The full text of Dialogue/Speech/Discussion in the first "Nikkei Global Management Forum"

[OKUDA] Thank you very much. I'm Hiroshi Okuda. I'm very honored and pleased to have been invited to this forum today. I found Dr. Welch's remarks very interesting and very provocative, so you may find my remarks rather unexciciting, but please bear with me for 30 or 45 minutes. The topic given me is Management beyond National Frameworks, a very large topic for me to address. I would rather have you talk about this subject so that I can learn from you. So I don't know how helpful my remarks are going to be to you or to your business, but as someone who has been involved in Toyota's business management, I can share with you my experiences.

First of all, for the Japanese automobile industry, global management is a necessary trend that one cannot live without. I say this for one reason, which is that we have to address the trade imbalances. As you know, automobile exports have always accounted for large share of Japanese exports, and therefore has been criticized as the evil cause of the trade imbalances for Japan. Said differently, it means that the automobile is an expensive product costing more than one million yen, hardly comparable to the export or imports of agricultural products. And with the export surplus increasing, the yen has continued to appreciate and the manufacturing industry was forced to reduce their cost structure. This has been a process of history that has repeated itself, and the increase of finished cars has invited unemployment in the importing countries, therefore people have talked about this evil circle. And to break out of this circle we wanted to create a structure that would not be affected by the changes in the foreign currencies and, therefore, we went in favor of local production. Local production, therefore, was a natural choice for us.

And the second point is that globalization has been inevitable for us to add competitiveness to our industrial structure. The automobile industry is now a mature industry, so people say. But globally, automobiles are owned by only one in eight people, and therefore, if you look at the convenience, the joy of riding in automobiles, there are many people who are not yet familiar with what automobiles can offer them. So there's still a great potential for automobile sales to grow. And to realize these potentials, of course, you have to answer the questions relative to environment, safety, recycling needs, and avoiding traffic congestion. And that, in turn, will require technological innovation to be incorporated into automobile manufacturing. And therefore, the automobile industry is an industry which is facing a new phase in its process of growth.

In our case, we are in 160 countries at 5,400 points of sales throughout the world. In terms of our overseas sales, since the 1970s, except for the economic bubble period, we have always sold more outside the country than domestically. In the '70s we sold 870,000 units, but currently 3 million cars overseas. In Southeast Asia, we began first with the knock-down production, and in 1984 we went to Freemont California in the United States, which was a joint venture with General Motors. Since then, we have found ourselves in all corners of the world for full-scale overseas production. At the end of last year, we were in 24 countries in 34 regions or locations where we're operating our factories. And last year, the amount of production was 1.5 million. So of the 3 million cars sold abroad, one in two cars are locally produced. That's the situation of Toyota currently. Particularly in North America, last year, we were able to sell 1.5 million cars of which 970,000 were locally produced. So two in three Toyota cars sold in the United States were produced in the Americas.

In terms of employment, we have 70,000 people working inside Japan, but outside of Japan we have 60,000 employees. We have, therefore, been able to contribute to the promotion of employment in terms of our local production operations.

Global management is important, but what is the requisite? What is the most important requirement to pursue global management? I think the answer lies in the value that a company can represent. Corporate philosophy must be embodied in the values that corporations represent. In the case of the Toyota Group, Toyota Sakichi, founder, has left us his 5-point articles, a set of philosophies for us, which has since then been the basis for the corporate philosophy of Toyota that we all aspire to.

This Toyota set of principles talks about the corporate function, that it has to contribute to the growth and development of industry. All cooperating together, a company is a part of a society, therefore should not be bound by short-term profitability. Only when the company contributes to the society and community is the company's role or function fulfilled. And we are a manufacturer of goods, and therefore research and development and creativity has always been an important part of our corporate tenet. By consistently pursuing research and development we try to pursue creativity, so that we're always one step ahead of others in coming up with creative products.

And in terms of social contribution, we put our customers first. Localization has also always been our philosophy, so that better products at lower costs can be provided to our customers. And for employees, we guarantee opportunities of employment, and also a worthwhile place to work. And for shareholders we return to them appropriate level of stocks and dividends. And we pay taxes to the governments, and with the community we work together for mutual growth, so that we can all be there to contribute to the development of welfare and a more affluent society. Ever since our foundation, this has been our tenet, our philosophy, and this has been the principle that we've worked to live up to.

