Yesterday, Toyota announced that it will be shutting down its Japan production plants for 11 days in February and March due to declining demand in the US and around the world. Toyota saw its December sale volume drop 37% in the US and 18% in Japan. The shutdown extends trends set last year when Toyota shut its light truck manufacturing plants for nearly 3 months in San Antonio and extended holiday shutdowns in Kentucky and Indiana. Today, there are reports that Toyota are in negotiations with labor for a pay cuts during the planned closures, and additional reports are coming in that Toyota Portugal has a planned shutdown as well.
During this global downturn, Toyota has steadfastly refused to cut any of its full-time workforce (they legally cannot in Japan) and has instead assigned idle workers to employee retention programs. In more normal economic times, employee retention programs (aka job banks) were continuous improvement classes that trained workers in procedures that helped workers improve the quantity or quality of their work output. When opportunities arose to increase production capacity and put these individuals back to work, employee retention programs save the cost of HR services to select new hires, the cost of legal red tape for hiring and layoffs, and the burden on management for teaching the Toyota work culture to newbies. For skilled workers in well managed companies, the cost savings can exceed 18 months of salary. On top of that, the workers return to work more productive than ever, and Toyota builds rapport with its workers and can justify the larger profit margins during better economic times.
But that's in more normal economic times. During Toyota's shutdown in San Antonio last August, Toyota laid off hundreds of temporary workers and deployed their full time employees towards public works projects, painting walls, planting trees, and picking up trash. Clearly this kind of activity is not the best use of time for their employees (it is better than playing poker and doing crossword puzzles,) and unsustainable in the long run. In the short run, Toyota can afford this kind of activity because it has saved for a rainy day after years of profitability and now can feed its employees with its mountain of cash. However, it has eroded Toyota's fundamentals and Toyota expects to post its first loss in 70 years.
Management has thought this plan of action through, but the strategy counts on its sale volume fully recovering within one or two years and then burn through the huge inventory that Toyota has managed to accumulate within the past year Toyota sales volume can recover sale volume by two methods: demand for personal vehicles recover in the long run or other producers permanently reduce their production capacity. If these two phenomenon do not contribute to a full recovery in sale volume, the Toyota strategy will be a failure and Toyota will have to cut its workforce. The Toyota strategy applies to its parts suppliers who are also pursuing a policy of no layoffs but unlikely to be as generous as Toyota in paying a full salary for its employees.
For the auto industry and parts suppliers industry as a whole, the only path for recovery is for demand to fully recover. The Toyota strategy exposes as fallacy the idea that a bailout of the Big 3 will have any effect in saving jobs for the entire industry. Any measures to keep Detroit in production will be to detrimental to Toyota and its suppliers. The bailout would merely relocate the job losses from Detroit to manufacturing centers in the rest of the country. Predictably, states with Toyota and other foreign auto manufacturers have been staunchly against the bailout.
Most the other foreign manufacturers have not adopted the Toyota strategy. BMW, Volkswagon, Mercedes, and Nissan have all conducted broad layoffs. Honda, and Kia have done so on a smaller scale limited to its sales and administrative offices. Toyota and Mazda have limited cuts to its temporary workforce (more on the Japanese temporary worker in a future post.) It remains to be seen if the Toyota strategy will be a success and whether Toyota will be reward for its loyalty to its workers.
