A Strategic Transformation in Store for Toyota Motors?

Toyota in Need of an Overhaul?

Toyota is one of the largest and most efficient motor vehicle manufacturers. It has been the global leader in motor vehicle sales by volume for 8 of the past 14 years. And, under the 14-year tenure of Toyota Motors President Akio Toyoda, the auto manufacturer increased global sales by 40% and doubled its market capitalization. One would not be faulted to think that Toyota Motor's future as a global motor manufacturer was secure.

Efforts of Toyota President Akio Toyoda have achieved great success for Toyota Motor.
*(Photo by Mayumi Tsumita via Nikkei Asia)*

However, a debate has begun in Japan regarding the need for Toyota Motors to transform itself. President Toyoda's recent decision to pass the leadership baton to Koji Sato, currently head of Toyota’s Lexus division, has renewed debate in Japan's business circles about the need for Toyota to shed its focus on manufacturing to achieve growth in new areas. Even the Nihon Keizai Shinbun, Japan's largest and most authoritative business daily, piled on with an opinion piece headlined "Toyota needs to shed 'carmaker' mantle for next chapter of growth."

The call for change at Toyota Motors is not without reason. The unique competitive advantages that propelled Toyota's global success are no longer unique and, therefore, no longer advantages. Toyota's industry-disruptive Just-in-Time supply chain and production management system that radically reduced its per unit cost of production has been well studied and adopted by its competitors. And most of Toyota's competitors have begun to match its gold standard for quality.

Driving in a new direction? Toyota President Akio Toyoda driving and successor Koji Sato test-drive a Lexus electric vehicle.
*(Photo via Toyota YouTube channel and Nikkei Asia)*

The distinct failure of the major manufacturers to introduce disruptive technologies or processes has created a trend toward commoditization. Consumers find it increasingly difficult to distinguish between the manufacturers' products and make a purchase decision based on price. Manufacturers compete to have the lowest cost per car manufactured by jockeying for a larger market share.

But if a shift from “carmaker” in a global vehicle market that is increasingly commoditized is needed, one could not be faulted for wondering what Toyota must become to write that next chapter of growth.

How to Determine a New Chapter of Growth?

A strategic review to address Toyota Motors’ challenge is in order. During a brief internship at a boutique consulting company in Tokyo, I was first tasked with reading Bruce Henderson's "The Origin of Strategy." I learned that, stripped down to its essence, the strategy process identifies future opportunities of increasing value, the core capabilities required to capture that value, and a plan of action that expands the scale and scope of that advantage over competitors.

Rather than simply aiming to increase market share, Henderson argued that strategy and technological innovation should redraw boundaries between markets. Markets should be defined by the consumers' needs that are met by a product, not by the product itself. A simple goal of achieving market share blinds a company to those future opportunities of increasing value.

Until the mid-1990s, the photography market was divided into two segments – those companies that made the cameras that captured images and those companies that made the chemicals that made film and paper to preserve those images. Throughout the ensuing years, Eastman Kodak has likely maintained its dominance in the chemical-based image preservation market. The value of this market decreased as it shrank, and the market for digital image capture and preservation exploded. One could argue that the software arms in the mega digital conglomerates that provide the digital platforms now command a significant portion of the value chain of what has become the digital image capture, manipulation, transmission and storage industry.

Another why to express Henderson’s idea and provide a fuller expression of its significance, is the concept of “job to be done,” where consumers hire a company because they have a “job that needs to get done.” The company sees the value of the product it provides according to the extent it addresses the customers’ need to get a job done. In the case of Kodak, consumers wanted to preserve memories and they hired Kodak to get that job done. The simple goal of achieving market share, such as Eastman’s Kodak’s focus on the chemical-based photography market, can blind a company to disruptions in the market that radically transforms the boundaries of that market and ultimately blinds them to future opportunities of increasing value.

So where is that future opportunity of increasing value for a global motor vehicle company such as Toyota Motors? If new technologies will redraw the boundaries that define the motor vehicle industry over the longer term, what technologies will serve as the catalyst for that transformation?

Electric Vehicles (EVs) as a Future Opportunity of Increasing Value?

Some say that electric-powered motors are that opportunity. It will be the disruptive technology that transforms the competitive infrastructure of the vehicle manufacturing industry and the path that leads to a future opportunity of increasing value for Toyota Motors. The success of Tesla is spotlighted as the future of the vehicle manufacturers.

Tesla’s wholehearted commitment to EVs has shifted the competitive infrastructure of the vehicle manufacturing industry by lowering the cost structure and allowing the new entrants to enter. The cost of managing the supply chain, inventory, and assembly of components on a vehicle frame is much lower for an EV when compared to an internal combustion engine (ICE) powered vehicle.

For instance, the components in the drivetrain of an ICE powered vehicle contains more than 2,000 moving parts typically, whereas the drivetrain in an EV contains around 20. Fewer moving components reduces risk of failure and lowers the costs of the managing supply chain and in maintaining the vehicle after sale. The thousands of mechanical engineers tasked with mitigating vibration, noise, and heat in the propulsion of the ICE powered vehicle are no longer needed.

