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Toyota Motor Corp.: Heir Steers Carmaker out of Crisis

This case was written by Morten Bennedsen, The André and Rosalie Hoffmann Chaired Professor of Family Enterprise and Academic Director of the Wendel International Centre for Family Enterprise, INSEAD; Brian Henry, Research Fellow, INSEAD; and Yupana Wiwattanakantang, Associate Professor at National University of Singapore Business School [hereby acknowledging the grant she received from the Centre for Asset Management Research & Investments (CAMRI)]. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

The case and teaching note were generously financed by the André and Rosalie Hoffmann Research Fund for Family Enterprise.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.

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A Café Inside Union Station, Washington DC

It was a cold 24th February 2010. Akio Toyoda was sipping hot tea in a café overlooking the train tracks at Union Station in Washington DC, not far from his next stop, Capitol Hill. He paid little attention to the announcements over the loudspeakers. His mind was focused on the Congressional hearings of the House Oversight and Government Reform Committee. He was about to be asked a lot of tough questions. Needless to say, the thought of being dragged through the mud was not exactly pleasing. Moreover, the fate of the company and its employees, shareholders and suppliers would depend on his answers. As he gulped down the last of the tea, he thought about his illustrious family history. He had been in the top job for less than a year. Was this, he wondered, the end of the road for the Japanese family that had founded and reigned over one of the most respected automakers in the world?

Why should it be otherwise? After all, the Toyoda family were now minority shareholders. Did the company even need a family member to run it when it had been run more or less successfully by professional managers for the previous 14 years? Admittedly the share price had been going south for the last couple of years and needed a boost, and moreover the previous professional manager had pushed aside quality in favour of top line growth.

His assistant pointed at his watch. It was time to go, to face some painful questioning by elected members of Congress. Not a pleasant thought.

Congressional Hearings

When Akio Toyoda stepped into the waiting limousine in front of Union Station, he was greeted by Yoshi Inaba, head of Toyota’s North American operations. They were both due to appear before the House committee, in the Rayburn building. Toyoda realized that his poor command of English was going to be made all the more apparent since Yoshi Inaba would not need a translator. “It’s going to be OK. Don’t forget that we have a second meeting where things are going to be very different,” said Inaba, referring to a gathering at Washington’s National Press Club of Toyota dealers and employees later in the afternoon.

It was a tense moment for Akio Toyoda as he took his seat facing lawmakers in the meeting room. He began by apologizing (see Exhibit 1 statement released prior to the hearings). “I am deeply sorry for any accidents that Toyota drivers have experienced,” he said in English. He also apologized to the millions of Toyota car owners whose defective vehicles had been and were being recalled in the USA1and worldwide.2 Finally he apologized to surviving members of the Saylor family, four of whom had died in an accident in August 2009. However, he pointedly did not make the traditional Japanese bow that many were possibly expecting.

During the three-hour question and answer session, Rep. Dan Burton, a Republican from Indiana, asked why an accelerator pedal made for Toyota in Japan looked different from a pedal made for Toyota in the USA, pointing to photos on a large screen. Speaking through a translator, Akio Toyoda replied, “As the Congressman knows, a car consists of some 20,000

1 Toyota Gas-Pedal Fix Clears Regulators, Kate Linebaugh, The Wall Street Journal, 17 January 2010 2 US/JAPAN: Politicians criticise Toyota ahead of Congress hearings, just-auto.com editorial team, 25

February 2010

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to 30,000 parts, and I would like you to first of all know we work together with suppliers in designing those parts.”3 Other questions followed in quick succession, making it hard for Akio to keep up as the interpreter fed back to him through an earpiece in Japanese. Yoshi Inaba stepped in to cover for his boss on a number of occasions.

In addition to his apology, Akio Toyoda announced the creation of an expert panel on quality, as Toyota was not sure what was causing the sudden acceleration incidents. But, he insisted, there was no problem with the design of the electronic throttle-control system.4 Furthermore, he denied any cover-up and pledged to restore consumer trust in the company.

Perhaps his most revealing statement was when Akio Toyoda said, “My name is on every car. You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers.”5

Following the meeting, Akio Toyoda went to the National Press Club in Washington DC to address the city’s dealers and employees. Standing tearful under a giant display bearing the Toyota brand name, he said, “At the hearing, I was not alone. My colleagues in North America and around the world were there with me.”6

The next day, Akio Toyoda went back to Capitol Hill for a 30-minute meeting with the Transportation secretary and agreed to work together to enhance the safety of Toyota cars and protect American consumers.7 The talks were described as “productive and focused on the importance of safety and working cooperatively to protect consumers in the United States,” by the Transportation department in a subsequent statement.

Background to the Congressional Hearings and the Toyota Vehicle Recalls 2009-10

The day before Akio Toyoda’s testimony, a former Toyota car owner had appeared before the House Committee to tell the story of how her Toyota-made Lexus 350 ES sedan suddenly accelerated to 100mph while she was driving on a highway. Luckily she lived to tell the story. But not all Toyota drivers and their passengers were so fortunate. One of the most devastating crashes involving sudden accelerators occurred on 28 August 2009, when four members of the Saylor family were killed in a Lexus 350 ES sedan in horrific circumstances. The vehicle’s accelerator pedal got stuck in the floor mat causing the car to accelerate to 125mph just before the car went out of control and crashed. The driver was an off-duty California Highway Patrol officer Mark Saylor, who could be expected to have experience of driving in dangerous conditions. In December 2010, Toyota reached a settlement of $10 million with the surviving members of the Saylor family.8

3 After stoic showing in Congress, Toyoda breaks into tears, Nobuhiro Kubo, Reuters, 25 February 2010 4 Japanese editorial excerpts, Kyodo News, 26 February 2010. 5 Meadville dealer attends Toyota hearings in Washington D.C., Jim Martin, Erie Times-News, 25 February

2010 6 After stoic showing in Congress, Toyoda breaks into tears, Nobuhiro Kubo, Reuters, 25 February 2010 7 Toyota chief, U.S, transport chief discuss safety issues, Kyodo News, 26 February 2010 8 Toyota settles suit over California crash for $10 million, Meri News, 4 December 2010

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“It was the [Saylor] tragedy that forced Toyota, which had received more than 2,000 complaints of unintended acceleration, to step up its own inquiry, after multiple government investigations since 2002.”9 With its reputation at stake, Akio Toyoda had to react to the growing crisis. The company was repeatedly accused of:

• Underestimating the severity of the sudden acceleration problem

• Overestimating the popularity of its brands that were affected by the problem

• Announcing false diagnoses and insufficient fixes

• Contradicting the US National Highway Traffic Safety Administration

• Not projecting the cost of its recalls and lost sales

• Releasing statements that were misleading and inaccurate

• Treating the growing safety issue as a minor issue.

