How India changed Toyota

TOYOTA KIRLOSKAR MOTOR thrives on bad news. The tsunami in Japan that halted suppliers’ operations, fuel price hikes, the global economic downturn leading to spending cuts, fluctuating currency—Hiroshi Nakagawa, CEO of Toyota Kirloskar, India’s fourth-largest passenger vehicle maker, looks back on all these events unperturbed. His company sailed through these problems actually gaining market share. It grew by 90% in FY12 when the industry struggled to grow 5%. Jeffrey Liker, a long-time Toyota tracker and author of The Toyota Way (published in 2004, four years before Toyota became the world’s largest automaker), says that historically, the company has done best in bad times. “In fact, the most dangerous times for Toyota are when the economy appears to be stable because they are afraid they will be lulled into complacency.”

Which is, perhaps, one reason why India is proving such a success for the carmaker. From 2011, there’s been an overall sense of gloom in the market; the economic climate hasn’t been particularly good, fuel prices have risen as has inflation, there’s cut-throat competition in the car market—and Toyota’s performance has been stellar. Between April 2011 and March 2012, Toyota sold 1,60,203 vehicles, compared to 84,087 vehicles in the April 2010-March 2011 period. The net addition of a little over 76,000 vehicles was two-thirds of what the entire industry added that year. The CEO of a leading carmaker in India says Toyota has boosted sales through commercial buyers or fleet operators. Toyota Kirloskar, however, claims commercial buyers account for only 13% of overall sales in 2011 and 2012.

Conventional wisdom in the auto industry is to focus on small and compact cars, which account for 60% of the market according to industry body, the Society of Indian Automobile Manufacturers. That’s because India is known to be a price conscious market. Nakagawa admits that “India is the toughest market [in the world] because customers are price conscious and ask for high quality.” That’s the big reason why companies such as Maruti and Hyundai are growing their compact car business.

Rather than taking a giant like Maruti head-on, Toyota decided to take the route charted by the likes of Volkswagen and Ford. As early as 1998, Vikram Kirloskar, vice chairman of Toyota Kirloskar, warned Toyota executives about warring against incumbent Maruti Suzuki. Nakagawa too says, “Maruti is a giant in India.” So, rather than growing up, as Maruti Suzuki did (starting with the hugely popular small car, the 800), Toyota Kirloskar has descended from large and expensive utility vehicles (Qualis and Innova), luxury (Camry) and executive-class (Corolla) sedans, to affordable sedans (Etios) and finally compact cars (Liva).

“We do little. But whatever we do, we do well,” says Shekar Viswanathan, who was deputy managing director (commercial) at Toyota Kirloskar until December, now vice chairman overseeing corporate affairs and government relations. He’s reacting to the fact that in 15 years, Toyota Kirloskar has launched just six vehicles for large-scale production. “Introducing a product is easy; sustaining it with service and what the customer wants out of it is much tougher,” he says.

Till 2011, Toyota Kirloskar had no compact car, despite their popularity. One of the main reasons for this is that in India, as in the rest of the world, launches are dictated by headquarters in Toyota City, Aichi prefecture, Japan.

In 2011, Fortune said Toyota would need to make “deep changes” in operations to avoid being “overseen by a giant Japanese bureaucracy that protects corporate fiefdoms in Toyota City”. The problem, as seen in the U.S. then, was that Toyota kept its operations separated in a structure that forced each function to report back to Japan.

But India seems to have persuaded the notoriously rigid company to be more flexible. It’s significant, given that Toyota Kirloskar accounts for a mere 2% of global revenue, unlike bigger markets, such as the U.S., which have also seen some deviations from the Toyota Way.

ONE OF THE big reasons for the change is Nakagawa himself. As a long-time Toyota hand (he’s been with the company since 1977), Nakagawa has been able to get headquarters to view India as a special market. In some ways, he’s carrying on what his predecessors did. Sachio Yamazaki (1997-2001) was instrumental in setting up the Toyota Kirloskar plant and alliances, while Atsushi Toyoshima (2002-07) consolidated Toyota, and is credited with the Innova’s success—which really marked the company for big things in India.

A politics and economics graduate from Meiji University, Tokyo, Nakagawa has moved up the ranks at Toyota. He was vice president of Toyota Motor Worker’s Union, actively involved at the production lines, apart from industrial policy development. He was also executive managing coordinator at Toyota Motors in Thailand, where he led the launch of the IMV (international multipurpose vehicle) platform, on which the Innova was launched.

