Hedge Funds

The Lesson for Corporate Japan in Toyota's Mess

Martin Fackler|The New York Times

When Toyota’s president, Akio Toyoda, apologized for the recalls that have marred Toyota’s reputation, he talked not just about his company’s fate, but also his nation’s.

“I hope to return Toyota to profit and contribute to the revitalization of Japan,” he said.

Once a leading symbol of Japan’s rise to global economic might, Toyota has become one of the most visible signs of its decline. And even before the recalls, Japan’s rivals from South Korea and China had started overtaking Japan in key industries from semiconductors to flat-panel televisions. And Toyota looks set to issue another damaging recall, this time of its popular Prius hybrid.

“At this rate, Japan will sink into the sea,” said Masatomo Tanaka, a professor at the Institute of Technologists, a university that specializes in training engineers. “If Toyota is not healthy, then Japan is not healthy.”

Many economists and business executives say they hope that Toyota’s trauma will be the wake-up call that Japan needs to understand that its reliance on manufacturing and industrial exports, which served the country so well after World War II, is no longer wise.

Yukio Noguchi, a professor of finance at Waseda University in Tokyo, said Japan must finally evolve into a postindustrial, service-based economy — a painful transition that the United States and Great Britain underwent in the 1980s. Others said Japan should focus exclusively on high-end, high-profit products, like robots and fuel cells, rather than mass-produced goods subject to quality-control issues.

“Even Toyota can fail. Even Lexus, even Prius,” said Mr. Noguchi. “Our world-leading manufacturing industry may no longer be world-leading. This has a strong impact on the national psyche.”

Toyota looms so large over Japan that this nation can seem like a one-company town. Toyota is Japan’s largest company by sales ($230 billion last fiscal year), and in recent years has been its most profitable company and its biggest taxpayer.

Toyota has also been Japan’s largest purchaser of advertising, making the major media here afraid to criticize it. In late 2008, the former president of Toyota, Hiroshi Okuda, even threatened to stop buying ad time from what he called overly critical media outlets.

Toyota long enjoyed near hallowed status here as the greatest practitioner of “monozukuri,” a centuries-old ideal of perfection in craftsmanship, seen in pottery and ancient sword-making.

This pride of craftsmanship turned loose on the factory floor is widely seen here as a secret to Japan’s postwar “miracle” and as a cultural advantage that helped Japanese engineers surpass Detroit’s.

The possible withering of that ideal has battered Toyota’s self-image, leading to widespread angst in the media and worries about the already steep economic slowdown.

More broadly, it may speed a transition that was already under way, albeit in slow motion, since Japan’s long economic stagnation began in the early 1990s. According to the Cabinet Office, manufacturing accounted for 22 percent of Japan’s entire economic output in 2008, down from 28 percent in 1990.

The transition was slowed in the 2000s when a weak yen fueled an export boom that benefited Toyota and gave Japan its longest stretch of economic growth since World War II. However, the vulnerability of that export dependence was exposed in the recent financial downturn. When consumers in the United States and elsewhere cut back on purchases of autos and flat-panel TVs, Japan became the hardest-hit major economy, even though it was not touched by the real estate market and securitization woes.

However, manufacturing’s share of the economy still remains far above the level of 12 percent in the United States. And few economists or journalists here advocate shifting abruptly. Rather, the feeling is that Japan needs to find a new balance by replacing its smokestack industries with more information technology and software, industries in which it is weak.

At the same time, Japan can still play to its considerable strength as a center of quality industrial goods, keeping higher-end boutique producers in sophisticated industries like machine tools, alternative-energy technologies and robotics, areas in which Japan is strong. Its companies have also prospered from the new boom of factory construction in places like South Korea and China because much of the advanced machinery used on the production lines is still made in Japan.

Some economists said there is a danger here as well, and one that is seen in Toyota’s travails. They said Japanese companies risk becoming too obsessed with sophisticated engineering, to the point that they overlook points that appeal to consumers, like ease of use and design. This is what happened to Sony, they say, whose digital Walkman is better engineered than Apple’s iPod, but far less popular.

“Toyota became so proud of its manufacturing systems, and its concepts like ‘kaizen’ and ‘just in time,’ but this became arrogance. It forgot about the most important thing: its customers,” said Ryozo Yoshikawa, a professor of manufacturing management at the University of Tokyo.

This shift will be hard for Japan, where many policy makers and pundits still seem to cling to the old model of heavy industries and consumer goods. If Japan can pull it off, it could serve as a model for other export-dependent Asian nations, which will also eventually face the same choice.

If Japan cannot pull the shift off, economists warned, the one-time powerhouse will only continue to falter under competition from lower-wage countries.

“I hope that Toyota will change our way of looking at our economy,” Mr. Noguchi said. “We cannot survive if we continue to stick to the old type of industries.”

Related Tags