Even Toyota Doesn’t Feel Safe Right Now

• Toyota’s CEO is warning suppliers that they need to step it up.

• “Right now, we in the automotive industry are battling for our very survival,” he said at an event, per Automotive News.

• This means loosening overly-strict production standards and focusing on reduced costs.

Toyota has always run lean with little appetite for risk. That strategy has worked out well—at least up until now. However, its outgoing CEO, Koji Sato, recently raised a red flag about the state of the auto manufacturing industry. And if Toyota is feeling the heat, you know there’s trouble ahead.

Sato spoke up at a recent supplier summit where 484 different companies gathered. Speaking to the hundreds of executives in attendance, Sato delivered a very clear message that things need to change, or Toyota, the world’s largest car company by sales, “will not survive.”

“Unless things change, we will not survive. I want everyone to acknowledge this sense of crisis,” said Sato, according to a report from Automotive News. “Right now, we in the automotive industry are battling for our very survival,” he said.

Now, when Toyota of all companies says something like this, it’s unlikely that the bigwigs in the audience shrugged it off. The Toyota Production System is basically gospel, and Kaizen—the lean manufacturing principle—built the foundation of modern Toyota’s company culture. If Toyota feels like it’s losing ground, then the ground is probably moving.

The problem isn’t just one thing, either. It’s everything, everywhere, all at once. Chinese automakers are gaining ground quickly and setting a new standard for manufacturing costs. Software is becoming a core part of cutting-edge vehicle. Tariffs are still a thing. The auto industry has seen more upheaval in the last few years than it did over the last several decades.

“A difficult battle lies ahead. We must work together as one and strengthen our ability to prevail. To do that, we need to improve productivity across the board,” he continued, per Automotive News. “Both as individual companies and as an industry, let’s transform how we fight to ensure our survival.”

So, what exactly does this transformation look like? Toyota has always had extremely strict quality standards. The brand would reject parts for tiny cosmetic flaws that almost no human would notice. But that could soon change.

The brand is implementing something that it calls “Smart Standard Activity.” This is meant to slash overly-engineered quality standards and lower costs. Essentially, Toyota believes it will lower the price of its components and cut back on wasted parts.

Automotive News explains what this means:

Under Toyota’s previous quality standards, suppliers were often forced to scrap components because they had cosmetic flaws, even though they had no functional defect.

Previously, for example, Toyota would reject headliner boards with the occasional black spot or steering wheels with all-but-imperceptible wrinkles in the molded resin. Toyota’s standard for wire harnesses caused suppliers to dump 10,000 a month just because of discolored plastic.

“The average customer doesn’t even see these parts,” said Shoji Nishihara, a purchasing manager in Toyota’s vehicle development department.

So, Toyota relaxed its specs for parts not visible to customers.

Toyota is also reportedly letting suppliers cut back on the tooling and molds they need to keep around to produce service parts.

Incoming CEO Kenta Kon (who begins his reassignment from CFO to CEO on April 1) seconded the reality check at the same event. He warned suppliers that despite a massive annual sales volume of 11 million vehicles and strong profits, he wouldn’t exactly say Toyota is in a “secure and comfortable position.” He said one of his priorities will be reducing the company’s break-even point.

“Each side drives the other to grow stronger,” said Kon, to the suppliers. “The only way to achieve this, I believe, is to rebuild our weakened competitive foundations and restore Toyota’s strength.”