Vikram Kirloskar attributes Nakagawa’s organisational nous to those roots. “What Nakagawa-san has really done is create a strong organisation, one that can manage this scale of investment and growth,” he says.

When the Etios was launched in 2011, Nakagawa was asked by reporters if the car’s success really mattered to Toyota. Yes, it does, was the reply. The reason, he said, was that most main markets such as Japan, the U.S., and Europe are saturated. The growing market is very limited. While the market in China is growing rapidly, he said there were doubts about the future of the market there. In that global scenario, India was something of a star, Nakagawa added.

Today, the Etios platform is a template for other markets. This is one of Nakagawa’s focus areas. Instead of sticking to exports alone, he wants to design platforms that are accepted in emerging economies. It’s working. Nakagawa’s counterpart in Brazil wants India to design and develop cars on the Etios platform for his market. Etios is the first Toyota project where the prototype and supplier specifications have been designed for (and in) India, to, thereafter be applied in other Toyota markets.

The sedan was introduced in Brazil last year with production of up to 70,000 units; Indonesia is next in line. Masanori Takahashi, deputy managing director (product design and manufacturing), Toyota Kirloskar, was the force behind the Etios project. “With Etios, we didn’t have any teachers—no master model or master parts [to replicate]. It was a massive project,” says Takahashi. (Tata Motors envisaged a similar approach with the Nano for Brazil in 2009, but Etios was the first from India in that respect.)

Another coup that Nakagawa was responsible for was ensuring that both Etios and Liva hit the market with diesel and petrol variants. “All small cars are powered by petrol engines to keep them affordable,” says Jagdish Khattar, former managing director of Maruti Suzuki. But with the almost unstoppable rise in petrol prices, buyers are moving away from these cars (in the Rs 2.5 lakh to Rs 4 lakh range), preferring to pay a little more for diesel cars, which run on relatively cheaper fuel. This has hit car companies that had planned to increase production of the cheaper cars. In 2012, after a series of petrol price hikes, Khattar says, “The market for cars priced between Rs 5 lakh and Rs 7 lakh [diesel variants] grew 30%, while the Rs 2.5 lakh to Rs 4 lakh category saw almost negative growth.”

In this backdrop, Toyota sought to bring out its diesel variants faster than its parent company planned. When petrol prices went up 9% in May 2011, to touch Rs 63.37 per litre, Nakagawa flew to Japan with a couple of other expat managers. His mission: to make a case to advance the production dates for Etios diesel engines. Toyota’s original plan was that a Japanese plant would make engines for Toyota Kirloskar—three lines for petrol and one for diesel. Nakagawa persuaded HQ to reverse this. Insiders say Nakagawa’s experience and influence in Japan clinched matters in Toyota Kirloskar’s favour.

INDIA ALSO CHANGED the way Nakagawa looks at management. Like most Japanese, he likes meetings to be defined, and used to hate it when discussions meandered and lengthened. Like most non-Indians, he saw this as a sign of how disorganised Indians are. But after spending enough time in the country, Nakagawa has changed his mind, and says meandering discussions are a sign of flexibility. So, he says, he has also learnt to be flexible and builds in some buffer time so meetings can run on.

It was at one of these ‘flexible’ meetings that Sandeep Singh, deputy managing director (marketing), brought up his idea of Q World, a roadshow to launch the Etios. Singh proposed that this be held across the country from January 2010 to May that year, to allow customers and dealers to experience the car before its formal launch. Nakagawa said this was a first for Toyota, which was known for big commercial launches by a global Toyota exec. But then he agreed to it, saying it actually tied in with one of Toyota’s key philosophies: genchi genbutsu or ‘experience on site’.

The idea proved a good one. Chief engineer Yoshinori Noritake, the man behind the Etios, had spent six years studying the Indian buyer. Since the car was Toyota’s entry into the mass segment, Noritake promised to keep the cost of operations low, while meeting Toyota’s quality standards. To do this, he used different (and cheaper) materials, and also came up with design innovations in seating and placement of the instrument panels. Noritake was sure that he’d built the best car for that price.

The car was introduced to buyers at Q World, and initial reports were not positive. Customers did not like the material and looks of the interiors. It taught Toyota that sedan customers in India are willing to pay more, says Shigeru Tomonaga, who headed Toyota Kirloskar’s production until 2012-end and is now chief of its Suppliers Support Centre. By mid-2011, the interiors were altered and the aesthetics changed.

