TOYOTA CITY – China is setting the bar for Toyota Motor Corp.’s next round of cost-cutting and efficiency improvements, says Kosuke Shiramizu, executive vice president-Manufacturing and Quality Management.

Interviewed at company headquarters here, the 62-year-old executive – charged with carrying on the legacy of Toyota Production System founder Taiichi Ohno – warns of the impending threat from China.

“The question facing us is how to compete with a country whose labor costs are currently one-twentieth or one-thirtieth those of Japan,” he says, adding that China will become a force to be reckoned with in less than five years. “If we look at home appliances and consumer electronics – including refrigerators, cameras and televisions – China is already the world’s largest producer. And its trade surplus with the U.S. now exceeds that of Japan.

“It is just a matter of time before China becomes the world’s largest producer of automobiles.”

To cope with the emergence of China as an economic superpower, Shiramizu says Toyota must cut manufacturing and tooling costs in half over the next three years. “Otherwise we won’t be able to compete,” he says.

Following are excerpts of the interview:

WardsAuto: What are the prospects for further cost cutting in manufacturing? What areas have the greatest potential?

Shiramizu: The main areas are raw materials and machining, especially in the powertrain area, including engines and transaxles. In those areas there is still a great deal of fat, thus many opportunities to cut costs.

WardsAuto: Specifically, how do you plan to cut costs?

Shiramizu: Our main focus is on reducing lead time, as cost is proportional to lead time. Over the past 10 years we have reduced vehicle lead time (excluding the powertrain) by three-fourths. During that same period we have made virtually no progress in shortening powertrain lead time, which is why I feel there is tremendous potential for savings, particularly in the components and machining areas.

WardsAuto: Do you also plan to make greater use of common components from one-generation model to the next or across model lines?

Shiramizu: We are doing that, too. But allow me to get back to the powertrain area. At present we make several thousand prototypes before beginning series production. If we can reduce these prototypes from several thousand to several hundred, cost would go down to one-tenth. Again, time and cost are related.

WardsAuto: What are your targets?

Shiramizu: We aim to cut lead time by 50% within the next three years and, in fact, believe some components can be cut by more than 50% through increased productivity.

WardsAuto: And that 50% target is based on what?

Shiramizu: Cost per vehicle.

WardsAuto: How does this approach differ from that of Kaneyoshi Kusunoki, another former boss of yours, who set annual productivity targets of 10%?

Shiramizu: In the past, when we referred to productivity, we usually meant productivity per worker. The word has now taken on a much broader meaning.

WardsAuto: And this new meaning involves raising equipment utilization in Toyota’s casting, forging and machining operations?

Shiramizu: More than that, we must develop completely new and revolutionary production machinery. Utilization rates already are (close to 100%).

WardsAuto: Is Toyota still the most efficient producer of cars in the world?

Shiramizu: We are one of the most efficient. Other car makers are making rapid progress, so it would be imprudent to say we’re the best.

WardsAuto: So whom do you benchmark – Honda Motor Co. Ltd.?

Shiramizu: No, China. The issue foremost on our minds is how to compete against China from our base in Japan. China is our big benchmark, and that’s why we must double productivity.

WardsAuto: So then, you are not benchmarking any of the established car makers – Nissan Motor Co. Ltd. and Honda in Japan or Volkswagen AG in Europe?

Shiramizu: That’s not exactly correct. Of course there are things we can learn from Nissan and Honda. But if we concentrate only on Nissan and Honda, Toyota will lose in the larger global arena when it must compete (head on) with China. The question facing us is how to compete with a country whose labor costs are currently one-twentieth or one-thirtieth those of Japan.

WardsAuto: And you can bring down costs without lowering quality levels and switching to cheaper components?

Shiramizu: That’s our expectation. As an example, if we could double machining speed – for instance, raising hourly output of forged parts to 1,500 or even 2,000, from current levels of 800 – that would contribute to reaching our productivity goals. Another approach would be to machine 10 engine-block prototypes – instead of 20 – and achieve the same result. This would contribute to 50% savings.

WardsAuto: But isn’t this move to smaller production “lots” the ultimate goal of the late-Taiichi Ohno?

Shiramizu: When there is a need, yes. Cutting machining time in half enables us to make smaller or larger lots depending on customer requirements (without productivity or output loss). In other words, productivity and cost are not “lot size” dependent.

WardsAuto: Switching subjects, will modularization play a key role in lowering costs?

Shiramizu: It’s hard to compare actual production costs between modular and non-modular production. But if the result of modularization is leaner, more efficient product development, there might be merit to combining (operations), particularly from the standpoint of lowering costs and reducing muda, or waste.

But in general, we at Toyota feel that specialists do a better job. They control quality processes more effectively and are more efficient. Using an example from Japanese food, manju, or sweet bean paste-filled dumplings, the question is do these taste better when made by two specialists (one making the sweet paste and the other the crust)? Or are they tastier when the whole process is under one roof (essentially one producer making both parts)? As I see it, if the paste isn’t sweet, the manju won’t get sweet by combining production.

Turning back to the auto sector, if each individual component isn’t up to standard, one cannot expect a module to be any better. I personally feel that modularization was conceived by Delphi (Corp.) and Visteon (Corp.) when the companies were spun off from General Motors (Corp.) and Ford (Motor Co.).

WardsAuto: Do you foresee increased quality problems by expanding usage of modules?

Shiramizu: That’s our basic feeling. Both Delphi and Visteon (two of the industry’s leading proponents of modularization) appear to be losing their competitiveness...if they ever had it to begin with.