Crisis Management

On 20 January 2009, at the height of the recall crisis, Toyota’s supervisory board named Akio Toyoda president of Toyota Motor Corp., replacing Katsuaki Watanabe (who would become a vice-chairman). The management changes would become effective in June 2009, following approval at the annual Toyota shareholders meeting.

At the time of his nomination, Akio Toyoda, 52, was executive vice president in charge of purchasing, quality, product management, information technology and intelligent transport services. A race-car driver, he was particularly fond of the Lexus luxury line of cars and had led a press conference for the brand at the 2004 Beijing motor show. He was devastated by the deaths of the Saylor family members in a Lexus, a model which had 14,900 recalls.10 But the son of former CEO Shoichiro Toyoda was not prepared for the fallout from the recall crisis:11

Shoichiro Toyoda12

9 Toyota’s Slow Awakening to a Deadly Problem, Bill Vlasic, the New York Times, 1 February 2010 10 Luxury Lexus LS next for recall; Quality issues continue as Toyota brand has steering problem, Woodyard,

C., USA Today. 20 May 2010. 11 Akio Toyoda deserves to be Toyota Motor Corp.'s next president, James B. Treece, Automotive News, 19

February 2007. 12 https://en.wikipedia.org/wiki/Shoichiro_Toyoda, accessed 22 October 2015.

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“From January 2000 to January 2010, there were reports of 52 deaths linked to Toyota vehicles with uncontrolled acceleration. This led to recalls in 2007 and in 2010 involving approximately 7.5 million vehicles. At first, there was uncertainty regarding the cause of the problem. Later, NASA engineers determined that the problem was corrected by Toyota and that there were no electronic flaws in the pedal design.”13

One of the first appointments Akio Toyoda made as president was to bring back Yoshi Inaba as head of US operations. A master of crisis management, Yoshi Inaba humbled himself before the assembled reporters at the Detroit auto show in early January 2010, saying that the recall crisis was “a hard lesson” for Toyota. Behind the scenes he worked non-stop to fix the problems at the root of the crisis. He appointed a quality project team which eventually came up with two solutions to the sticking pedal problem. For his part, Akio Toyoda had decided to keep a low profile until he was taken by surprise by a Japanese TV crew at the World Economic Forum in late January 2010, when he made his first brief apologetic statement (see cover photo).14

Congressional Hearings

But although to some people he may have appeared aloof and not really interested in resolving the recall crisis, the reality was completely different. The following steps were taken by Akio Toyoda to manage the crisis:

• Appointing Yoshi Inaba as Toyota’s No. 1 point man in the USA

• Appearing at the Congressional hearings with Yoshi Inaba

• Apologizing to the Saylor family at the Congressional hearings

• Committing publicly to fixing the sticking pedal problem.

Toyota said the unintended accelerations were caused by either a sticking gas pedal or a misplaced floor mat.15 The company then went about finding solutions to dealing with both issues. For the first issue, it came up with the idea of installing shims or “selective spacers” in the gas-pedal assembly to increase the tension within the pedal and prevent the accelerator staying in a depressed position. Toyota announced measures to rectify the pedal issue that included trimming the gas pedals and installing a new brake-override system. This was designed to ensure that the brakes always took precedence over the accelerator when both pedals were depressed.16 Each affected Toyota could be repaired in 30 minutes or less. In addition, Toyota suspended production on some lines at five North American assembly facilities for a week so that it could install new gas pedal assemblies and adjust production.

13 U.S. may require brakes that can override gas pedals in new cars. Manning, S., & Raum, T. USA Today, http://usatoday30.usatoday.com/money/autos/2010-03-02-toyotadeaths N.htm, 2 March 2010, unable to access on 23 June 2015.

14 Toyota’s Slow Awakening to a Deadly Problem, Bill Vlasic, the New York Times, 1 February 2010 15 Toyota Knoxville dealer doing 'whatever it takes' to recover trust, By Roger Harris, The Knoxville News-

Sentinel, 25 February 2010 16 Toyota Plans Aggressive Fix for Pedals --- Dealers Told Part Could Arrive This Week to Repair 2.3

Million Vehicles in In Sudden-Acceleration Recalls, Kate Linebaugh, The Wall Street Journal, 17 January 2010

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Akio Toyoda may have not responded to the crisis as quickly as his critics would have liked, but the US authorities likewise had failed to respond when complaints about runaway Toyotas first emerged in 2002. The National Highway Traffic Safety Administration conducted six separate investigations into consumer complaints of unintended acceleration, and none of them found defects in Toyota cars other than unsecured floor mats.17 As a result, the agency denied petitions for further investigative action because it did not see a pattern of defects. However, with the publicity surrounding the Saylor tragedy in August 2009, both Toyota and the US government decided enough was enough. The Congressional hearings were scheduled and the company came up with solutions.

This was not the first recall crisis involving Toyota and a member of the Toyoda family. Forty years earlier, in 1969, a recall crisis emanating from the USA had caught former president Eiji Toyoda by surprise. His swift response and political connections helped the company deal with the first recall crisis affecting the carmaker in an environment that had suddenly become far more regulated than ever before (details are given later in the case).

In naming Akio Toyoda as President of Toyota in January 2009, the board of directors chose a leader who could take the company forward at a time when oil prices were rising and the global economic recession was just beginning (see Appendix 1). The board needed a leader who could steer the company during a particularly difficult period and protect the brand’s reputation from the fallout of the recall crisis.18 Said Akio Toyoda at a press conference in Tokyo on the day of the announcement, “I am simply determined to do my utmost in being handed this big role of steering Toyota as it faces what has been said to be its worst crisis in a century,” adding that he wanted to be “a president who was close to the workers.”19

The Role of the Salaryman

In Toyota’s corporate culture, a salaryman fulfils an important role for the controlling family.20 When no Toyoda family member is available to run the company, a trusted non- family executive is appointed in the interim. This was exactly what happened in the years before Akio Toyoda was ready to take on the top job.

Behind the scenes, however, while the salaryman served as president, members of the Toyoda family still firmly controlled the company. Shoichiro Toyoda, father of Akio Toyoda, was chairman of the board until 1999, and then honorary chairman, a position he continues to hold.21 Eiji Toyoda, the former president of Toyota and cousin of Akio, was chairman of the board until 1994, and remained supreme advisor until his death in 2013.

