When Kenji Nakakura took over as
president and CEO of Toyo Tire & Rubber Co. on Jan. 1, 2008, he
never imagined just how hard that job would become. Just months into
the job, the world financial markets melted down and tire sales went
from slow to abysmal. Instead of steering the company toward its 70th
anniversary in 2015 on the wings of new investments in products and
facilities, Nakakura has faced a series of painful reductions and
starkly revised business plans.
Toyo’s
fiscal 2008 told the tale: sales dropped 8.1% to $3.27 billion, net
profits were a negative $106.7 million. North America, which
contributes fully a third of Toyo’s global sales, posted 2008 profits
of $20.2 million (down 60% vs. 2007) against sales of $980.4 million
(down 14.2% vs. 2007).
In
a recent interview with Tire Review, Nakakura, 60, revealed the details
of the company’s revised plans, its expectations for the future, and
how its brands will press ahead in a highly competitive global market.
Talk
about the specific changes Toyo will make in response to its 2008
results, and what you see as the challenges Toyo and the tire industry
face going forward.
There are some very near term counter
measures that we are taking. We have been taking them since autumn of
last year. First of all, we want to have management that takes very
good care of our cash flow – investments, inventories and also costs
and expenses, we want to bring all of these down. Regarding our
investments, the exception is all of the investments that have already
been done. All of the others have already been frozen. And we have
already had short-term shutdowns at some of our plants in order to
adjust our inventories. We also have a global effort to decrease the
number of our employees – full and part time. We used to have 10,200
employees but we have decreased that to 9,100 as of the end of March
2009, and those reductions include 200 white-collar workers. The
downsizing of our personnel has been mainly among our non-full-time
workers. These have been contract workers.
When you think
about the costs and expenses, full-time employees actually have higher
wages. This may be a Japanese way of thinking or just my way of
thinking, I’m not sure, but full-time employees are investing their
lives or entrusting their lives with us whereas part-time or contract
employees are investing their time with us. In Japan the labor market
is not very liquid. We don’t have the infrastructure. So when people
job-hop or switch companies, it’s not to their advantage. It’s very
rare for people to job-hop. In many cases it’s not necessarily good for
their career.
As I mentioned, we want to engage in management
that takes good care of its cash flow and we also want to decrease our
fixed expenses – and I think that most companies are doing this – but
we are also engaging in structure reform. As an example, our production
volumes are down right now but we need to have a structure in place so
we can make profits even when production is down. So we are looking at
direct and indirect efficiencies. It is the same for the administrative
departments as well, the way they do things. We’re trying to think in a
zero-based way. We are reviewing everything that we have been doing in
the past to make sure there is value added in everything being done.
One example is e-mail; is e-mail going to only the necessary people or
is it going to many people who don’t need it? If that is the case,
then a lot of people are wasting time opening and responding to e-mails
they don’t need. That costs money. It is the same with meetings. There
are people who attend meetings, they take all the time and expense to
attend but don’t contribute in the meeting. They take back all that
they heard in the meeting but don’t do anything with it. So is this
really leading to profits? We are trying to rethink and review being
zero-based. We are looking at our businesses that are not profitable or
don’t have future potential, and looking at changing the way we do
things. What we are aiming for is lean operations.
Japanese
style management is starting to change in that way, too. When someone
joins your company they become part of a family, so whether they are
good or not so good you stick with them until the end, you stand by
them. Back in the days when Japan was expanding and its economy was
growing that was fine, but we’re seeing a shrinking economy and with a
fatty constitution you can no longer survive. So we’re trying to do
this in all parts of the corporation – including sales.
How are these changes impacting the way you manage the company?
For
me this year, the most important issue I need to tackle is structure
reform. Whenever I have time, I visit our plants and sales offices and
ask them how structure reform is going, how they are doing. What’s
really important is that people need to think for themselves and bring
about changes themselves. When people think for themselves voluntarily
it may develop into something really good. However, if things are done
in the U.S. or European style, with the top staff thinking about things
and writing the scenario, things may get done faster but they are not
long lasting. We think this recession is a very good opportunity for us
to move forward with structural reform – thinking by yourself and
trying to make yourself lean. If we can have this really take root,
when the time of growth comes we can start growing very quickly.
We
also have seven cross-functional projects where we are looking for
growth opportunities. Nitto’s global development is one of these
projects.
Every three years we come up with a medium-term
business plan. The one we have right now started in 2008. When you look
back to when the plan started, the situation has completely changed so
we have reviewed that business plan. So by March 2011, the end of the
2010 fiscal year, we plan to have a structure in place with a total of
8,300 employees. The original plan for investments for three years was
104 billion yen, but we will downsize this to 54 billion yen. We
currently have 35 billion yen in inventories and we plan to reduce this
by 4 billion yen by the end of 2011. Regarding expense, we will
downsize our expenses in 2009 by 4 billion yen; we have not yet decided
about expenses for 2010.
