding the feeling of the ABS braking system and says that only the 2009 model Prius is involved. Since January, the company has fixed the software so that the ABS responds more quickly.
This press conference was an unsuccessful attempt to reassure customers and blunt the impact of hearings scheduled for Wednesday in the U.S. Clearly, Toyota is trying to avoid a safety recall in Japan and is lobbying the government to permit a voluntary repair program that involves less stigma and cost. The company's insistence that there is no defect, just a software glitch, rings hollow and does little to regain trust and restore confidence. Prius is a critical model driving sales for Toyota and questions about its braking system and other safety defects linger.
Initially, the safety defects were portrayed as a made-in-America problem, but now the design defects have hit home, raising new questions about Toyota's famous quality control circles. Had this story not come out in the U.S. it is doubtful whether Toyota would have even considered a recall at home. But now, as international coverage of quality problems expand, the domestic media here have their backs covered and are likely to start asking some of the same questions and raising some of the same issues, if more politely.
Much is at stake for the company and the nation as Toyota tries to restore its reputation. There have been an alarming number of cases in recent years in which Japanese products have not met the high quality standards that the world and its own people expect of it. In some quarters this is seen as a barometer of a nation in decline, one that is adrift and slipping.
Japan can ill-afford complacency about the quality of its products and stagnant productivity especially given its demographic time-bomb. A population that is aging and declining at the same time is one that needs to do more with less. It needs to raise added value and per capita output to support a growing elderly population and its pension and medical care needs. And this means keeping up with competitors such as South Korea, which are ready to displace Japan wherever it falters. A resurgent Toyota is a good-news scenario that can mean a lot to the battered national psyche and help restore Japan's reputation as a manufacturing powerhouse where the attention to detail is a hallmark rather than a question mark. Here is betting that Toyota will turn this around, reinvigorating its fortunes and inspiring a nation badly in need of inspiration.
—Jeff Kingston is director of Asian Studies at Temple University Japan. His book "Contemporary Japan: History, Politics and Social Change" is due out in September.
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