In the 14 years between 1995 and Akio Toyoda’s appointment in 2009, three successive salarymen held the CEO position (see Appendix 2 and the chart below). In 1995, Tatsuro

17 Toyota’s Slow Awakening to a Deadly Problem, Bill Vlasic, the New York Times, 1 February 2010 18 Toyota Appoints Founding Family Member As Next Pres, Dow Jones International News, 20 January 2009 19 Toyota returns to founding roots in choosing Toyoda as new president amid global slump, Yuri Kageyama,

Associated Press Newswires, 20 January 2009 20 The usage of the term salaryman has become demonized in popular Japanese culture to the extent that it has

come to be solely associated with negative connotations. In this business case, the term remains unique to the Toyota culture and in particular to the succession planning process of the Toyoda family.

21 As of this writing, 9 November 2015.

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Toyoda suffered a stroke and his short three-year term at the head was brought to a premature end.22 At that time, his nephew, the 39-year-old Akio Toyoda, was still too young to be considered for the top job, so a salaryman was brought in to run the company.23

The Epoch of the Salarymen (Toyota Motor, 1995 – 2009)24

The first salaryman to be named president of the company in 30 years, Hiroshi Okuda, stepped in at a time when Toyota was losing market share and focus.25After only four years running the company, he was replaced by another salaryman, Fujio Cho, who ran it for the next six years from 1999 to 2005. One of the most trusted salaryman in this epoch, Fujio Cho became a mentor to Akio Toyoda and was made honorary chairman of the board in 2013, a post that had never been held by a salaryman before (and that he continues to hold).

Hiroshi Okuda26

22 Tatsuro Toyoda recovered and is the chairman of the board of Toyota Industries. 23 Toyota Founder’s Grandson Joins Board, Dow Jones International News, 31 October 2000 24 TMC Daily Share Prices, Nikkei 225 Index, Japanese Car Index, which consists of eight publicly traded

automotive companies on the Japanese Stock Exchange: Daihatsu Motor Co. Ltd., Hino Motors Ltd., Honda Motor Co., Ltd., Isuzu Motors Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Nissan Motor Co. Ltd., and Suzuki Motor Corporation. All Japanese share prices are between 1 January 1995 and 1 January 2010. Source: S&Q Capital IQ.

25 Akio Toyoda makes name for himself, James B. Treece, Automotive News, 25 September 2000 26 https://en.wikipedia.org/wiki/Hiroshi_Okuda

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Salaryman Katsuaki Watanabe took over from Fujio Cho in 2005 and held the position for the next four years. Under his leadership, Toyota expanded its operations relentlessly, a move that was at first rewarded by the financial markets. However, the recall crisis caught up with the company towards the end of 2006, and its share price plummeted, losing half its value over the next two years. It was time for a change at the top.

When Akio Toyoda’s was nominated president on 20 January 2009, Fujio Cho was at his side at the press conference in Tokyo. Said Cho, Toyota “needs to be more than just a strong company. It needs to be a good company. He is not another salaryman like me.”27 On the day of the announcement, Toyota shares rose 2.3% to 3,100 yen in Tokyo.

Fujio Cho28

Upon assuming the role of CEO, Akio Toyoda indirectly blamed his predecessor for frantically pursuing sales volume which had caused the automaker to lose touch with its customers and overlook quality concerns. “Everyone knew Toyota was growing too fast. But it was only Akio Toyoda, because of his family background, who could make hard decisions and steer the company back to a normal condition,” said a former executive at that time.29

Indeed, the board’s nomination was designed to give the company the needed lift and ongoing momentum that his predecessor lacked. To avoid embarrassment, Katsuaki Watanabe was quietly shifted to a new vice chairmanship position without any power. However, no direct criticism of salarymen was ever made, as the family had chosen to base its succession planning on them regardless of the short-term outcome.

Between 1950 and 1967, the Toyota was led by two salarymen one after the other before the 54-year-old Eiji Toyoda was able to take on the top job. The 17-year wait was well worth it. The legendary CEO probably did as much, if not more, than any other leading post-war industrialist to take his company to profitability and worldwide prominence. When he died at the age of 100 in 2013, tributes poured in from all over the globe. Yet without the two salarymen, the family succession would never have been possible.

27 Toyota returns to founding roots in choosing Toyoda as new president amid global slump, Yuri Kageyama, Associated Press Newswires, 20 January 2009

28 https://en.wikipedia.org/wiki/Fujio_Cho 29 Toyota: Rebirth of a brand, Kana Inagaki, Financial Times, 4 June 2015.

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Akio Toyoda Takes the Lead

In a veiled reference to the Japanese royal family, Akio Toyoda was labelled a “prince” by the Japanese press, as he was one of the youngest executives to join the Toyota board (in 2000) and the youngest president in the company’s history. Said journalist Yuri Kageyama, “There’s no doubt the clean-cut, bespectacled Toyoda is the rising star of his family and an emerging candidate to head Toyota Motor Corp sometime down the road. His career highlights questions about the influence still wielded by Toyota’s founding family at a time when this nation, long dominated by lineage and seniority, is gradually turning to Western-style promotion based on ability.”30

After earning an MBA from Babson College, Akio Toyoda served as vice president at New United Motor Manufacturing Inc. (NUMMI), a Fremont, California-based joint venture between Toyota and General Motors.31 This was Toyota’s first North American automotive assembly plant, whose first president was Tatsuro Toyoda,32 the brother of Akio Toyoda’s father.33 Toyota closed the NUMMI plant after GM pulled out of the joint venture as part of its bankruptcy proceedings in July 2009 (more details below).

During this difficult period, Toyota exploited the Toyoda name to send a powerful signal to the markets that with the family back in charge, the company was returning to its roots and would restore the values, quality and reputation upon which the business was founded.34 By 2012, Toyota had become the largest automaker in terms of the number of vehicles sold worldwide. Its share price tripled on the Tokyo Stock Exchange between 2012 and 2015.

Family Asset: Name and Network

When Akio Toyoda delivered his first speech as president-designate, he made it clear that the company would stay competitive and build its human capital under his competent and professional management. At a press conference on 20 January 2009, Akio Toyoda compared his father Shoichiro to a flag around which the company rallied. “I am not yet that flag, but I intend to do my best so that maybe 20 or 30 years from now, people may look back and refer to me as a flag,” he said. Seen in a wider cultural context, the flag analogy reflected aspects of the Japanese attachment to names and ancestors.

