The way back for Toyota

Japanese automaker’s recalls don’t invalidate its vaunted production system

By Jeffrey K. Liker

Toyota, the icon of operational excellence and pristine quality, recalled more than 8 million vehicles in the six months before mid-February, calling into question everything we thought we knew about the Toyota way. Many industrial engineers who adopted lean methods using Toyota as a model are wondering if that model remains valid. My conclusion: The news of Toyota’s demise is premature, and most of the assumptions about plummeting quality and safety of Toyota automobiles have been exaggerated and sensationalized by the U.S. media and Congress. On the other hand, Toyota now has work to do to rebuild customer trust and needs to become an even better model of customer responsiveness.

My book, The Toyota Way, became an international best-seller with sales of more than 600,000 copies in 27 languages. As I travel the world speaking and consulting, I sign books that are dog-eared and filled with Post-It notes. People explain that their company adopted Toyota’s way as a blueprint for reforming the entire organization top to bottom. They wish to become a “lean learning enterprise” and the Toyota of their industry. As a result of all the adverse publicity about Toyota recalls, they wonder if they made a good choice for a corporate benchmark.

In an uncertain world, any complex multinational company making a complex mechatronic system like a modern automobile will have problems. The Toyota way always has been and always will be an ideal vision for Toyota. In fact, Toyota teaches its own version of problem solving, called Toyota business practices, and an early step in defining the problem is to identify the “ideal condition.” Without a vision of “perfection,” in the words of James P. Womack and Daniel T. Jones of the Lean Enterprise Institute, there is no true north direction, and the targets likely are set too low.

What does this have to do with product recalls and Toyota’s supposed quality problems? It is rare in history that a company’s image has gone from such towering heights as the world’s best in operational excellence to questioning every aspect of the company’s integrity and capability within weeks. I will take a scientific approach to analyzing what happened, what we know and what we do not know.

What we know happened

In the year 2000, Toyota set a goal to achieve 15 percent market share, which would make it the biggest auto company in the world. The media reports suggest that focus on growth led the company into a downward spiral in sales, profitability, quality and, finally, the crisis of 2010. Yet all the data I can find, other than specific anecdotes, shows that by 2010 Toyota was an incredibly financially healthy company with an exceptional quality and safety record.

In 2007 (fiscal year 2008), Toyota made record global profits, earning $19.9 billion. This was particularly impressive since it was the 50th consecutive year of profits for the company, it was a down year for auto industry sales (worst of the decade to date), and American rivals were all losing money. For example, in the five-year period from 2004 to 2008, General Motors lost a record $81 billion, while Toyota earned more than $53.6 billion. Ford was teetering on the brink of bankruptcy, while GM and Chrysler eventually went bankrupt. In fiscal year 2009, during the global financial crisis, Toyota reported major reductions in sales and its first-ever loss, $4.5 billion. This seemed to start the media reports that Toyota was declining in excellence.

Some have interpreted the large number of units recalled as evidence that the company lost its way on quality. Yet Toyota repeatedly won quality award after quality award in recent years. For example, based on 2009 North American data, Toyota won 10 of the coveted JD Power initial quality awards for the best vehicles in a segment – more than any other automaker. The Toyota Motor Corp. assembly plant in Higashi-Fuji, Japan, received the Platinum Plant Quality Award for producing vehicles yielding the fewest defects and malfunctions, averaging just 29 problems per 100, while the industry average in 2009 was 108 problems per 100.

If we look at Consumer Reports, in 2009 three of the top five most reliable brands were Toyota (Toyota, Scion, Lexus). The Prius was the most satisfying overall car. Lexus was the overall best in reliability (for the eighth time in 20 years) and the Sienna minivan was the top-rated nonluxury car. Now reliability and lack of quality defects are not the same as safety, and the large number of vehicles recalled implies to many a serious problem in safety. If we look at all the recalls, what do we see?

