Partnering with Suppliers While Maintaining Internal Capability

Toyota is very careful when deciding what to outsource and what to do in house. Like other Japanese automakers, Toyota outsources a lot, about 70% of the components of the vehicle. But it still wants to maintain internal competency even in components it outsources. These days a management buzzword is “core competency.” Toyota has a clear image of its core competency, but seems to look at it quite broadly. This goes back to the creation of the company, when Toyota decided to go it alone instead of buying designs and parts of cars from established U.S. and European automakers.

As we discussed in How Toyota Became the World’s Best Manufacturer: The Story of the Toyoda Family and the Toyota Production System, one of the philosophical roots of Toyota is the concept of self-reliance. It states in the Toyota Way document: “We strive to decide our own fate. We act with self-reliance, trusting in our own abilities.” So handing off key capabilities to outside firms would contradict this philosophy. Toyota sells, engineers, and makes transportation vehicles. If Toyota outsourced 70% of the vehicle to suppliers that controlled technology for them and all its competitors, how could Toyota excel or distinguish itself? If a new technology is core to the vehicle, Toyota wants to be an expert and best in the world at mastering it. They want to learn with suppliers, but never transfer all the core knowledge and responsibility in any key area to suppliers.

In The Toyota Way in Action: New Century, New Fuel, New Design Process—Prius the Prius was discussed. One of the core components of the hybrid engine is the insulated gate bipolar transistor IGBT (a “semiconductor switching device [IGBT] boosts the voltage from the battery and converts the boosted DC power into AC power for driving the motor”).

Toyota engineers were not experts at semiconductors, but rather than outsource this critical component, Toyota developed it and built a brand-new plant to make it—all within the tight lead time of the Prius development. Toyota saw hybrid vehicles as the next step into the future. They wanted “self-reliance” in making that step. Once they had that internal expertise, they could selectively outsource. Senior managing directors insisted on making the transistor in-house because they saw it as a core capability for future hybrid vehicle design and manufacture. Toyota wants to know what is inside the “black box.” They also did not want to trust other companies to put the effort they knew they could apply into cost reduction.

In The Toyota Way in Action: New Century, New Fuel, New Design Process—Prius we mentioned how Toyota decided to work with Matsushita to outsource the battery technology, which is at the center of hybrids and future energy-efficient vehicles. Toyota sorely wanted to develop this capability in-house, but finally did not have the time. Rather than simply handing off responsibility to Matsushita, Toyota established a joint venture company—Panasonic EV Energy. This was not their first experience working with Matsushita. The Electric Vehicle Division of Toyota had already co-developed with Matsushita a nickel-metal hydride battery for an electrical version of the RAV4 sport utility vehicle, so they had a prior relationship and a track record of successfully working together.

Even with this past history of working together, the joint venture tested the company’s differing cultures. Yuichi Fujii, then General Manager of Toyota’s Electric Vehicle Division and Prius Battery Supervisor, at a point of frustration, said (as quoted in Itazaki, 1999):

I have a feeling that there is a difference between an auto maker and an electric appliance maker in the way they feel the sense of crisis about lead time. A Toyota engineer has it in his bones to be fully aware that preparing for production development should occur at a particular point in time. On the other hand, I feel that the Matsushita engineers are a little too relaxed.

There were also some concerns about Matsushita’s quality control discipline and if the level of quality required for this new, complex battery was too high for what Matsushita was used to. Fujii was reassured when he found a young Matsushita engineer one day looking pale. He learned he had been working until four in the morning to finish some battery tests. Yet he had come back in the next day to “make sure of just one thing” (Itazaki, 1999, p. 282). At that point Fujii realized that there was a “Matsushita style” that could work together with Toyota’s style. Ultimately, the two corporate cultures did complement each other and produced a world-class hybrid vehicle battery.

Even when Toyota chooses to outsource a key component, the company does not want to lose internal capability. Witness Toyota’s relationship with Denso. Formerly, Nippon Denso (Japan Electronics) was a division of Toyota. It spun off as a separate company in 1949 and grew into one of the largest global parts suppliers in the world. Denso essentially grew up with Toyota as a partner and is still partly owned by Toyota in the Japanese keiretsu (set of interlocking corporations). Denso was the electrical and electronic parts supplier of choice for Toyota and acted like it was still a division of Toyota. As a general rule, Toyota wants to have at least two suppliers for every component, but it broke this rule often in its relationship with Denso, making Denso its sole supplier. So in 1988, when Toyota opened an electronics plant in Hirose and made a major effort to recruit electrical engineers, it was a shock to the industry. Why this seeming reversal of policy?

First of all, Denso had become so big and powerful that there were some well-known strains in the relationship with Toyota, such as Denso getting a bit too cozy with Toyota’s competition, including Toyota’s archrival, Nissan. Second, and more importantly, Toyota recognized that electronics was becoming an ever-increasing part of a vehicle—including computerization and the trend toward electrical vehicles. About 30% of total vehicle content these days is electronics-related and electronics technologies change at a much faster rate than traditional automotive technologies. Toyota believed that it needed to truly master any core technology internally in order to manage its suppliers effectively (e.g., understand true costs) and to continue to learn as an organization to stay at the forefront of the technology. Toyota determined that electronics had become so central to the automotive business that only an intensive program of “learning by doing could infuse its entire organization with the skills and values essential to making electronics a genuine core competence.” Now it is estimated that about 30% of Toyota recruits are electrical engineers (Ahmadjian and Lincoln, 2001).