For Akio Toyoda’s comparison to resonate, the family lineage must live on through the CEO, whose name would fly high at Toyota’s subsidiaries around the world. The name would be seen by stakeholders as a key attribute, a guardian of the values that underpinned the contributions made by family members over the past century. The importance attached to names in Japan was nothing new; many companies carry the founder’s name (Mazda, for example, derives from founder Jujiro Matsuda).35 Akio Toyoda’s nomination was also proof

30 Grandson of Toyota founder joins board, fuels speculation of higher ambitions, Yuri Kageyama, Associated Press Newswires, 7 November 2000

31 Toyota returns to founding roots in choosing Toyoda as new president amid global slump, Yuri Kageyama, Associated Press Newswires, 20 January 2009

32 Toyota, A History of the First 50 years, Toyota Motor Corp., 1988, p. 336. 33 Toyota Under Fire, Jeffrey K. Liker, Timothy N. Ogden, McGraw Hill, 2001, p. 19 34 The Family Business Map, Morten Bennedsen and Joseph P.H. Fan, Palgrave McMillan, 2014, p. 32 35 The History and Spirit of Mazda, page 1, from

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that no discord had disturbed the family succession, based on the Japanese model whereby only one son controls the firm. At Toyota, the top job has been held by an adopted son (Risaburo), family heirs (Kiichiro, Eiji, Shoichiro, Akio) or in the event no family member is available a salaryman.

In addition to name, the Toyoda family had built a powerful network of connections over the generations. Having a well-crafted network gave the Toyoda family a competitive advantage. It was connected via marriage ties to Shinzo Abe, Yasuhiro Nakasone and Yukio Hatoyama, respectively the current and two former prime ministers of Japan, and seven top business families, namely Mitsui (the biggest pre-war zaibatsu), Shimizu (a worldwide general construction company), Kajima (a worldwide general construction company), Ishibashi (Bridgestone), Uehara (Taisho Pharmaceutical Co.), Saito (Daishowa Paper Manufacturing Co.), and Lida (Takashimaya Department Store).36

These connections went back to the founder of Toyota Motor Corp, Kiichiro Toyoda (1894- 1952), who inherited a love of engineering and creativity from his father Sakichi Toyoda (1867-1930). Toyota Motor started out as a small department within the original loom-making business started by Sakichi Toyoda, named Toyota Industries.37 In changing the name slightly, the latter replaced the d with a t because he thought the Japanese way of writing the t would give a more symmetric appearance to the company name. Like other business founders in Japan, he adopted his son-in-law (husband of his daughter Aiko) to run the business. Risaburo (1884-1952) promptly changed his surname to that of Toyoda, took over the management of Toyota Industries, and helped develop the automotive department.

As Risaburo Toyoda was now considered the ‘eldest son’, Kiichiro Toyoda became the ‘second’ son in the family. “Adoption as a form of succession planning is a uniquely Japanese practice and may differentiate its family businesses fundamentally from those elsewhere.”38 During the early 1930s, Kiichiro’s interest in automobiles was encouraged by his father even though automobile production was considered a risky business. In the mid-1930s the car- making department was spun off from Toyota Industries as an independent company named Toyota Motor. Although Risaburo Toyoda was named president of Toyota Motor when it was officially incorporated in 1937, Kiichiro Toyoda was appointed as president in 1941 and stayed in the post until 1950. He died suddenly in 1952 at the age of 57. Risaburo Toyoda, 68, died less than three months later.39

Eiji Toyota Takes the Helm

When Kiichiro Toyoda resigned as president in 1950, no member of the Toyoda family was available to take over as president so the first salaryman was appointed, Taizo Ishida, who ran

http://www2.mazda.com/en/csr/download/pdf/2005/e200503.pdf , accessed 21 Oct 2015 36 The Family Business Map, Morten Bennedsen and Joseph P.H. Fan, Palgrave McMillan, 2014, p. 43 37 Toyota: Looking for Growth in China, Rajan Shah, Case study, Reference no 307-043-1, ICFAI Business

School Ahmedabad 38 Adoptive expectations: Rising sons in Japanese family firms, Vikas Mehrotra, Randall Morck, Jungwook

Shim, Yupana Wiwattanakantang, Journal of Financial Economics 108 (2013) 840–854, p. 843 39 http://www.toyota-

global.com/company/history_of_toyota/75years/text/taking_on_the_automotive_business/chapter2/section7 /item3_e.html, accessed 6 November 2015

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the company for 11 years. In 1961, a second salaryman, Fukio Nakagawa, was appointed to run the firm until, in 1967 Eiji Toyoda (1913-2013), the nephew of Kiichiro Toyoda, became the third member of the Toyoda family, age 54, to run the car company.

Eiji Toyoda40

Revered as a world-class visionary, Eiji Toyoda served as CEO of Toyota Motor for 15 years, longer than any president before or since. Under his leadership, Toyota “set up at least 10 new factories, began exporting to dozens of countries, established just-in-time production and built a reputation for manufacturing excellence. The Corolla became the best-selling car of all time. He stressed the importance of manufacturing concepts that became central to Toyota’s production methods, such as kaizen or continuous improvement, just-in-time supply chain management, and jidoka or the use of machines that shut down when irregularities are detected. His greatest achievement may have been laying the foundation for the company to apply its manufacturing expertise overseas, which led to the formation of Toyota’s first venture in the U.S. in 1983, a year after he passed the presidency to his cousin, Shoichiro.”41

Toyota First Recall Crisis

In 1969, Eiji Toyoda was confronted with the company’s first recall crisis that had its origins in a wave of consumer activism in the USA. It would be the beginning of an institutional ‘crackdown’, whereby all sorts of regulations were created that affected carmakers and tire makers, including CO² emissions, mechanical defects and myriad safety issues. In 1969, Toyota was asked to recall Coronas to address a mechanical problem in its brake-fluid tubes42 (see Exhibit 2). To avoid tarnishing the reputation of Toyota Motor, Eiji Toyoda in June 1969 delivered a speech to the entire company, asking employees to revisit Toyota’s basic philosophy on quality.43 More than six months later, a new Inspection Division was established for each car plant. As a result of these and other initiatives Toyota was the first recipient of the Japan Quality Medal in 1970, perhaps a sign that Eiji Toyoda’s connections with the Japanese establishment ran deep.

40 http://www.bloomberg.com/news/articles/2013-09-17/eiji-toyoda-who-turned-toyota-into-export-giant- dies-at-100, accessed 22 June 2015.

41 Ibid. 42 http://www.toyota-

global.com/company/history_of_toyota/75years/text/entering_the_automotive_business/chapter2/section1/i tem1.htm, accessed 9 November 2015.

43 Ibid.

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Japan Quality Medal44

A Perfect Storm Hits the Auto Industry 2008-09

When Akio Toyoda took the reins in 2009, the automotive industry was at the centre of a perfect storm that caught him and many other carmakers by surprise. Although 2008 had looked like another record year for Toyota (see Appendices 3 and 4) the dark clouds of crisis were gathering on the horizon. Oil prices, which had been steadily rising over the previous 12 months, span out of control by the spring of 2008, hitting a peak in July 2008.

The immediate effect of the spike in oil prices was the collapse of sales in global markets for large vehicles, including Toyota’s popular SUVs and trucks. Its overseas operations, including those in the USA, accounted for a third of Toyota’s worldwide revenue, but the USA was its most profitable market. In large part because of the huge growth of its American market, the most profitable five years in the company’s history were those leading up to 2008.45 Ironically, Toyota got a foothold in the North American market during the 1973 oil embargo, thanks to its smaller cars, that appealed to consumers who demanded energy-saving vehicles.

But 15 years later, Toyota had become a major player in every product line. Its North American plants had huge success with the Tundra full-size truck and a range of SUVs, including the Sequoia, Highlander and RAV4. In 2008, the Camry, a medium-size vehicle, was the best-selling car in the USA, and the Lexus the best-selling luxury brand.46 Toyota Motor was at the top of its game, largely because of a huge expansion of its manufacturing capacity driven by salaryman Katsuaki Watanabe.

Katsuaki Watanabe

44 http://www.toyota- global.com/company/history_of_toyota/75years/text/entering_the_automotive_business/chapter2/section1/i tem3.html, accessed 6 November 2015.

45 Toyota Under Fire, Jeffrey K. Liker, Timothy N. Ogden, McGraw Hill, 2001, p. 21 46 Ibid.

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Toyota Shaken by Profit Loss

The spike in oil prices was followed almost immediately by the 2008 global financial crisis, which had a devastating effect on the automobile sector. Car loans were impossible to get given the collapse of the credit markets. This was an unprecedented challenge for the industry, as most people financed their cars with loans. Even sales of small vehicles collapsed.

With the global financial crisis causing US currency investors to flee for safe havens elsewhere, the US dollar started to weaken against the Japanese yen in October 2008, which translated into a loss of $540 million in operating income for Toyota in fiscal year 2009. It was not until four years later when the dollar started its upward climb and by May 2015, the dollar was at its highest level against the yen since July 2007 (see chart below).47

Source: S&P Capital IQ, Accessed 21 December 2015

“The combined impact of plummeting sales and the currency adjustment led to Toyota’s first loss as a company since 1950, a loss of more than $4 billion for fiscal year 2009 on global sales of 7.6 million units, a drop of 1.3 million units from 2008.”48 It was its first operating loss in 70 years.49 In the North American market, Toyota suffered a 40% drop in sales in the fiscal year ending 31 March 2009.

Of course it was not the only major automotive maker to suffer. GM went bankrupt in July 2009, having $172.81 billion in debt but only $82.29 billion in assets.50 If GM were not granted loans by the US government under the T.A.R.P. legislation funding provisions that year, the company would probably not exist today. It was as a direct result of GM’s reorganization that Toyota a few months later was forced to shutter its first North American automotive assembly plant (NUMMI) in California, its 50-50 joint-venture with GM where Akio Toyoda had served as vice-president from 1998. “When GM declared bankruptcy and walked away from its obligations to the venture and its workers,” Toyota had little choice but to close the venture. Unlike GM, Toyota did not abandon its employees: the Japanese company paid out $250 million in severance to NUMMI employees and provided job

47 http://www.marketwatch.com/story/euro-drops-on-greek-debt-fears-dollar-nears-year-high-versus-yen- 2015-05-26, accessed 21 December 2015

48 Toyota Under Fire, Jeffrey K. Liker, Timothy N. Ogden, McGraw Hill, 2001, p. 25 49 Toyota: Family scion will attempt revival, Hans Greimel, Automotive News, 26 January 2009 50 GM Files For Bankruptcy, Dan Strumpf and Kimberly S. Johnson, Huff Post, 2 July 2009

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placement services, earning it the respect of its workforce, some of whom were later rehired by Tesla Motors in 2010.51

Board Appointment of Akio Toyoda

Having joined Toyota in 1984 at the age of 28, only two years after earning his MBA, Akio Toyoda worked his way up the organizational ladder for the next 25 years before becoming president.52 Between 1995 and 2009, the three salarymen who ran Toyota ensured that the up- and-coming family member was getting sufficient experience in a variety of different roles throughout the company. By the time he joined Toyota’s board of directors in 2000, Akio Toyoda had adequately prepared himself for the transition to the leadership role he would inherit. Having established his own professional identity, Akio Toyoda developed a great deal of international experience, especially in the USA, which was highly regarded by non-family members of the executive committee. Thus the successful transfer of power between generations and from salarymen back to family members ensured that the entrepreneurial spirit of the Toyoda family lived on.

Long before the recall crisis, Toyota’s board of directors had been planning a management transition. For them, it was just a matter of time before Akio Toyoda acquired sufficient experience in the company. The governance structure ensured that the company would always be managed by a Toyoda, as it had a supervisory board that was entirely composed of lifetime Toyota executives.

In the period leading up Akio Toyoda’s ascension to the presidency, the board was controlled by Shoichiro Toyoda, who helped groomed his son to take power. The two salarymen Hiroshi Okuda and Fujio Cho were also members of Toyota’s internal board during this period (see Appendix 5). The board had to be certain that Akio Toyoda had the ability, experience and motivation to run Toyota; his family name was not the only consideration.53

Compared to the typical corporate board in American and European companies, which are made up primarily of independent outside directors, the Toyota board was different. Its structure and governance ensured that the traditions and values of the Toyoda family were enshrined in the culture and organization of Toyota.54

Suppliers the Toyoda Family Knows Well

Toyota Industries and Denso Corp. had long been the first-tier suppliers of Toyota Motor in a close-knit relationship where all three companies shared the risks and rewards of doing business together. Toyota Industries supplied automotive engines to Toyota Motor while Denso supplied auto parts. In growing the carmaker in size from one generation to the next, the Toyoda family kept management control of the firm through its network of bespoke

51 Toyota Under Fire, Jeffrey K. Liker, Timothy N. Ogden, McGraw Hill, 2001, pages 34 – 36. 52 Like many Japanese firms, Toyota employs the term President, which is similar to CEO, the term used by

anglophone firms. 53 Toyota founder’s grandson joins board – but is he future president?, Yuri Kageyama, Associated Press

Newswires, 31 October 2000 54 Toyota Under Fire, Jeffrey K. Liker, Timothy N. Ogden, McGraw Hill, 2001, p. 27

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suppliers. This innovative approach to ownership solved the dilemma facing the fast-growing family firm: how to keep control while attracting new shareholders to invest significantly in the long-term growth of the company.

Toyota Motor sat at the top of the Toyota Group of 13 core companies which included Toyota Industries and Denso Corp. The three leading companies—Toyota Motor, Toyota Industries and Denso—owned significant shareholdings in each other for a number of reasons, the first to achieve good shareholder value, the second as a countermeasure against hostile merger and acquisition attempts, and the third being the means by which the Toyoda family controlled Toyota Motor (see Appendices 6-8). A former subsidiary of Toyota Motor, Denso became an independent company. As of the end of fiscal year 2014, Toyota Motor and Toyota Industries owned a 22.31% stake and a 7.85% stake in Denso respectively, giving them the single largest block of votes.55 Likewise in the cross shareholding, Denso owned a 9.10% stake in Toyota Industries and a 2.03% stake in Toyota Motor.56

Toyota Industries has been an independent company since 1933, known for its robust engines that are sold to companies in the automotive, materials handling, electronics, logistics and textile machinery sectors. In 2014, Toyota Motor and Denso owned a 23.51% stake and a 9.10% stake in Toyota Industries respectively, giving them the single largest block of votes.57 Likewise, Toyota Industries owned a 7.85% stake in Denso and a 6.57% stake in Toyota Motor.58

Like most cross shareholdings, the Toyoda family benefited from a cross-board structure where family members sat on all three boards of Denso, Toyota Industries and Toyota Motor. In addition to Toyota Motor and Toyota Industries, the Toyoda family have played a dominant role in the governance of Denso. Shoichiro Toyoda sat on the Denso board until his resignation in April 2015.59 Tatsuya Toyoda, Akio Toyoda’s first cousin, was a Denso executive director until his resignation was announced in April 2015, but two months later Denso issued a statement that Tatsuya Toyoda had been appointed as Executive Vice President of Denso Sales Japan Corp. Salaryman Fujio Cho, currently honorary chairman of Toyota Motor, also resigned as a member of the Denso audit and supervisory board in April 2015.

In addition, the three companies shared executives. Fujio Cho’s position at Denso was taken over by an executive named Moritaka Yoshida, who was a senior manager at Toyota Motor and a member of the board of Toyota Industries. Tetsuro Toyoda, the father of Tatsuya Toyoda, was the chairman of the board of Toyota Industries, while Susumu Toyoda, the grandnephew of the founder, was a managing officer.60 These intricate cross-management roles were and continue to be typical of family-run Toyota and its suppliers.

55 Orbis at bvdinfo.com, accessed on 21 October 2015. 56 Ibid. 57 Orbis at bvdinfo.com, accessed on 21 October 2015. 58 Ibid. 59 http://www.globaldenso.com/en/news/2015/20150428-04.html, accessed 22 July 2015 60 The authors were not able to learn any details about the place of Susumu Toyoda in the Toyoda family tree,

although it is assumed he is part of the family. More research is required in this area.

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Ownership

Having created a network of suppliers, the Toyoda family has been able to create value across generations and sustain the firm’s competitive advantage over time.61 It has maintained control over Toyota Motor through a group of firms that own major shareholdings in the company. By controlling the key assets—networks of suppliers, employees, shareholders and even patents—the family maintains control. The fact that Akio Toyoda steered the carmaker out of the recall crisis while keeping its long-term stakeholders loyal is a key measure of success for the innovative way the family keeps control of the company.

In addition to Toyota Motor, Toyota Industries and Denso, the family controls about 11 other companies which make up the Toyota Group. All of these firms own major shareholdings in Toyota Motor, such as Towa Real Estate, Toyota Tsusho, a trading company, and Aisin Seiki, an automotive components company. The family maintains a nucleus of stable long-term shareholders, including banks and insurance companies such as the following:

• Japan Trustee Service Bank

• Master Trust Bank of Japan

• Mitsui Sumitomo Insurance Group Holdings

• Nippon Life Insurance

• Daiwa Bank

• Sanwa Bank

• Tokai Bank.

Share Buybacks

Like many publicly traded companies, Toyota Motor, Toyota Industries and Denso all buy back their own shares for a number of different reasons. In fiscal year 2014, Denso owned 9.82% of its outstanding shares, Toyota Motor owned 7.18% of its own shares, while Toyota Industries owned 3.63%.62 By repurchasing their own shares, the publicly traded companies on the Tokyo Stock Exchange can reduce the shares held by the trading public. This means that even if profits remained the same for fiscal year 2014, earnings per share would have increased. Moreover, repurchasing their own shares benefits the stable companies owned by the Toyoda family and friends who have retained their shareholdings over the long-term, while it extracts value from short-term shareholders who have sold their shares.

Ford Dodges Bankruptcy in Epoch of Crisis

The global economic crisis also affected other automakers. Family-run Ford, based in Dearborn, Michigan, lost $15 billion in 2008, although the company had already lost $30

61 Founder’s grandson new boss of Toyota, The Detroit News, 24 June 2009 62 Orbis at bvdinfo.com, accessed on 21 October 2015.

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billion in the three years since 2006, the year it reported the largest annual loss in its history, of $12.7 billion.63

Ten years earlier, William Clay Ford Jr. became the first member of the Ford family to head the company since the retirement of his uncle, Henry Ford II in 1982. The great-grandson of Henry Ford, William Clay Ford Jr. was appointed executive chairman in 1998 and became CEO in 2001. He currently holds positions as executive chairman and chairman of the finance committee.64 Thanks to his leadership, Ford did not go bankrupt during this period. It was reported that William Clay Ford Jr. said “bankruptcy was not an option” in 2006 at the beginning of the crisis.65

He remained CEO for five years before naming a non-family member, Alan Mulally, as President and CEO in 2006. Another non-family member, Mark Fields, is the current CEO. By placing non-family professionals in key leadership roles, William Clay Ford Jr. acknowledged the limitations of family ownership. If Ford family members are not available to take over these positions, the company chooses external candidates on a short-term or long- term basis. In other ways to keep control, the Ford family has a dual-class share structure, whereby the family owns a separate class of stock that controls 40% of the voting rights at Ford Motor Co.66

Fiat Founding Family Agnelli Stay in Control

For Fiat, the global crisis triggered a sea change in the way the founding Agnelli family had traditionally controlled the company – with a fiercely guarded sense of independence. Fiat suffered from the crisis but not nearly as badly as some of its competitors in the USA, largely thanks to the Italian automaker’s robust sales of farm equipment.67

With a 30% shareholding in Fiat, the Agnelli family listened carefully when the non-family CEO Sergio Marchionne suggested that Fiat form a strategic alliance with Chrysler in 2008. “In a consolidation scenario, finding the right partner and the right combination would be the priority,” said John Elkann, the great-great-grandson of Fiat’s founder and chairman of the Agnelli family holding company, Ifil SpA. “The level of the shareholding would be secondary to the competitive position and the value any new combination would produce.”

