November 01, 2011

Has Toyota had a 'change of heart'?

On 7th Oct Bloomberg News bulletin posted an interesting article: 'Toyota Said to Ask Parts-Makers to Cut Prices or Be Replaced'. It is somewhat interesting because Toyota has been long held as the role model for close partnership with its suppliers. The partnership model with the first tier suppliers has been regarded as the critical factor for its success.  Not surprisingly, I was immediately asked by a number of executives in the automotive industry to share my view on this seemingly contentious phenomenon. Here is my answer and I would welcome any discussion and debate.

First, I believe it was a "desperate measure" for the "desperate time", for it was the first time I saw Toyota make such announcement that is seemingly controversial to its long beheld principles. The perpetual economic stagnation has been exacerbated by the rising exchange value of the Yen. The traditionally export-orientated industries of automakers and beyond have thus been truly bog mired in adversarial or even hostile environment. Something different has to be unleashed.

Second, I believe that it should not be read as an all-out "sea-change" in its relationship strategy, nor a "change-of-heart". The parts suppliers that will take the blunt of this strategy are likely to be the non-critical components prefecturers, not the sub-system manufacturers. The switching cost would be too high for Toyota to forsake its long-term sub-system producers. Toyota cannot afford it. Nevertheless, this announcement is still beneficial because "it kills the chicken in front of the monkeys"!

Third, I believe that any theories or business models, no matter how brilliant they may sound (just like the partnership model), will have to give way to the overriding "pragmatism" principle, which is only measured in terms of market success. A dogma is only worthy of beholding when and only when it delivers the practical success. It is perhaps the time now when the partnership modelf stood another real test.


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