Unlearning What Toyota Taught Us

The auto industry owes Toyota a debt of gratitude.

The giant Japanese automaker taught the industry how to run its manufacturing operations to their utmost efficiency, it set the industry standard for product development and it showed that corporate strategy should be measured in decades, not quarters.

It took the rest of the auto industry nearly 30 years to accept, learn and finally adopt what Toyota was doing. But they did it and it served them well. They improved their productivity, quality and profitability.

That was then. Today, the world is changing. EV startups, notably Tesla, have ripped Toyota’s game plan to shreds. They’re moving at lightning speed, taking daring steps with new technology and breaking the old business models.

Wall Street loves what they’re doing. Startups that never made one vehicle have market capitalizations greater than automakers that make millions of them. Here’s why: Stock prices are all about future growth and the Street believes the startups will grow far faster than the establishment.

The numbers tell the story. Traditional automakers grow their top lines at less than 3% a year on average – barely above the rate of inflation. Tesla’s top line is growing at more than 60% a year. Rocket growth! The market believes the other startups will do the same and that’s why their stock is soaring.

But forget about stock prices for the moment. They’re just a distraction and besides, EV mania is a stock bubble that’s going to burst. Let’s look at what’s really important: How come the startups can move so fast? Or, to put it another way, why do the traditional automakers move so slowly?

One reason the old-time players move slowly is because they copied Toyota’s product development process. As Dr. Jeffery Liker explained in his book, The Toyota Product Development System, Toyota freezes the specifications of a vehicle a year before Job One.

And then it typically doesn’t make design changes until two years after the start of production. Under the Toyota doctrine, design changes introduce variability, and variability leads to quality problems. So, by freezing the specs, Toyota and its suppliers have the time to SPC their manufacturing ops to Six Sigma quality.

Not Tesla. It doesn’t freeze specs. Just the opposite. It makes design changes on the fly. And it mainly makes those changes – this is a key point – to take cost out of its cars.

Tesla’s electronic architecture is a prime example. The architecture in the Model X worked just fine, but two years after it came out the Model 3 debuted with an entirely new architecture.

Other automakers would never do this. Once they’re done designing a new architecture, they won’t touch it again for a decade. They “know” you can’t make changes like that.

But here’s the kicker: According to Caresoft Global’s benchmarking analysis, Tesla chopped out more than $300 in cost with that new electronic architecture. In an industry that fights over fractions of a penny, that’s a staggering cost reduction.

And then only two years later, along comes the Model Y. Just a Model 3 with a new top hat, right? Nope. It has yet a different architecture from the 3 that delivers far more capability.

By designing on the fly, Tesla is taking out cost and adding capability far faster than the establishment.

It’s key to Tesla’s profitability and its ability to dominate the EV segment. Another important point: Tesla validates those design changes using digital models, so they can be implemented right away, not years down the road.

The same goes for the structure of the car. Traditional automakers pretty much develop a new platform, give it a facelift four years after Job One, and retire it four years after that. Not Tesla. It’s making major changes to the structure of the Model 3 and Y by replacing dozens of stampings with large castings: one in the front and one in the rear. Tooling costs drop, assembly time drops and Elon Musk can sleep soundly knowing the establishment will never follow suit, because – in the old mindset – you can’t do that.

Critics point to Tesla’s quality problems and say traditional automakers should stick with the tried and true. Valid point. Tesla is lucky its fawning customers are quite forgiving of its quality problems. 

Just as the Toyota Production System (TPS) was the natural evolution from the original Ford System, we’re now seeing an evolution that goes beyond the TPS.

Some traditional automakers are already “woke” to the new reality. Volkswagen CEO Herbert Diess actually invited Musk to speak to his top management, hoping to light a fire under them to recognize the threat and move more quickly. Ford’s CEO Jim Farley essentially gave the same message to his top executives.

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But not everyone is on board. I keep running into industry people who don’t see a threat, or any need to change the way they do things. They believe the startups don’t know what they’re doing and are bound to fail. I think they’re in denial.

And it’s kind of funny to me, because all the arguments I hear in favor of clinging to the old way of doing things are exactly the same ones I heard decades ago, when it was the Toyota Production System that was disrupting the industry.

John McElroy (pictured above, left) is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.