Monday, February 18, 2008

Toyota production down - no kidding.

Toyota Canada lowers prices on five models.

Let's talk about production, sales, volume - I don't like it (as a business model for a car manufacturer, that is).

Toyota evidently wants to topple GM as the planet's largest auto manufacturer. If they don't watch their step, they may find themselves there, with nowhere to go but down.

I'm not convinced a successful model for an auto manufacturer is volume. I think it ought to be profit. GM makes a lot of cars, and they are not happy. Porsche, not so many, and they're happy. Very happy.

It's harder to make $100 by making $1 on 100 cars than it is to make 50 cars with $2 of profit on each unit. Why? Because the administrative overhead associated with all that volume creates too many opportunities for quality and customer satisfaction breakdowns that threaten to collapse the entire house made of cards.

Building 100 cars means 100x all the raw materials and parts to get to the plant on time; 100 customers to find and then keep happy; 100 warranties to support; 100 recalls if some component is wrong; more inventory sitting on lots collecting dust and depreciating asset value if sales slump...all this hustle and hassle for a buck?

With less hustle to build 100 cars, a manufacturer has more time to think about design, technology, more time to test prototypes, more time to get it right. Rushing to market with a product "to get the sales" can backfire on brand equity. Consider the Ford Focus - best selling car, sure. But highest recalls. Ultimately, that equals erosion of trust in the Ford brand, and a customer lost is exponentially harder to regain. And then they tell two friends, and so on, and so on.

Another real problem with chasing volume is it requires the infrastructure to support, but the market can't support the infrastructure. To build those 100 units, you need the ports, the shipping and freight lanes, the manufacturing plant and workers. All this costs a lot of money. If this infrastructure pumps those 100 cars on a market whose total buying power is influenced by myriad factors beyond the control of the manufacturer (a government spending tax payers dollars on a phantom war or raising taxes to pay for increased politicians benefits or whatever), all of a sudden sales cannot meet forecasts. Statistics Canada apparently reported a 24.9% reduction production, and Toyota – which occupies so much of the market - would naturally be hit by that. So, they sold 80 of those cars, but the remaining 20 are sitting in "days supply" and demand at the dealer level is leveled off, so they shout back to the plant "stop building, we can meet the remaining demand with the inventory we currently have."

Forecasts called for 100 sales, they only sold 80 (which was supposed to be pretty good. 80 new members of the brand family, right?). But, forecasts were not met, "people aren't buying our brand as quickly as we thought", so that big plant, built to build 100 cars, now has to layoff a shift. Now the workers are unhappy, they aren't getting the amount of work they were promised. Morale goes down. Quality goes down on the 80 they still plan to build. The people who bought the next batch of 80 cars have more to complain about, and so goes the vicious cycle. And then the brokers downgrade the stock, shareholders start to complain, management flurries into action cutting costs willy nilly, further hampering the company's ability to perform efficiently...

Car technology and car quality continues to increase. As people buy better cars, it means they don't have to buy a new car as often. Where do car manufacturers expect to find new buyers? There are only so many people in any market who are going to buy a new car and, while that number's growth is relatively fixed (based on population growth, age demographics, people remaining in the driving pool longer due to increased life expectancy and health), the choice they have and the relative quality they expect are both increasing, which means competition is tighter.

If industry growth is tied directly to population growth, then all car companies should sit tight at their market share piece of the pie and focus on reducing costs - costs associated with manufacture, as well as costs associated with poor design, recalls, warranty support. The reduction of costs creates the profit margins to make selling worthwhile.

GM got to the top of the volume heap, and now lead in losses and are miserable. Meanwhile, Porsche is the most profitable car company on earth. Between these two extremes are a bunch of car companies trying to establish some model of balance between quality and volume, but now that Toyota has built the infrastructure for volume, any performance short of full production capacity will be considered failure. They made that bed for themselves, and now they must lie in it.

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