Part of the reason why the Agnelli family listened to Marchionne was that Fiat, which was one of Europe’s smallest players, was under more pressure than other car companies to find a partner that could provide economies of scale. Sales of Fiat vehicles were plunging in 2008, even in Italy, the company’s biggest single market. In November 2008, Fiat car sales in Italy fell 29.5% to 138,352 vehicles, their lowest level since 1993.

63 Ford: Biggest loss ever, Chris Isidore, CNN Money, 25 January 2007. Retrieved 3 July 2015 64 S&P Capital IQ 65 Ford CEO: ‘Honesty’ Best Weapon Against Bankruptcy, Greg Levine, Forbes. 5 April 2006). Accessed 3

July 2015. 66 The Family Business Map, Morten Bennedsen and Joseph P.H. Fan, Palgrave McMillan, 2014, p. 95 67 Fiat Seeks Ally Before Pickings Get Slim, Stacy Meichtry, The Wall Street Journal, 9 December 2008.

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Six months later, when Chrysler emerged from bankruptcy protection, Fiat Group took a 20% stake in the company, with Marchionne taking over as CEO.68 In 2011, Fiat’s stake in Chrysler increased to 53.5%, and in 2014 Fiat and Chrysler merged to become Fiat Chrysler Automobiles (FCA), the seventh largest automaker in the world. Fiat’s founding Agnelli family maintained a 30% shareholding in FCA.69

After Emissions Scandal, VW Enters a Period of Succession Uncertainty

In late September 2015, VW was hit by one of the biggest blows in its history, the diesel emissions scandal. While the fallout from the scandal is only just beginning to take its toll, one of the unlikely heroes might have been Ferdinand Piëch, who resigned as chairman of the supervisory board of VW in April 2015 after failing in his efforts to fire the then CEO Martin Winterkorn and replace him with Matthias Müller, the then CEO of Porsche. However, since Winterkorn was replaced by Müller in the wake of the emissions scandal, there is speculation about the future role of Ferdinand Piëch at VW.

From a financial point of view, the families that control the VW Group—Porsche and Piëch who own a 16% shareholding—have lost vast sums of money. Said Richard Milne, an FT journalist, “Ferdinand Piëch, as a member of one of the two families that control VW by holding a majority of its voting shares via Porsche Holdings SE, is a big loser from the carmaker’s stock price decline since the scandal.”70

While the glory years of Ferdinand Piëch may be behind him, the fourth generation members of the Porsche and Piëch families have been making inroads into the management structure of the auto companies they own. For example, Julia Kuhn-Piëch, age 34, and her cousin Louise Kiesling, have replaced Ferdinand Piëch, 78, and Ursula Piëch on VW’s supervisory board. Many other fourth-generation members of the Porsche family are set to play big roles in VW Group, including Ferdinand Oliver Porsche and Daniell Porsche, who could eventually become the largest single shareholder of Porsche Holdings SE, through which the family controls VW. The families are also represented on the boards of Skoda, Seat, Audi and the commercial vehicle brands MAN and Scania, among others within VW Group.71

While many companies in the automotive industry are dominated by families, the differences between them are often more apparent than the similarities. Certainly the assets of the Toyoda family have almost nothing in common with the assets of the Porsche and Piëch families –the name and reputation of Ferdinand Piëch are completely at odds with those of Akio Toyoda,

68 BREAKING: Marchionne confirmed as post-bankruptcy Chrysler CEO, Noah Joseph, Autoblog.com. Accessed 3 July 2015

69 Fiat Chrysler to spin off Ferrari, issue $2.5 billion convertible bond. Agnieszka Flak, Reuters, Accessed 3 July 2015.

70 http://www.ft.com/intl/cms/s/0/fe07b240-7645-11e5-933d-efcdc3c11c89.html#axzz3pCvAHLcU, accessed 21 October 2015.

71 VW SUCCESSION: The Man Who Would be King, Martin Murphy, Christian Schnell, Markus Fasse, Handelsblatt Global Edition, 27 July 2015

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for example. Nevertheless both men have played a larger-than-life role in the respective corporate cultures and continue to do so.72

Turnaround Story

By 2011, Toyota Motor eventually regained the public’s confidence in the quality of its vehicles, with revenues moving sharply upward. But in the depths of the recall crisis, when the reputation of the company was at stake, Akio Toyoda used to tell visitors to his offices in Tokyo a story about his grandfather Kiichiro Toyoda. The story goes that the founder stopped to help someone on the side of the road fixing his Toyota truck. He got under the truck and tried to make the repairs himself. Arriving at his office, he went directly to the engineering department where he called together his engineers to discuss the causes of the truck’s problems.

His attention to rooting out problems became known as kaizen (continuous improvement). For the grandson, the morale of the story was less about the origins of kaizen and more the idea that any problem affecting a Toyota vehicle was seen as a direct challenge to the family name behind the vehicle.73

Having put the recall crisis behind the company, Akio Toyoda focused on turning the company around. Few would have predicted just how well he would succeed. In 2015, Toyota posted record sales and profits of nearly $400 billion and $18 billion, respectively. However, his approach had been a cautious one, having stopped construction of all new facilities for three years while streamlining the company’s existing operations. In 2015, Toyota Motor announced plans to spend more than $1.4 billion on new plants in Mexico and China, the world’s largest car market.

In a move that could upset its relationship with Denso, Toyota launched a strategic vision, the Toyota New Global Architecture, aimed at building vehicles that share common platforms and parts with the goal of reducing parts costs by $1,000 per vehicle. In so doing, Toyota Motor put Denso and all parts suppliers on notice that Toyota would be sourcing parts that were globally competitive at lower costs.

