Lessons from Toyota

The management and union of Japan’s leading carmaker Toyota sign their annual labor contract at the usual venue - the former office of Kiichiro Toyoda, who founded what is today’s Toyota Motor. When the automaker was on the verge of going bankrupt in 1950, the company decided to lay off 1,500 of its 8,000 employees. Unionists protested strongly, setting fire to piles of redundancy notices in front of the president’s office. A bitter and violent strike went on for 75 days. In the end, they agreed to accept the dismissals if Toyoda and other executives also resigned. Toyota has not had a strike for the following 53 years.

The Toyota Way became fashionable in Korea from 2003. Various books were published on the Toyota Production System, originally called “just-in-time production.” In that year, Toyota recorded an operating profit of 14.4 trillion won ($12.3 billion) on sales of 165 trillion won - a record for an Asian manufacturer. But the following year, the company’s labor union was the first to propose a freeze on their base salary. They claimed the company’s earnings mostly came from overseas operations and that the profit largely came from a weak yen. They said a salary freeze was a necessity while inflation was hovering below zero percent. The management, touched by the offer, rewarded the union by pushing back the retirement age to 60.

During the so-called “lost decades,” Japanese companies went two separate paths to stay afloat. Many decisively chose the American management style. About half of Japan’s listed firms offered employees compensation in stock options and performance-linked incentives. The best example was Nikko Cordial. Its chairman Masashi Kaneko, who had a MBA from Columbia University, said the best way to do business was to do what foreign investors want after the company recorded its best earnings in 2006.

After joining hands with Citigroup, the company shut down unprofitable businesses and slashed employees. He was referred to as “an American with a Japanese face.” The following year, Nikko Cordial, the nation’s third-largest brokerage house, faced delisting for massive accounting fraud. Japanese CEOs falling from grace often take their own lives, but Kaneko went on living in luxury with a woman 40 years younger than him.

Toyota was among those that kept to the Japanese traditional management style. Its employees felt safe in their jobs until retirement even during the lengthy recession. To share their pain, executives could not receive salaries more than three times what the average employees got. Hiroshi Okuda, then-chairman of Toyota, maintained that job security was an employer’s duty. He said employees should be regarded as investments, not costs. If they are dismissed during hard times, the company could be ruined. He called Carlos Ghosn, CEO of Renault-Nissan, the Angel of Death when the latter brutally cut staff by 2,000. The employees of Toyota repaid the company by improving production costs by 1 trillion won every year. They were said to live off research and development incentives rather than salaries.

The Yeouido Institute, a think tank of the ruling Saenuri Party, recently said in an unofficial 14-page report that Korea won’t be able to last for 10 years if it enters a Japanese-style stagnation. We may not like it, but it may be right. Unionized members of large companies still run to the streets to protest politics, which often ends in violent clashes. The third-generation heirs, who are ascending in the business groups their grandfathers or great grandfathers founded, are untested. They mostly have American MBA educations and don’t have any idea about the Korean Way. They would likely dutifully follow business management textbooks and cut staff when earnings are poor.

The years ahead could be long and hard. The economy is structurally slow-moving and faces unstable external conditions from a rate hike in the U.S. and slowdown in China. When the younger CEOs without experienced entrepreneurship meet with militant unions, we may see a flood of people on the streets from so-called “voluntary” retirements. Waves of layoffs have already swept over local shipyards in Geoje Island and Ulsan.

Korea’s labor and management should learn from the wise Toyota Way. U.S. managements prioritize market value. But in terms of market capitalization, Toyota is unrivalled at 250 trillion won, ahead of other auto giants like Volkswagen (90 trillion won), Mercedes-Benz (83 trillion won), Honda (68 trillion won), Ford (64 trillion won) and Hyundai-Kia (55 trillion won). We may just have to think about why.

JoongAng Ilbo, Dec. 22, Page 34

The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho