[Business & Issues] The Fall of Hyundai's Rival Toyota... Why It Stumbled Despite Record Earnings

Loss of Trust Amid Fraud Certification and Power Abuse Controversies
Timely Supply and Production Methods Become Adverse Factors
Chairman's Autocratic Management Controversy...Delayed Entry into Electric Vehicles

[Image source=Reuters Yonhap News]

Last year, Toyota became the first Japanese company to surpass a market capitalization of 60 trillion yen (approximately 512 trillion won), thanks to record-breaking performance. However, the company has been unable to escape a downward trend in its stock price due to a series of negative issues, including quality certification fraud and allegations of power abuse against subcontractors. Critics argue that Toyota's unique management strategy, which was the driving force behind its rapid growth, has ironically become the cause of quality deterioration. Along with a decline in brand trust, there is also criticism of the autocratic management style of Akio Toyoda, the fourth-generation owner and chairman.

Japanese Government Continues Investigation into Certification Fraud and Power Abuse Allegations

[Image source=AP Yonhap News]

Japan's Ministry of Land, Infrastructure, Transport and Tourism plans to continue its investigation into Toyota's quality certification fraud. The production suspension period for three car models?Corolla Fielder, Corolla Axio, and Yaris Cross?where fraudulent certification was confirmed, will be extended. Toyota initially planned to halt production until the end of July, but since the ministry has not lifted the production suspension order, it is widely expected that production will not resume in August either.

On July 3rd last month, the ministry issued a production suspension order for the three models after discovering fraudulent activities during the certification evaluation process necessary for mass production of Toyota vehicles. A full investigation was conducted until the 5th to determine if there were additional fraudulent acts.

No further fraudulent activities were confirmed during the certification evaluation. However, the ministry has not lifted the production suspension order, and before the case is resolved, circumstances have emerged showing that a Toyota subsidiary abused its power over subcontractors, leading Japanese authorities to take a tough stance. On June 30th last month, Toyota Customizing & Development (TCD), a Toyota subsidiary, was investigated by the Japan Fair Trade Commission for violating subcontracting laws after it had entrusted approximately 650 sets of molds (metal casting molds) and inspection equipment to about 50 subcontractors nationwide free of charge.

The Yomiuri Shimbun reported, "According to the Fair Trade Commission's investigation, subcontractors feared losing business with Toyota and therefore did not request payment for mold management fees," adding, "Unfair equipment storage has been a long-standing practice, with some subcontractors forced to store equipment for nearly 30 years."

Stock Price Plummets... Just-In-Time Supply Becomes a Liability

Following a series of negative developments, Toyota's stock price, which surpassed 60 trillion yen in market capitalization for the first time among Japanese companies in early March, has been declining since April. The stock price, which was 2,635 yen per share at the beginning of the year, reached an all-time high above 3,800 yen in March but has since dropped more than 15%, showing a sluggish trend.

Toyota was initially expected to maintain its stock price growth after recording its highest-ever performance last year. According to Nikkei, Toyota's sales for the 2023 fiscal year (April 2023 to March 2024) reached 45.0953 trillion yen (approximately 396 trillion won), with an operating profit of 5.3529 trillion yen (approximately 47 trillion won). Global vehicle sales hit a record high of 11.09 million units.

However, the quality certification scandal and power abuse controversy have raised concerns that Toyota's so-called "Just-In-Time (JIT)" supply strategy and "Toyota Production System (TPS)," once considered strengths, are now leading to quality deterioration and brand image decline. The focus on maintaining production methods to maximize profitability has ironically resulted in poorer quality.

JIT and TPS are production methods that procure necessary materials according to the situation without large inventories of parts and produce only the amount ordered by customers. Since the 2000s, these have been Toyota's strategies for maximizing profitability. However, following the COVID-19 pandemic and conflicts in Ukraine and the Middle East, raw material prices soared and maritime shipping faced difficulties, making it hard to maintain these production methods. Despite this, Toyota insisted on meeting the target production periods on the production line, which is interpreted as a cause of increased product defect rates.

Controversy Over Autocratic Management by Fourth-Generation Owner Akio Toyoda... Delayed Entry into Electric Vehicles

[Image source=Yonhap News]

Some argue that Akio Toyoda's excessively autocratic management style has been the root cause of the crisis. Even when employees sense problems with the company's or management's operations, they remain silent, creating an atmosphere where quality issues that had been submerged are now surfacing everywhere.

The Japanese economic weekly magazine Japan Business Press (JBpress) pointed out, "Since Akio Toyoda took power, only the chairman's values have been absolute within Toyota, and those who do not worship them cannot survive," adding, "In the past, Toyota respected diversity and had strong bonds with subcontractors beyond simple hierarchical relationships, but all these strengths have disappeared."

Toyota shareholders have also directly expressed dissatisfaction with Akio Toyoda's leadership. At the Toyota annual general meeting held on June 18th last month, the approval rate for Akio Toyoda's reappointment as director was 71.93%, the lowest ever. Since 2019, the approval rate had been maintained at 95%, dropping to 84.57% last year and now falling to the low 70% range.

There are also criticisms that Akio Toyoda's autocracy has delayed Toyota's entry into the electric vehicle market. Despite recording its highest-ever performance by selling over 11 million vehicles last year, electric vehicle sales accounted for only 1% of that total, about 110,000 units. It is evaluated that technology development itself was delayed due to Akio Toyoda's negative view of electric vehicles. In January, at a business event, Akio Toyoda stated, "No matter how much the transition to electric vehicles progresses, I believe the market share will be around 30%," adding, "The remaining 70% will be hybrids, hydrogen electric vehicles, hydrogen engine vehicles, and engine vehicles will definitely remain."