We are now living in an age of globalization. Every one of us has to behave with a global mind-set and to maintain a global perspective. We wanted to make sure that our future directions were clear and in 1996 we created a vision for the year 2005, which we announced to all the employees of Toyota. This was a set of visions for the future, and it talked about Toyota's contribution to society and the community so it embodies our traditional philosophy that we have always cherished. So there's globalization; there are advances in terms of information technology, our society is changing at an enormous speed, and to keep up with the speed of change we have to change ourselves constantly, otherwise else the company's survival, its very existence is in peril.

In terms of the competition among companies, we see this competition in all industries. Industrial barriers and national borders are disappearing. Indeed, what we are being engaged in is a borderless competition. To address this situation, competitive advantage has to be maintained. By grasping the tone of change accurately and to build on the traditional strength and review its resources of strength, to adapt to the circumstantial and environmental changes, to optimize our system, such a reform to seek optimized system has to be carried out promptly. We need people; we need goods; we need technology; we need money; we need information. Let me address each of these requirements in our business management.

First of all, what is the source of the competitiveness of Japanese companies? It is the management strategy or management philosophy which respects people, which puts people at the forefront. Particularly in a company like ours, whose job is to produce goods, we have to look at technological development and sales and marketing and production plants. We need human resources in all of these operations. The foundation of business management is to develop human resources, because it is in human resources that we can find the source of competitiveness. Last year, Moodies downgraded us because Toyota maintains a life-long employment system. It did so only by focusing only on the life-long employment system that we were maintaining. It is very a narrow and near-sighted approach to our business, we believe. Because, as you know, yes, we do have a lifetime employment system in Japan. In terms of postwar growth, we always had long-term employment. Long-term employment offered employment stability, which, in turn, provided for the stability of labor-industrial relations, which was conducive to teamwork in the workplace, enhancing the loyalty the employees had for their company, and they were able to join in and take part in the growth, so it was very advantageous for the company for the individual employees to realize their full potential. Without such a system it would have been difficult for Japanese companies to hire human resources from outside. Without this kind of employment system, the cost would have been prohibitive.

Indeed, in the United States, where labor practices are very different, Boeing, Hewlett-Packard, and other top companies are focusing more on a long-term employment system and do recognize the merits and advantages of such a long-term employment structure. But if you look at this system of long-term employment, there's a tendency for collusion or chumminess, which tends to give rise to the closeness of a community, and could be a hotbed of corruption. These negative aspects have to be removed by introducing a transparent set of rules for competition, by evaluating and appraising people for their work and performance. But introduction of purely competitive rules would not be adequate for our purposes for human potential to be fully realized. It is only when human potential is fully realized that the employee's will to stay with a company will be maintained; he would feel it worth his while to stay with the company only when he knows his potential is going to be realized. And therefore, we provide various career paths. If someone wants to become a professional, he can be one. Or, if one is very innovative, there's a way opened for him to be in innovative businesses, such as creating venture companies. So various options are available for self-improvement. The employment structure is such that people can join us in the middle of their career, and we are trying to introduce these systems as a part of our culture.

We are a global company, and for us to survive, the right scholastic background is of no question. We only look at the potential capacity and capability of the people we hire, which means that we are not racist in terms of hiring only Japanese employees. Indeed, two of the Japanese automobile companies are now managed by non-Japanese CEOs. Mazda, being one, is showing an excellent performance.

In the case of Toyota as well, the Prius and Vitz are the cars designed by American and Greek employees, so non-Japanese Toyota employees are very much active as a part of our operation. We intend to hire more non-Japanese people and give them managerial positions.

The second point I'd like to make today is the social contribution we should make through manufacturing of products. First of all, we have to address technological innovation and technological development. As you know, technological innovation always opts the way for a breakthrough, to contribute to economic growth. As a producer of goods, our raison d'etre is supported by strong technological development first and foremost. Just because current economic conditions are weak, we should not lose sight of the future to make more investment in technology. Japan's growth so far has been supported by very eager willingness of all Japanese companies to make investment in technology. After the oil crisis, when profitability was being undermined, Toyota Eiji, the then-president, considered that to be a god-given opportunity instead, and therefore pursued energy conservation, and from this, he mobilized the entire corporate effort to conserve energy. That has been one factor which has contributed greatly to Toyota's success ever since.

At the beginning I talked about the auto industry, that this was still an industry of potential; we are at a new stage of development. And we are developing advanced technologies to look at the environmental issues and also to adapt to the high information age for which we are trying to introduce new generations of cars. So that in the 21st century we will see a new auto-sensitive society. And this will be an enormous challenge for us, but we have to make sure that we can respond and rise up to these challenges.

As you very well know, at the end of year 1997 we introduced the hybrid car, Prelius, the first one in the world. This really reveals our decisive action. This hybrid system, for some time I believe, will become the global standard for the world automobile, but I think in the future we will see the forerunners of the fuel-cell cars. These fuel-cell cars rely on energy generated by hydrogen and oxygen when they are combined. It becomes a driving force, and the only emission is steam. Therefore, all the manufacturers in the world are competing in its development, but we are determined to be at the top of the competitive stream here. This fuel-cell is not only limited to cars, but also could be used for power generation. Many applications are possible, and at the same time, energy efficiency is very high; there's no noise and no vibration. Therefore, the future of this technology, when it is really permeated into the market, I think, could replace oil consumption in power generation. I think the demand for these traditional power sources will be changed drastically.

The improvement of recycling technology is also crucial. To put it very simply, using one product for a long time, perhaps you might think is environment-friendly, but that does not create new environmental technology, nor other new advanced technology. And at the same time, if there's no replacement demand arising for several decades, then the production will not increase; the corporate productive activity will decline; and the economy itself will slow down. However, with the introduction of the recycling technology, finite resources could be used 100 percent, then the utilization of the new environmental technology-based products will see a major demand, and as a result of that, we will again see a major advance in new technology. And therefore, it will be a very virtual cycle appearing. Well, in order to realize this kind of society based on a virtual cycle, from the development of production and use and disposal, we intend to improve the recycle technology covering all these elements.

In the days ahead, those technologies starting with the environmental technology, et cetera, those companies who would be able to establish this kind of new technology will be the winning companies. Of course we will use all the capabilities that our company has, but we will not be only limiting ourselves to our own corporate technology, but would like to also rely on technologies developed by other people too.

At the same time, speaking about production technology, I think we are in a new stage of evolution. With the aging society in Japan, with fewer children, this is a trend that is advancing very rapidly and must be considered in terms of labor power where women and senior citizens will be required to join the labor market. And I think the opportunity will be rising. In order to make that possible, I think it is necessary to come up with the development of machinery that anyone can use and at the same time the know-how that enables the efficient use of these machines will be necessary, so that the production technology that is friendly to all the senior citizens and women will become very important.

Furthermore, as I have said before, the recycling technology-incorporated production technology should be realized. At present, from this perspective we are now trying to establish new production technology and making all possible efforts.

Next is the topic regarding the social contribution in relation to manufacturing. In the host countries and hosting regions, we will have to contribute to these host countries and host regions. And it is with this kind of attitude one will have to engage in all day-to-day management efforts. We are taking this customer-number-one principle on global terms, and in order to realize the greatest benefit to the local market, we intend to make the production closest to that market, and so we are making this optimum supply on the global level.

As you very well know, the auto industry has a very expansive surrounding industry, and in any region we would like to see them grow as one of the key industries of the host regions and host countries. And with this perspective, also including the nurturing of the surrounding industry, we are making all possible effort to further develop the technology that would be promoting the economic growth of the receiving countries.

Drawing up on the example of the United States, in 1992 we created a supplier support center, so that quality and production improvement could be conducted very effectively, and we are supporting this kind of activity. In the center, the major U.S. universities and research institutes give lectures and presentations, and also in relation to the instructions for improvement of the production system to the local companies, the related suppliers or non-related suppliers and all those people who are not really involved in our company, we're providing this kind of support system and we are conducting the same kind of procedure in all other areas.

And further, regarding the developing countries including Asia, for these countries to grow very successfully we will have to sow the seed for growth and also train the people. This kind of very long-range perspective is required in going into these developing countries.

In some cases we will have to maintain this perspective 20 years, 30 years, or even 50 years in order to contribute to these developing countries. We shouldn't simply look at developing countries as a market, but with this long-range cooperation and with the growth and industrial development, we will be able to see a harmonized global growth for the 21st century. And that simultaneously will lead to the growth of our own company. This is our firm belief.

Now, following the topic of human beings and resources, now I would like to speak about the funding aspect and long-term management in relation to funding and money. As I have said before, manufacturing management should be conducted on a long-range perspective and should be making a major investment for the advancement of technology and leading-edge technology and the decision should be made by the managers.

However, the procurement of funds in the past has relied on the main bank system and cross-holding of shares. But this has broken down already, and all companies based on self-responsibility are procuring their funds from the market. This is the reality of today's funding for the company. In order to make that possible, we will have to put greater emphasis on shareholders and also improve return on equity as well as improve capital efficiency. I think this is the era we are now in. However, if we are drawn by the interest of short-term profit and did not make any investment or did not make an effort for reconstruction of the company but sell the company instead, I think this is just a topsy-turvy situation. Shareholders are very important, but sustaining the growth will, at first, mean that the company is fulfilling its responsibility to the shareholders and growth of the company. And so there should be a balance between the long-term investment and short-term returns. So standing on that perspective, what is most important is sustained cost reduction effort. For manufacturers I think this is the perpetual theme.

As I have said before, in the field of leading-edge technology and overseas projects, we will have to make enormous investment in the future too. But on the other hand, when we see the price of the products, this is something that consumers will decide, and therefore, even though it is costly we cannot translate that cost to the price. It's very difficult to do that. And if we do not obtain relevant to revenue, then shareholders are going to be in trouble. Also we will not be able to sufficiently remunerate the employees. And so, in order to clear all these different hurdles, it requires a very drastic cost-reduction effort and effective use of the management resource. Twenty percent to 30 percent, this kind of major cost reduction would be regarded as almost impossible if we rely on the past system, but if we totally make a turnaround of how we look at the business, and if we change the system and mechanism from the very foundation, it is possible.

The Vitz, which is quite popular here in Japan, and the same goes for Fan Cargo, these are the products that were the result of this kind of endeavor, and we intend to further continue with our effort for reducing the cost and do all things possible as to the extent that our wisdom allows us to do.

Now, during the days of bubble, many people said that those companies who do not think of making investment of available funds, are the companies who should be thought of as fossils, and that's how Toyota was viewed. However, Toyota is always making its greatest premise that we will have to continue with our corporate growth, and if we are to take the attitude that money is a game, we'd rather invest it into innovative technology and invest in the after-market demand; we would rather invest in the aspect of manufacturing, which is the line of our own business. So, as long as it is possible we would like to localize our people, funds, and materials. Also speaking about funds, we intend to procure them in the locality where we are established and invest there too, and further to reinvest the revenue in the local market. And I think that will mean that a company is really playing its role in that host country.

In order to realize these ideals, we are taking a step-by-step approach, a very firm step, and come up with a corporate constitution that would not be affected by foreign exchange fluctuation.

While introducing these approaches, for us to pursue a global type of management, of course we have to focus on the systems and structures that are in keeping with the local and national conditions and circumstances. Needless for me to say, local legal systems and social structures are rooted in the history, culture, and environment of the countries in question. And it is all different depending on the industry or the company you are talking about.

In our case, in particular in terms of human resources system, we respect local customs and local laws. In terms of corporate governance, in promotion, and in salary increases and appraisals, we introduce systems which are commensurate with the local conditions and circumstances. This is our basic principle, but we also inject into such system whatever is good for us. Those better systems that we find overseas are imported back to Japan so that we can introduce them in Japan as well.

In recent days, some Japanese companies are trying to enhance their competitiveness by introducing American style of restructuring or by adopting the non-executive board of director systems. But these are the systems and methods born of a culture which is very much different in the historical, cultural, and legal background of Japan. By adopting this system, simply reducing the number of board members or cutting down on the number of employees, the shape and form may be improved, but the fundamental situation is not going to be changed for the better. A structure or system stands in relation to all the other supporting systems and structures. You talk about employment, but you have to look at the safety net for employment or mobility in the labor market, which does not exist in Japan. Therefore, a massive restructuring as is being done by foreign companies cannot be implemented in Japan very freely, because that might cause social anxiety and a very serious situation might result. And corporate governance: Who does the company belong to? In our American operation we try to observe American style corporate governance ideas. Our system and structure is therefore developed accordingly.