WardsAuto: Will Toyota introduce a completely “digitized” assembly plant in the coming 10 years, one in which all operations from casting and stamping to welding and painting are controlled by computer?

Shiramizu: The industry has already made significant progress in (digitizing) body assembly. At Toyota, this is largely driven by the fact that we produce so many different models and each year probably launch more new models than any other auto maker.

That said, no one has really advanced into the powertrain field, including engines, transmissions and transaxles. Compared to the body side, we are far behind. This is why I am placing so much emphasis in this area and our engineers are frantically working to improve our capabilities.

Specifically, we are developing new, high-speed machining processes in conjunction with the deployment of our so-called “global body line” (first introduced in 1998 with launch of the Vitz and planned for 34 Toyota body assembly lines around the world by 2005).

Once that structure is in place, we will be able to build cars with roughly half the workers and half the machines. If we do not address this issue effectively, we won’t be able to compete with (low-cost) producers in countries like China. Again, the key word is half – or double, in the case of productivity.

WardsAuto: Turning to the final assembly area, Toyota reversed course 10 years ago with the opening of the Kyushu assembly plant, where more emphasis was placed on human workers rather than robots. Since then, have you had any change of heart?

Shiramizu: Practically speaking, we will never be able to fully automate the final assembly area. (Assuming that the production technology becomes available), who’s going to pay for it? Of course there are certain areas in which we have no choice, particularly where heavy lifting or repetitive work is involved and where (workers) tire easily. But for the most part, there is no economic benefit for replacing assembly workers with machines.

WardsAuto: Then, with the exception of powertrain and final assembly, will other processes such as casting, stamping, welding and painting be fully automated?

Shiramizu: As these are basically simple processes, yes.

WardsAuto: What new manufacturing technologies and processes do you envision in the coming five to 10 years?

Shiramizu: We may get some hints from the cellular telephone market. In Japan, all molds for phone bodies are currently made by (three-dimensional) CAD/CAM processes. The operation is completely automated, and in fact requires only one day to engineer and manufacture a high-precision mold. This compares to just two to 2 1/2 days in China (which is still more dependent on human labor than Japan).

For cars, we can now make the largest dies in three months, down from eight months three years ago. Our next challenge is two months, then 1 1/2 months and employing no molding specialists.

WardsAuto: Are stamping dies the biggest cost center? And how much can you shorten the die-making process?

Shiramizu: No question about it, they’re the biggest cost center. During a full model change, we estimate that 70% of investment is in dies and tooling, perhaps as much as 80% including (outsourced) components.

WardsAuto: With respect to your 1.5-month target, is that for all dies?

Shiramizu: That’s for large dies, those that take the most time. For (smaller dies for) smaller components, the time period would be much shorter. That’s the only way we will be able to beat the Chinese, to do it in a way that the Chinese can’t compete with us.

WardsAuto: To what extent can you reduce the number of components, thus dies, in five years?

Shiramizu: Not so much. We will realize the biggest savings by simplifying die construction and shape and by increasing production speed, including die machining speed. But the total number of dies won’t decrease significantly.

WardsAuto: Are there limits to raising quality?

Shiramizu: My personal view is no. If we look at J.D. Power's “initial quality” survey, for five consecutive years Toyota has gained the top spot while reducing defects annually. All the while our own internal requirements and evaluation targets have gotten stricter.

WardsAuto: But aren't these gains becoming so small that they’re now almost insignificant?

Shiramizu: We haven’t yet reached the limit (absolute zero). Moreover, there is the effect of expanded overseas production. Some (manufacturing) skills are not easily transferable, which is one reason why we want to continue with digitization of manufacturing processes.

Generally, when we start production outside Japan, at least in the early stages, quality levels are much lower than those in Japan. (If we judge quality by) die quality, specifically defects and in-process problems, we have reduced these to 0.03% at our Takaoka and Tsutsumi plants. In the U.S. and Thailand, this percentage goes up slightly to 0.5%, while in South Africa, it goes up by a factor of 10 (to 0.3%).

Meanwhile, in China (at Toyota's Tianjin plant), defects stood at 80 when we began production three years ago. Since then we have reduced that to around 8. It's still a difference of several orders of magnitude, but (improving).

WardsAuto: Are these quality problems one reason Toyota hasn't been able to do a simultaneous global launch?

Shiramizu: Yes.

WardsAuto: When do you expect to be able to do a simultaneous launch?

Shiramizu: It depends on what you mean by simultaneous. My personal opinion is that six months constitutes simultaneous. At present, it takes us a little over a year from the first launch to the last of a particular model.

WardsAuto: Let’s take the next Corolla. Will that be launched simultaneously, say, in Japan and California?

Shiramizu: We're putting a great deal of effort into digitalization. I would think that in three years, by the next model change, that we would be able to launch the model six months apart at an (unspecified) number of locations.

WardsAuto: What impact will expanded production of "hybrid" vehicles have on your manufacturing processes?

Shiramizu: It will have a major influence. Hybrid systems are completely different, thus quality assurance processes are radically different. Take the electric motor. These have been around for more than 100 years, though it is difficult to produce them at the same quality level (as a gasoline engine). And it is difficult to automate production.

WardsAuto: Then will the number of processes increase?

Shiramizu: Yes, by around 30%. This translates directly into cost.

WardsAuto: Analysts feel that Toyota has too much installed production capacity in Japan, currently estimated at 3.5 million units including your contract assemblers. Do you agree?

Shiramizu: Yes, but not for all operations. In body assembly, for instance, we currently have too much capacity - in stamping, welding and painting facilities. Then again, we have a shortage of facilities for things such as hybrid systems and components.