You mentioned changes to your sales efforts…
We
also want to enhance or beef up on our sales efforts. Toyo has mainly
relied on North America for sales, and a lot of our profits come from
North America, as well. And we will continue to place emphasis on the
North American market, but we are going to place more managerial
resources on Asia and Japan because the performance of Toyo is not as
good as other competitors in the industry. This is our weak point. Our
marketshare in Japan right now is 10%, and we are behind Bridgestone,
Sumitomo and Yokohama. Japan, I think, is still a profitable market.
The market here is rather unique because of the sales channels.
Retailers are very small and they don’t have warehouses and carry big
inventories. So you need a delivery network, and if you don’t have this
network it is very difficult. As long as you can get hold of the
marketshare it is a stable, profitable market.
Can
you change the distribution scenario to take the burden off of the
tiremaker, or create a system more similar to North America with
independent and company-owned distribution that takes the capital
burden off the tiremaker?
That is a very important point,
and it is one of the important themes of our structure reform. This is
a channel where Bridgestone and Sumitomo have a very strong advantage.
But if we come up with something different, then they will be at a
disadvantage. So we think if we can bring about a paradigm shift like
that, it will be advantageous. Bridgestone and Sumitomo have the same
kind of distribution here as anyone else, but they have more service
points and more refined systems. But they have the risk of those
turning into very bad assets.
When you speak of Asia do you mean China?
Yes,
mainly China. Centered around China, but more like the Chinese culture
zone – Thailand, Indonesia, Philippines. These are all opportunities.
These countries all have a heavy Chinese influence politically and
business-wise.
Even when things start coming back, it won’t be
the same as, say, 2007. In Japan, people have the ability to buy and
they have strong ability to buy. There is very strong savings in Japan.
They are saving 1,400 trillion yen that is lying there sleeping. Why is
this? It’s because people don’t want to consume. They are worried about
the future. They don’t feel that the future is okay. They are worried
about jobs and pensions and insurance, they don’t feel secure about
their futures. They feel the politicians in Japan are all hopeless. I
think the media are talking too much about unemployment, which is
making people more insecure. But if people are stimulated in a proper
way, they have the money so I think they will spend.
I think
the Asian market is different. This may be my personal opinion, but
Asian people want to live a more cultural life. If they had the money
they would buy homes, cars, electronic devices and appliances. Chinese
people in particular feel that just having cash is no good. They want
to change the cash into something that is tangible. The Chinese people
want to spend and if you look at it there is still economic growth in
China. Even though China’s growth has slowed to less than 10%, it is
still growing and it is still a large market. And there are lots of
millionaires in China, much more than in Japan. That is the market we
have to go after. The other emerging countries have problems with their
currencies. Ukraine, Russia and others have problems with exhange rates
and with their reserves.
What about growth in India?
India
is an extremely difficult market. They are not open, and the tax rate
is extremely high. They want to help their internal industries grow so
it’s a very closed market. But it is an interesting market. In India
there are three cultural areas – Islamic cultural area, a Chinese
cultural area and the Indian cultural area. The Chinese are unable to
go into the Indian area because the culture is completely different.
And I think the Chinese manufacturers are not interested in India at
all. So maybe this is an opportunity for Japan. However, I think it
will be very difficult to do business in India unless you have
manufacturing sites in the country.
Are there opportunities for relationships or tie-ups with Indian tiremakers?
I
think all of the manufacturers in Japan are getting inquires from
Indian tire companies. It’s not just the Indian manufacturers, but also
the Chinese. They want to become global players. The Korean
manufacturers have already attained the position as global players. The
Chinese and Indian manufacturers are not there yet. Technology is the
problem. With the passenger radial tire, the hurdle there is not that
high. The hurdle for them is the OE market. The demands of OE customers
are very high and are difficult to attain. Continuous development and
improvement are necessary. If you look at the true global players, they
spend a high percentage of sales on R&D. The Chinese manufacturers
are only spending 1% or 2% at most and the Indian manufacturers are
spending less than that. It is very easy to copy electronic products
because there are blueprints and data. There is very little of that
with tires because you are constantly making adjustments to meet the
needs of the vehicles and the OEMs. So you just cannot simply copy a
tire.
Truck tires are especially difficult. These tires are
used in very tough environments. You need a high level of technology
for designing and manufacturing these kinds of tires. We find that a
lot of Indian and Chinese manfacturers are in touch with us because
they want those technologies.
