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Unlearning what Toyota taught us

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The auto industry owes Toyota a debt of gratitude.

The giant Japanese automaker taught the industry how to run its manufacturing operations with utmost efficiency, it set the industry standard for product development and it showed that corporate strategy should be measured in decades, not quarters.

It took almost 30 years for the rest of the auto industry to accept, learn and eventually adopt what Toyota was doing. But they did and it served them well. They have improved their productivity, quality and profitability.

That was then. Today the world is changing. EV startups, including Tesla, have torn Toyota’s game plan to shreds. They are evolving at lightning speed, taking bold steps with new technologies and breaking old business models.

Wall Street likes what they do. Startups that have never made a single vehicle have higher market capitalizations than automakers that make millions. Here’s why: stock prices are all about future growth and the high street thinks startups will grow much faster than the establishment.

The numbers tell the story. Traditional automakers are growing their sales at less than 3% per year on average, barely above the rate of inflation. Tesla’s revenue is growing more than 60% per year. Rocket growth! The market thinks other startups will do the same and that’s why their stock is skyrocketing.

But forget stock prices for now. They’re just a distraction and on top of that, the electric vehicle craze is a stock market bubble that’s about to burst. Let’s see what’s really important: how come startups can go so fast? Or, to put it another way, why are traditional automakers moving so slowly?

One of the reasons old players move slowly is that they copied Toyota’s product development process. As Dr. Jeffery Liker explained in his book, The Toyota Product Development SystemToyota freezes the specifications of a vehicle one year before Job One.

And then, it usually doesn’t make design changes until two years after production begins. According to Toyota doctrine, design changes introduce variability, and variability leads to quality issues. So, by freezing specifications, Toyota and its suppliers have time to SPC their manufacturing operations to Six Sigma quality.

Not Tesla. It does not freeze specs. Completely the opposite. It makes design changes on the fly. And he mainly makes these changes – this is a key point – to reduce the cost of his cars.

Tesla’s electronic architecture is a prime example. The Model X architecture worked great, but two years after its release, the Model 3 debuted with an entirely new architecture.

Other automakers would never do that. Once they’re done designing a new architecture, they won’t touch it for a decade. They “know” that you cannot make such changes.

But here’s the kicker: According to benchmarking from Caresoft Global, Tesla cut more than $300 in cost with this new electronic architecture. In an industry that fights for fractions of a penny, that’s a staggering cost reduction.

And then just two years later comes the Model Y. Just a Model 3 with a new top hat, right? Nope. It still has a different architecture from the 3 which offers much more capabilities.

By designing on the fly, Tesla cuts costs and adds capabilities much faster than the establishment.

This is key to Tesla’s profitability and its ability to dominate the electric vehicle segment. Another important point: Tesla validates these design changes using digital models, so they can be implemented immediately, not years later.

The same goes for the structure of the car. Traditional automakers pretty much develop a new platform, give it a facelift four years after Job One, and retire it four years later. Not Tesla. It brings major changes to the structure of the 3 and Y models by replacing dozens of stampings with large moldings: one at the front and one at the rear. Tooling costs drop, assembly time goes down, and Elon Musk can rest easy knowing the establishment will never keep up, because – in the old mindset – you can’t do that.

Critics point to Tesla’s quality issues and say traditional automakers should stick with what’s proven. Valid item. Tesla is lucky that its eager customers completely forgive its quality issues.

Just as the Toyota Production System (TPS) was the natural evolution of the original Ford system, we are now seeing an evolution that goes beyond TPS.

Some traditional automakers are already “awakened” to the new reality. Volkswagen CEO Herbert Diess actually invited Musk to speak to his senior management, hoping to light a fire under them to recognize the threat and act faster. Ford CEO Jim Farley essentially conveyed the same message to his senior executives.

And we are starting to see results. General Motors uses digital tools to reduce the time it takes to develop new models. He claims he has already cut two years from his PD process. And CEO Mary Barra says GM can catch up with Tesla in electric vehicle sales by 2025. So some of the giants are ready to change.

But not everyone is on board. I keep coming across people in the industry who don’t see a threat or a need to change the way they do things. They believe startups don’t know what they’re doing and are doomed to fail. I think they are in denial.

And it’s kind of funny to me, because all the arguments I hear for keeping the old way are exactly the same ones I heard decades ago, when it was the Toyota production system that was disrupting the industry.

John McElroy (photo above, left) is editorial director of Blue Sky Productions and producer of “Autoline Detroit” for WTVS-Channel 56, Detroit.