It will be interesting to see how global incumbent vehicle manufactures manage this transition, which will require massive restructuring of supplier relationships, make-up of engineering personnel, and shift to develop and manage a new set of core technologies.

Tesla CEO Elon Musk at the opening of a factory in Gruenheide, Germany.
*(Photo via ddp images / Sipa USA via A)*

The relatively lower cost structure for the manufacturer of EV’s allows new entrants to compete on that lower cost structure unencumbered by legacy investments in ICE-powered vehicle manufacturing. Without the high upfront costs to buildout an ICE-based manufacturing infrastructure as a barrier-to-entry, the EV-powered vehicle segment has seen a rush of new entrants. Early entrants, such as Tesla, focused on the higher-end segment of the vehicle market and the newer entrants, such as BYD, are targeting the middle and lower segments of the market.

But I would submit that EVs are simply an innovation of how the vehicle is powered, not the disruptive technology that transforms the vehicle industry and creates long-term future opportunities of increasing value. Indeed, as EVs take more share of the motor vehicle market, EV-based technologies, components, and products will become commoditized as competitors reduce prices to grab market share until the EV market reaches maturity. As that happens, the competitive advantage that will determine the winners and losers will once again be the lowest cost per unit produced and that will likely be one of the key factors that determines the winners and losers among the EV manufacturers.

I will offer my view on where significant valuation creation in the vehicle industry is likely to develop, how it might redraw the boundaries of the vehicle manufacturing sector, and where might be the future opportunities of increasing value.

Rather than technological innovations on how a vehicle is powered (hardware), I believe it will be the technologies that transform the control of the operation of the vehicle (software) that revolutionizes the vehicle industry and creates a new path for a future opportunity of increasing value.

Autonomous Vehicles (AVs) as the Future Opportunity of Increasing Value

Rather than EVs, I believe AV technology and its commercialization will be the disruptive force that could redefine the key elements of the automobile industry.

The immediate benefits of wide-spread use of AVs are straightforward. AVs promise to increase road safety, provide mobility options to those who are unable to drive, reduce traffic congestion, among other benefits. But the implications are deeper than these immediate benefits.

AVs will become a cornerstone of a software-based interconnected transportation ecosystem that relies on constant communication with other vehicles and with the communities in which it traverses. This will require a nationwide network of sensors and a cloud data storage system of a massive scale. The value of an AV-centric transportation system will increasingly be based in the software and the digital networks that operate the AV. The physical vehicle itself is likely to become a piece of hardware in that software-based transportation ecosystem.

If the future opportunity of increasing value is found in the interconnected software-based transportation system, how can these manufacturers capture that value?

Eventually, widespread adoption of AVs could also transform the brand proposition in the mind of the consumer, possibly creating brand extension opportunities for firms likely to win a competitive presence in the software-based transportation eco-system. Mega digital conglomerates such as Google and Microsoft with the core capabilities to pioneer the establishment of such an eco-system could extend their brand to the vehicle itself by simply contracting with an OEM to manufacture AVs under their brand. In this case, the hardware is produced by a low-cost OEM and Google provides the operating system for the vehicle, the connectivity to the transportation eco-system, and the software and storage required to maintain that ecosystem.

This will also create unique competitive challenges for Toyota Motors and the other global vehicle manufacturers. Should they be satisfied with becoming the OEM providing the hardware? Can they build a competitive presence in the AV-based transportation eco-system beyond supplying the hardware of the vehicles?

Obviously, such an eco-system is many years away. Enabling technologies have yet to be developed and commercialized that would enable AVs. The infrastructure of onboard and land-based sensors has yet to be started in any meaningful way. Regulators around the world have yet to come to grips with the road safety implications and the need for standards to ensure a seamless AV transportation system. It also remains unclear whether consumers will adopt AVs.

A Transition from “Toyota Motors” to “Toyota Mobility”

But what is likely to be an inevitable march towards the emergence of commercialized AV transportation eco-system, Toyota Motors will need to decide how best to capture value in the market. From its beginnings as a manufacturer of looms, to motor vehicles, to aerospace, Toyota Motors has excelled in entering new businesses. But all of these have been manufacturing based. The official name of “Toyota Motors” gives a nod to Toyota Motor’s manufacturing heritage. However, Toyota Motors has made some investments in AV technology and established Woven Planet, a subsidiary with a mandate to develop commercial opportunities in this market. The manufacture of motors will be a core element of Toyota’s business for many years to come. But building a competitive presence in an AV-centric transportation eco-system will increasingly turn Toyota’s attention to broader needs of mobility in that infrastructure. Perhaps, some day we might find that Toyota has changed its official name from Toyota Motors” to “Toyota Mobility.”

References

Based on International Organization of Motor Vehicle Manufacturers figures. https://www.oica.net
https://asia.nikkei.com/Spotlight/Comment/Toyota-needs-to-shed-carmaker-mantle-for-next-chapter-of-growth
https://mse238blog.stanford.edu/2017/08/tomo12/cars-will-become-commodity-do-we-even-need-to-own-a-car-in-the-future/
https://hbr.org/1989/11/the-origin-of-strategy
https://www.forbes.com/sites/sap/2018/09/06/seven-reasons-why-the-internal-combustion-engine-is-a-dead-man-walking-updated/?sh=1414f993603f