Carpets. Carpets that are not clipped down, particularly all-weather rubber carpets sold by dealers, can slide around and jam the gas pedal. This can be a problem in every car, which is why they have clips on the driver’s side to hold the carpet in place. There was one spectacular car crash killing four people involving a Lexus that a dealer gave out as a loaner car. The dealer threw in an all-weather carpet, one designed for a much larger vehicle, without fastening it down, and the floor mats entrapped the pedals. The car caught fire after crashing and the upper right corner of the rubber mat was fused to the gas pedal, providing evidence that this was the cause of the acceleration. Toyota engineers figured out that if they cut down the size of the pedals in some models there was enough space for two carpets piled one on top of the other, as Americans sometimes do with the all-weather mats, leading to 5.4 million vehicles recalled in the U.S.

Sticky pedals. Apparently this is caused by an interaction between the composite material of one part of the pedal, as made in one plant by supplier CTS (they say Toyota designed the pedal), and humidity and wear of the part over time (recall of 2.3 million vehicles; 1.7 million of these also had the carpet recall). Toyota only verified less than 15 incidents of sticky pedals in America and could not verify any resulting accidents. Not only did Toyota recall all cars globally with pedals supplied by CTS, but also (with pressure from the National Highway Transportation and Safety Administration, or NHTSA) shut down all sales and production of the affected vehicles for one week, which is unprecedented.

2010 Prius braking. A software glitch on the 2010 Prius introduced during an upgrade to the software can cause the anti-lock braking system to feel inconsistent as the control system senses and reacts to slippage during slow and steady application on rough or slick road surfaces. Toyota claimed the conventional braking system still would stop the car, and there were no confirmed accidents from this problem. Toyota fixed the software for new cars in production months earlier and made no public announcement. Toyota’s defense is that it was a “drivability” issue rather than a safety issue, and thus a recall was not necessary. In fact, Ford had a similar problem on the Fusion Hybrid around the same time and was able to get by quietly with a technical service bulletin.

Other issues have surfaced, such as a problem in the front propeller shaft on recent Tacoma models, a Dana part that is also in the trucks of Ford and Nissan. This led to Toyota recalling another 8,000 vehicles. Interestingly, Ford and Nissan chose not to recall vehicles with the same propeller shaft, saying it was not a safety concern.

Here are some additional facts:

• There were almost 500 auto recalls in the United States in 2009 – that’s nearly 10 recalls per week.
• There were already more than 30 non-Toyota recalls by March 1.
• Since 2001, Toyota had among the fewest NHTSA complaints per vehicle sold in the United States. Only Mercedes-Benz and Porsche ranked higher.
• Over the last decade, NHTSA has logged approximately 24,000 unintended acceleration complaints, according to media reports – only a fraction related to Toyota vehicles. If we use as a measure of unintended acceleration vehicles per 100,000 sold, Suzuki had the highest rate in 2006 and 2007 and Volkwagen had the most complaints in 2008 and 2009.

The problem with using recalls as an indicator of vehicle safety is that recalls are rare events, the result of a small number of specific technical problems. Often, the cause of the problem occurred years before the recall event (for example, a part designed five years earlier), and even verifying a small number of vehicles with the problem can lead to recalling millions of cars that may not have the problem.

Toyota repeatedly has claimed that the number of incidents behind each recall is small, and there is little to show that engineering defects led to actual accidents. Some evidence backs this position. For example, Leonard Evans, who worked for General Motors for 30 years, wrote a book called Traffic Safety and the Driver. He claims that characteristics of the vehicle are the sole cause of an accident only 2 percent of the time, and drivers are at least partly to blame more than 90 percent of the time. From 2000 to 2008 about 22,000 people were killed in a Toyota or Lexus vehicle, and he claims none of these were related to a vehicle defect. He acknowledges that an additional 19 deaths, about two per year, may have been related to accelerator problems, although even in this case he claims that the brake pedal should have been able to stop the car. In fact, repeated tests over the years have proved that if the throttle is wide open and the brakes are applied, the brakes will always win. Car and Driver magazine recently proved this on Toyota vehicles.