The Etios changed the Toyota Way in its promotions as well. Globally, Toyota doesn’t use a brand ambassador for its cars; the product, as the ad teams say, was always the hero. But in India, and with the Etios, things changed. This was the first time Toyota had to reach out to the mass market. Singh tells of how he managed to persuade Nakagawa to allow music star A.R. Rahman to feature as the face of Etios. With Rahman as brand ambassador, Singh believed that Toyota could talk with customers in the mass segment.

“It took one meeting with Nakagawa-san to clear this idea,” says Singh. The discussion involved a briefing on Rahman, how he hailed from India to make it big on the international stage, etc. And the clincher: Rahman would write the music score for the commercials.

Nakagawa acknowledged the logic in Singh’s case and agreed. Singh adds that on one level, this is actually the Toyota Way. “The Japanese are very clear: When they hire people, they want to delegate, believe them, and let them own the decision.”

His experience with Indian flexibility has taught Nakagawa to tap into colleagues’ unexpected inputs and ideas in the midst of a day—a departure from a typical Japanese approach, which demands logical, written arguments. Takahashi adds that one of the big ways in which the Japanese changed was in how they viewed processes.

The Japanese are used to recording their ideas and thoughts on paper. Indians are more prone to presenting those ideas for discussion, before crystallising their thoughts. Toyota used to insist on all its managers following the “A3 concept” where an idea or concept had to be presented in writing on an A3 sheet of paper. “It is a very focussed method,” says Takahashi. But, he adds, “Many in India had difficulty putting this down on one sheet of paper.” Nakagawa was willing to listen to ideas in the verbal form, while other Japanese managers relaxed the A3 rule, asking only that ideas and concepts be presented in a logical manner.

Of course, in the big things, Toyota has stayed true to its Japanese character. Most important is in how it is prepared to wait for acceptance. The Toyota Way author Liker cites how the company was first known in the U.S. for making small and basic transportation vehicles, yet took just 10 years to become leaders in luxury vehicles. Its Lexus, introduced in 1989, was competition for the BMW, Cadillac, and Mercedes-Benz. The Etios is the first evidence of its waiting game in India, albeit in the mass segment. Nakagawa says the slow and steady approach has helped Toyota ensure its people—dealers, suppliers, employees—stay true to the plot, and more focussed on customers.

THE TOYOTA KIRLOSKAR brass are now trying to replicate the Etios success story with the Liva, and are persuading HQ to give them time to prove that the hatchback can succeed. In 2012, Toyota sold just over 31,000 Liva cars. Monthly sales fell from 4,030 units in January 2012 to a low of 1,813 in September, before recovering to over 2,000 units. The Liva has 11 competitors—and Maruti and Hyundai with 4.5 lakh customers have 51% share of this segment. Toyota has less than 4%.

While Vikram Kirloskar defends the hatchback, saying that both the Qualis and the Innova had lukewarm sales in the first couple of years, Singh says Toyota needs to change its existing mindset of catering to established customers. “The main customer in this category is youth. He wants to make a statement, to show he is doing well in life,” he explains. That’s why Singh is looking to introduce more powerful and sportier features in the Liva.

In 2011, Toyota Kirloskar launched Toyota Racing Development to build on the Formula 1 fever that was catching on in India. Toyota Racing is a single-make racing car championship platform for budding drivers. Then, last March, the company signed on cricketer Virat Kohli. “He is seen as someone on the road to success, much like our product,” says Singh. This year, he adds, Liva will engage more with young people, sponsoring events including a university Twenty20 cricket championship.

Takahashi explains: “A lot of Liva [marketing] will come down to genchi genbutsu. Meet the people by talking. I want to understand their background, religious customs, habits. You get genchi genbutsu only by talking to people. Otherwise, biases creep in.”

Singh conducted an informal survey and realised that thanks to stiff competition, customer enquiries for the mid-range cars don’t convert into sales immediately. “Corolla and Camry customers are typically aged over 40, well-to-do, and have decided on the purchase when they walk in. On the contrary, the Etios buyers are 25 to 35 years old, undecided on which car to buy. Selling to them needs a different set of skills,” says Singh. He has begun a low-key initiative to change the sales patter, and salespeople are now trained to deal with the new profile of buyers. For Liva, Toyota will engage more with young people, Singh says, citing a university cricket championship Toyota has sponsored.

Nakagawa’s bet is to slowly but steadily grow Liva’s share in a fatigued market. He says it is part of the Toyota Way to extend a new product’s need and value from the design and development stage to employees, suppliers and dealers. “It’s about ownership to create the highest quality in operations—not just with the product, but also service at dealerships when customers come in,” he explains.

For Toyota Kirloskar—and Nakagawa—the Liva is a challenge to be tackled the same way the company took on the economic downturn: head-on.