From
a product standpoint, what can you tell us about what Toyo is doing to
broaden its product portfolio? Are there specific product areas you
feel Toyo needs to address?
In the North American market,
Toyo has – and in particular you can say this for Nitto –made its name
and profits in niche markets. That is how we started out. We use the
word broadline, but we really started out by changing the definition of
the wheel and the tire. What we have been doing is we look at wheels in
the OE market and we started changing the tires for the OE market. We
offer tires with the same rim diameters that can be used on multiple
wheel positions. In niche marketing, design is very important. In the
broadline market, quality is the most important. With these basic tires
there are customers who feel that cheap tires are okay. They have a
budget, and price is most important. That’s one set of customers. But
there is another group of customers for whom safety and quality is most
important. We believe there is a volume of these customers.
As
mentioned before, there are the technologies we gained through truck
and OE tires. We believe we have very good technologies for creating
high quality products. For example, at our U.S. plant we have nearly
completed development of a tire that is number one globally in terms of
precision. With an 18-inch tire, the balance weight we have attained is
within 5 grams. The OE standard is 50 grams and in the replacement
market the standard is 60-70 grams. Our standard right now for Toyo is
25-30 grams. So 5 grams, we believe, could be considered quite an
amazing thing. We will be able to meet that level for all of the
passenger tires – Toyo and Nitto – we produce at the Georgia plant.
People in the dealerships will be able to see the quality of Toyo and
Nitto tires, and consumers will see this because there won’t be balance
and vibration problems. Also, the look will be better because there
will be fewer balance weights. There are a lot of these hidden
technologies we have that we think we can take into the market and gain
share. We can attain this precision thanks to our new engineering
method and our ATOM manufacturing technology. We are also working to
improve the precision of our light truck tires produced there. We also
use the ATOM method in Japan, but it is very limited. So this is really
only at the Georgia plant.
Is
this something that is only because of the ATOM system, or is it
something that with non-automated systems you can show improvement?
There
are a lot of improvements to the existing methods we use. But the main
thing is the ATOM system because the margin of error is quite small. In
traditional methods, the room for errors is much larger, whether it is
mixing or creating components or assembling those components. With the
ATOM system, you don’t have to rely on human skills.
How will the product changes to broaden Toyo and Nitto offerings impact the Georgia plant?
We
have already entered the second phase at the plant with passenger
tires. The first phase was mainly light truck products, but the demand
has come down so we are switching some of the light truck facilities to
passenger tires. And the Georgia plant already has the capability of
making profits. As long as we have the volume we can make profits
there. So producing broadline products at the Georgia plant will mean
more stable profits.
Last year
Toyo and Bridgestone agreed to work together on a number of fronts. How
has this relationship progressed so far? What benefits has Toyo
realized from this agreement?
We announced the alliance
on May 16 of last year. President (Shoshi) Arakawa of Bridgestone and
myself have met and toured each other’s plants and we looked at each
other’s newest technologies. We have been very open with each other. We
have been hiding nothing from each other. But in the R&D areas,
that’s not quite the case because we are still competing with each
other. We currently have five teams that are sharing and exchanging
information on manufacturing technologies, purchasing, co-production,
distribution and non-tire businesses. All of the teams have been
holding meetings with each other on a very friendly basis. More than we
imagined, the Bridgestone members have been very friendly, they have
been gentlemen.
Toyo has had relationships with many other
companies – General, Continental, Yokohama, Goodyear, Michelin and at
one time with Pirelli, as well as Chinese companies. So you might say
that we don’t have much resistance working with other companies.
Bridgestone has shown a lot of interest, especially in the maufacturing
technologies. They have been talking about the technologies that they
want, the new engineering methods they are interested in. And we are
very much interested in their plants and how they do their
manufacturing. They have something we don’t have, so we’re interested
in that. Right now we are still at the stage where we are exchanging
ideas and sharing technologies so the effects should be visible later
on. And we think that in the future, this is where the biggest profits
will come from. With the purchasing, Bridgestone is such a large
company that we have to go carefully because of the antimonopoly laws.
Maybe we can become a customer of theirs, they can be our supplier.
Regarding distribution, in Japan we have already started with some
joint efforts.
We are doing this together, so we want to try
to avoid announcing something before they do or them announcing
something before we do. We will be making official announcements on the
fruits of the alliance later on.
Have there been any discussions about expanding that relationship, and if so, in what ways?
We
have said, ‘Let’s first work on these five areas, see what the results
are and then we can start thinking about other areas.’ So we have not
talked about anything further just yet.