Do the data support the demise of Toyota’s famed obsession with quality and safety? Certainly, any objective look at the data would say that the company appears to be one of the best automakers in quality and safety, continuing through 2010. Recalls are an imperfect measure because a small number of problems can lead to huge numbers of vehicles recalled, and the definition of a recall, as opposed to a technical service bulletin or ordinary warranty repair work, is determined by the automaker’s administrative response. Toyota’s response was very much influenced by pressure from the U.S. government, which by 2010 had risen to an all-time high.

Recalls are spectacular events that make it appear to the public that millions of vehicles have problems and encourage a logical fallacy referred to as “hasty generalization,” an inductive generalization based on insufficient evidence. Generalizations by journalists, and even close watchers of Toyota, argued such things as the Toyota production system had failed (even though none of the recalls were related to production defects), Toyota had lost its way due to focus on growth and profitability, Toyota’s problem was excessive part standardization, and Toyota was failing to develop and monitor its suppliers closely. The remarkably small number of actual problems that led to the recall (e.g., less than five problems with causes dating back five or more years) would not justify any of these macro-level generalizations.

Is there really a problem?

I am not arguing that Toyota is perfect and doesn’t have problems. Toyota autos, as all autos, have unforeseen problems, which may ultimately lead to recalls. Moreover, there are plenty of convincing reports that Toyota was slow to respond to the sudden acceleration complaints and got behind the curve years before the 2010 crisis.

The much broader issue that prompted the intensive investigation into floor mats and pedals is sudden acceleration. A detailed study conducted by Sean Kane, whose Safety Research & Strategies Institute is funded by trial lawyers suing Toyota, claims more than 2,000 cases of unintended accelerations from 2000 to 2009. He claims acceleration-related accidents and deaths increased soon after Toyota started building electronic drive-by-wire systems, and he has detailed accounts of drivers who claim their cars suddenly accelerated without a sticky pedal or carpet entrapment.

The smoking gun beneath all of this is a theory that electromagnetic interference (EMI) causes the drive-by-wire system to accelerate the vehicle even when the accelerator is not depressed. These claims have been made in lawsuits against other automakers but never have been proven. As mentioned, until 2010 Ford had more of these complaints than Toyota; then all the publicity caused claims against Toyota to skyrocket. Toyota responded that it never has been able to replicate the problem despite extensive testing, including tests near power plants, where EMI is unusually high.

Toyota’s drive-by-wire system was designed to counter the possibility of EMI or other failure modes. They put in two different sensors in the pedals and two different computer chips in the engine control unit and two different sensors to detect how much the throttle is opened. Crosschecks test for any inconsistency in the signal or the interpretation by the computer chips, and any inconsistency causes the throttle to shut off the gas and a fault code triggers a warning light.

Why would Toyota be singled out for unintended acceleration by the press and ultimately by the U.S. Congress? The CEO of Edmunds.com wrote a letter to U.S. Secretary of Transportation Ray LaHood explaining that Toyota does not have significantly more reports of unintended acceleration than other automakers. The letter recommended that an investigation of this issue should focus on all automakers since EMI effects, if real, would affect all cars.

A detailed account of the U.S. House hearings by Ed Wallace, a journalist who specializes in automotive issues, provides a chilling description of how elected officials on the House Energy and Commerce Committee set Toyota president Akio Toyoda up with biased witnesses, most of them paid by lawyers who have mounted a class action lawsuit. For example, Wallace notes inconsistencies in the testimony of a woman who claimed her 2007 Lexus ES 350 suddenly accelerated to more than 100 miles an hour and then as suddenly slowed down for no apparent reason. She also claimed the brakes did nothing, shifting the car into neutral and reverse did nothing, and the emergency brake did not work. The emergency brake in that vehicle is not electronic, but a traditional cable system, and it mysteriously failed at the same time. Afterward, her local Lexus dealer examined her car and could find nothing wrong with it.

NHTSA sent an employee down to Tennessee to investigate her complaint. The conclusion was that she had two sets of floor mats in her car – a rubber all-weather floor mat placed on top of the standard factory issue – and that situation likely created her problem. The car was sold with 3,000 miles on it and the driver who bought the car had no problems despite driving another 27,000 miles. None of this was brought up in the congressional investigation.