But for Japan, we have to look at the situation from a broader perspective as to how a more appropriate Japanese system of self-management can be developed, and we need information disclosure commensurate with globalization and strengthening of the auditing system and improvement in terms of general shareholders' meetings and board meetings. By energizing and activating these functions we can improve on our check and balance system, thereby our corporate existence will be more efficient and better balanced.

I have touched upon many points today, but basically the philosophy of corporate management is to endeavor to be a company that maintains strength beyond passage of time. A company that maintains strength transcending time, is a phrase I borrowed from the author of a book, Visionary Company, by Professor Jerry Bolas of Stanford University. A manager has to endure and strengthen their corporate organization by maintaining a strong and unwavering corporate philosophy. To protect company from all the drifts, he should be never be satisfied by the status quo; should not fear failure; and should introduce a culture of challenge. And he says that a long-term successful company is a company that sees a permeation of such business philosophy which encourages change.

I think a company that transcends time is the company which grows younger with time. I have always said that one should never be a prisoner of success; not changing is the worst behavior that you can exhibit. Alvin Toffler has talked about the third wave. We may be observing a change that comes only once every 50 or 100 years, a very long-term change. And therefore, as a business manager we have to always work to our best to endure and strengthen our corporate organization.

Last but not least, I would like to take this opportunity to thank you for your support and endorsement of Toyota, the company. And I hope you will continue to give us your encouragement and support as we go forward. And with this I think I can conclude my rather disorganized discussion. Thank you very much.

[SEKIGUCHI] Thank you, Mr. Okuda. I was rather surprised that he was wearing his head-set on his left ear because he was listening to the English translation as he was reading his text.

We still have some time for questions. If you have a question, please limit this to one question each, and please identify yourself. But may I take this first opportunity to ask the first question?

In the earlier session with Dr. Welch, Mr. Welch was talking about restructuring. It doesn't mean that people would be left jobless; it provides people with an opportunity to find and seek better jobs. So in essence, it doesn't have to be that the same company should keep employing the same set of employees forever. What do you think, Mr. Okuda?

[OKUDA] I don't think I got the point of your question fully, but the point I'd like to make, I'm not saying that one should never fire people, but there's a Japanese system which is uniquely different from the United States. In terms of the mobility of the labor market we don't have such a flexible and mobile labor market, and we have venture companies to accept people who are changing jobs. No. Given this environment, kicking people outside the company will only add to the pains that they will feel, so as a business manager, as a business leader, knowing that their livelihood will be undermined, we couldn't simply kick them out. So the employment question has to be answered with that kind of consequence in mind.

[SEKIGUCHI] More questions from the floor? The gentleman with the yellow tie?

[QUESTION] Tsunoda is my name; from a bicycle manufacturer in Nagoya. Sir, you said that it's not right to go for M&A while not making full efforts to restructure your own company. And from the point of view of the employee, if he or she is asked to move to another company, new skills have to be obtained. Even with all the efforts, there may be some who would be left out of this press, who are not able to acquire new skills. What should you do with them?

[OKUDA] Well, very unfortunately, in terms of Japanese corporate environment, specialized and professional skills -- employment has been on the basis of specialization. So the Japanese system has not been amenable to labor mobilization where people can move from non-professional to the next, or one specialization to the next. But we now have to think more in terms of greater flexibility in the market so that people can change jobs or positions any time. And I think that kind of education is being provided. In the United States, in a certain company, 25 percent of the human resources budget is indeed used for such reeducation purposes. In the case of Toyota, in our sales companies, there's what is known as Toyota University. People are sent to this university and receive education or training, so that wherever he or she may be assigned next, that individual will be able to live up to their full potential. And for Japan to further internationalize and globalize, this is an issue that cannot be bypassed, and our company is already focusing on the importance of internal or inhouse education.

[SEKIGUCHI] One last question?

[QUESTION] As chairman of Nikkeiren, you gave us a good recommendation about improving employability. What are your specific ideas about this improvement of employability, not necessarily speaking on behalf of Toyota?

[OKUDA] Yes. I do believe that recommendation was a very good one, but in practical terms, of course we do provide more education to improve employability of the employees, but the question is how to find trainers and teachers. And we're racking our brains to find better teaching resources. If we cannot find professors or teachers in Japan, we will be inviting such people from outside, from overseas. But this is a recommendation which has not been thrashed out yet. Although I do keenly feel the importance of employability.

[SEKIGUCHI] Thank you very much.