You
mentioned that Bridgestone had learned some things from your automated
systems. Has Toyo learned things from Bridgestone’s BIRD system?
Yes there are several things we have learned form their BIRD system. They have several things that we do not.
Do you see other tiremakers entering into similar relationships with other tire companies?
It
is difficult to say. I think a lot of people think it is strange that a
giant company like Bridgestone and a small company like Toyo can form a
relationship on an equal basis. Normally with such alliances, one of
the parties will have very strong technologies and the other company
say they want to use these technologies. But we have a more equal basis
with manfacturing technologies.
What types of tires is Toyo working on for the future?
Lower
rolling resistance. That’s where future developments will be. Lowering
rolling resistance while keeping other characteristics the same or
better, and maybe lowering costs.
Toyo
is a partner with Continental and Yokohama on a medium truck tire plant
in the U.S. What is the status of that relationship and plant? Is Toyo
considering adding truck tire capacity to its Georgia plant?
We
have an agreement in place and it is not possible to manufacture truck
tires any place in America other than the joint venture plant because
of the agreement. Because of the recession we have excess capacity
right now so it is very difficult for us to keep up with the minimum
requirement that we have. Adding capacity is not needed right now.
Is Toyo looking to expand its North American truck tire business significantly?
No, we’re not thinking about that right now.
Let’s
talk a little about Toyo’s eco-tire plans. What is Toyo working on in
terms of “green” tires? What new technologies are being used?
Renewable
components and natural rubber are two areas we are considering. We
cannot disclose this yet but we have some very new technologies. We
have been offering a lot of functions using synthetic rubber that were
not previously possible with natural rubber. NR is an excellent
ingredient and it has a lot of functionality but it doesn’t have any
outstanding properties. With the sport tires, for instance, with SBR it
is possible to raise abrasion resistance, something that is not
possible with NR technologies.
Long-term, how far does Toyo want to take its eco-tire program? Will it encompass every tire Toyo produces?
In Japan, we have already started with the truck tires and are looking to expand this.
Looking at the whole tire industry, what sort of environmental issues do you feel the tire industry needs to address?
With
tires, it is air that supports the weight. But the part that wears is
only the tread. So the body needs to be reusable, tires need to be
renewable. Not necessarily retreading, though that is one solution.
That’s the kind of technological development that is necessary. Those
are the kinds of products and engineering methods you will see progress.
Among all tiremakers, who do you think is the leader in terms of environmental programs?
It
is difficult to say. All companies will probably say it is themselves.
Even Chinese companies will say it is them. But it is probably going to
be the European or Japanese manufacturers that will lead the way.
With
all tiremakers looking to build business in China – and now in India
and other emerging markets – has the North American market become less
important to tiremakers?
If you talk about relative
speaking, then probably yes. For us, of course, North America will
remain a very important market and we have not changed our target for
North America, which is a 5% marketshare. That remains the same. And we
do have plans to expand our Georgia plant. I think for the whole
industry, too, North America will continue to be an important market.
China
and Asia are sort of like Africa in the old days when Europeans were
rushing there to try to build colonies, to be there first and get as
much as they could. That’s what it is like, I think, with China. We are
standing on the sidelines and watching what happens. What Toyo does is
wait for the market to mature a little bit and then focuses on
customers who want high quality products. It’s not like we want
colonies; that’s not our business style. We want to find partners so
that we can sell high quality, high image products to customers who
want them. Others have been rushing into China and going after volume
but we have been taking a different strategy. China will have more
vehicles to be sure, so it will be a much larger market than North
America. But the U.S. is still a very large market. Even though the
U.S. market is shrinking right now, it will still produce 10 million or
more new vehicles each year. And in the U.S. market, it is not just the
cheap cars and cheap tires that are sold. There are more expensive or
bigger models selling in the U.S.
What do you see as Toyo’s weaknesses?
One
weakness that we have is we do not have a manufacturing base in low
cost countries. We don’t have our own facility in a low cost country.
What do you see as Toyo’s strengths?
One
is the two top brand structure that we have with Toyo and Nitto. The
second thing is we have very good fundamental manufacturing, and TBR
and OE development. Those are strengths that we have. And the degree of
freedom in making decisions is very high. For example, if we think up a
new tire we can get to market quickly and for a lot lower investment.
At a major large company, the mold expense for a new product will be
very high because they need 10 times as many molds. So they have high
risk if the product fails to have an impact. With a smaller company
like Toyo, we can have Nitto’s Invo product. The Invo product would
have been impossible at a large company. And something like the ATOM
plant in Georgia would be difficult to do at a large company because
the risk is high. For us the risk is lower, so it’s easier to make
those managerial decisions.