Is the Toyota production system still valid?

I believe the evidence I have laid out raises serious doubts about the assertion that Toyota no longer builds exceptionally safe and reliable automobiles. It certainly raises questions about whether the specific problems that led to the recalls – the way customers use aftermarket carpets, supplier parts, a single software glitch – can be generalized to massive problems in engineering and manufacturing.

In March, some key evidence surfaced suggesting at least some unintended acceleration claims were invalid. David Gilbert, an associate professor at Southern Illinois University, had claimed before Congress that he was able to cause unintended acceleration in Toyota vehicles with a simple circuit that did not affect non-Toyota vehicles. But Toyota’s outside experts easily and publicly demonstrated that Gilbert’s simulation triggered unintended acceleration in GM, Ford, Chrysler, Mercedes, BMW and Honda vehicles as well – without generating a fault code. Moreover, it was an outside circuit spliced in that would never occur in real world driving.

Ironically, the same day of that demonstration a Prius driver reported a case of unintended acceleration on a highway outside San Diego. A subsequent investigation by NHTSA with Toyota engineers showed that the driver had pressed on the accelerator and lightly on the brakes more than 250 times in his “uncontrollable” ride, which overheated and destroyed the brakes. Another “runaway Prius” in New York City was found to be a result of driver error when the driver mistakenly pushed down the accelerator pedal, thinking it was the brake.

Toyota has been adamant that its electronics system has never failed in any test it, or NHTSA, has conducted. Yet, the company has apologized continually and agreed that it had not been as responsive to customer concerns as it should be. In retrospect, Toyota and its president have concluded that these delays in responsiveness are a serious problem and reflect, in Toyoda’s words, excessive “hubris and arrogance” that developed in the company culture. Toyoda has vowed personally to lead a global quality control task force and study every part of Toyota’s quality and safety process, with the help of outside quality and safety experts. He also initiated actions to make the North American branch of Toyota more self-reliant, so recall problems can be addressed locally without waiting for approval from Japan.

I would argue that the approach Toyoda is taking follows the principles of the Toyota way exceptionally well, and that is what will help Toyota get past the media feeding frenzy and all of the pressures from the U.S. government. The principles are to think long-term, put the customer first, openly surface problems and carefully solve the problems at the root cause. Toyoda took responsibility for personally leading the problem-solving process to get to the real root causes and take corrective actions. Few presidents of major corporations personally would take such an active role.

What does this all mean for industrial engineers? Any industrial engineer who has been helping organizations improve themselves through lean methods should keep doing what they are doing. The methods have proven to be powerful in many types of processes all over the world, and by now the evidence is overwhelming with or without Toyota as a model. Industrial engineers who frequently refer to Toyota as a positive example of lean principles in action may have to answer questions by people who do not know all the facts. As always, I would expect industrial engineers to be above emotional arguments and to learn the facts through careful study.

So why did the world’s biggest and, arguably, best automaker’s reputation plummet overnight? Is it mass hysteria? Is it the power of the press? Is it political motivation by a government that finds itself the owner of Toyota competitors? Is it communication weaknesses within Toyota, a company that has globalized yet retained significant control from Japan? I think you can make a convincing argument that each was a factor leading to the crisis.

More important now for Toyota is how the company responds. They certainly know all of the facts I have recounted here and many more. It would be too easy for Toyota to dismiss all of the claims of serious problems as media hype and politically motivated. That would be easy, but not the Toyota way. The Toyota way is to confront problems openly, find the root cause, solve the problems and learn. In the long-term, if Toyoda is successful in leading Toyota to another level of customer responsiveness, we may have an even better model for excellence in the future.

Jeffrey K. Liker is a professor of industrial and operations engineering in the College of Engineering at the University of Michigan. He has written five books about Toyota, including The Toyota Way and Toyota Culture: The Heart and Soul of the Toyota Way. He has a Ph.D. in sociology from the University of Massachusetts and a B.S. in industrial engineering from Northeastern University. His articles and books have won eight Shingo Prizes for Research Excellence.