Time for Reflection

Akio Toyoda took a quick detour to visit the Toyota Museum in Nagakute-cho, where he loved to look at some of his grandfather’s creations. What an inventive man, he thought. Wondering what Kiichiro Toyoda would have done in his shoes, Akio Toyoda asked himself the following questions:

1. Why are you (assume the role of Akio Toyoda) the right person to run the firm built up by your ancestors?

2. What has been the contribution of Toyoda family to the firm?

72 More research needs to be done on the family assets of the Porsche and Piëch families. 73 Toyota Under Fire, Jeffrey K. Liker, Timothy N. Ogden, McGraw Hill, 2001, p. 213

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3. What are the challenges the Toyoda family will face in the future? 4. The global car industry has been dominated by families historically - Why? 5. Do you think that families will continue to dominate the auto industry?

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Exhibit 1 Statement by Akio Toyoda to the US congressional committee on Oversight and

Government Reform Prior to His Testimony on Capitol Hill on 24 February 201074

Thank you Chairman Towns. I am Akio Toyoda of Toyota Motor Corporation. I would first like to state that I love cars as much as anyone, and I love Toyota as much as anyone. I take the utmost pleasure in offering vehicles that our customers love, and I know that Toyota's 200,000 team members, dealers, and suppliers across America feel the same way. However, in the past few months, our customers have started to feel uncertain about the safety of Toyota's vehicles, and I take full responsibility for that.

Today, I would like to explain to the American people, as well as our customers in the US and around the world, how seriously Toyota takes the quality and safety of its vehicles. I would like to express my appreciation to Chairman Towns and Ranking Member Issa, as well as the members of the House Oversight and Government Reform Committee, for giving me this opportunity to express my thoughts today.

I would like to focus my comments on three topics – Toyota's basic philosophy regarding quality control, the cause of the recalls, and how we will manage quality control going forward. First, I want to discuss the philosophy of Toyota’s quality control. I myself, as well as Toyota, am not perfect. At times, we do find defects. But in such situations, we always stop, strive to understand the problem, and make changes to improve further. In the name of the company, its long-standing tradition and pride, we never run away from our problems or pretend we don't notice them. By making continuous improvements, we aim to continue offering even better products for society. That is the core value we have kept closest to our hearts since the founding days of the company.

At Toyota, we believe the key to making quality products is to develop quality people. Each employee thinks about what he or she should do, continuously making improvements, and by doing so, makes even better cars. We have been actively engaged in developing people who share and can execute on this core value. It has been over 50 years since we began selling in this great country, and over 25 years since we started production here. And in the process, we have been able to share this core value with the 200,000 people at Toyota operations, dealers, and suppliers in this country. That is what I am most proud of.

Second, I would like to discuss what caused the recall issues we are facing now. Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick. I would like to point out here that Toyota’s priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to customers' voices to make better products has weakened somewhat. We pursued growth over the speed at which we were able to develop our people and our organization, and we should sincerely be mindful of that. I regret that this has resulted in the safety issues described in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have experienced.

Especially, I would like to extend my condolences to the members of the Saylor family, for the accident in San Diego. I would like to send my prayers again, and I will do everything in my power to ensure that such a tragedy never happens again.

Since last June, when I first took office, I have personally placed the highest priority on improving quality over quantity, and I have shared that direction with our stakeholders. As you well know, I am the grandson of the founder, and all the Toyota vehicles bear my name. For me, when the cars are damaged, it is as though I am as well. I, more than anyone, wish for Toyota’s cars to be safe, and for

74 The Guardian, 24 February 2010

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our customers to feel safe when they use our vehicles. Under my leadership, I would like to reaffirm our values of placing safety and quality the highest on our list of priorities, which we have held to firmly from the time we were founded. I will also strive to devise a system in which we can surely execute what we value.

Third, I would like to discuss how we plan to manage quality control as we go forward. Up to now, any decisions on conducting recalls have been made by the Customer Quality Engineering Division at Toyota Motor Corporation in Japan. This division confirms whether there are technical problems and makes a decision on the necessity of a recall.

However, reflecting on the issues today, what we lacked was the customers’ perspective.

To make improvements on this, we will make the following changes to the recall decision-making process. When recall decisions are made, a step will be added in the process to ensure that management will make a responsible decision from the perspective of “customer safety first.” To do that, we will devise a system in which customers' voices around the world will reach our management in a timely manner, and also a system in which each region will be able to make decisions as necessary. Further, we will form a quality advisory group composed of respected outside experts from North America and around the world to ensure that we do not make a misguided decision.

Finally, we will invest heavily in quality in the US, through the establishment of an Automotive Center of Quality Excellence, the introduction of a new position – Product Safety Executive, and the sharing of more information and responsibility within the company for product quality decisions, including defects and recalls.

Even more importantly, I will ensure that members of the management team actually drive the cars, and that they check for themselves where the problem lies as well as its severity. I myself am a trained test driver. As a professional, I am able to check on problems in a car, and can understand how severe the safety concern is in a car. I drove the vehicles in the accelerator pedal recall as well as the Prius, comparing the vehicles before and after the remedy in various environmental settings. I believe that only by examining the problems on-site, can one make decisions from the customer perspective. One cannot rely on reports or data in a meeting room.

Through the measures I have just discussed, and with whatever results we obtain from the investigations we are conducting in cooperation with NHTSA, I intend to further improve on the quality of Toyota vehicles and fulfil our principle of putting the customer first.

My name is on every car. You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers.

Thank you.

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Exhibit 2 Published Speech by Eiji Toyoda

To All Toyota Employees: Take a Valuable Lesson from the Recall Problems.

I apologize for the intense concern the recall problems have caused all of you, our hardworking employees.

I will not delve into what the media is saying, or our own account of the matter, as you already know those details fully well. However, there are two key points I would like to reiterate. The first is that we have adhered to the founding philosophy of Toyota to make cars available for everyone, and to this day put the customer first in all things. And the second is that we have worked day and night to deliver ever-higher quality and ever-lower prices in accordance with our motto, Good Thinking, Good Products.

Toyota’s technologies have grown to the point where they now surpass global standards. This is stunning progress when you consider how we started. I am not saying, however, that we should be complacent. Cars are used today by countless people in a myriad of environments, and we must endeavour to create even safer, more complete cars.

In that sense, the recent recall problems can be considered a valuable lesson. I would like everyone to think seriously about how to address these problems and how we can benefit from them.

I want everyone to make the most of this valuable experience in their own position and capacity. That is to say, I want managers to take full consideration of quality cost, supervisors to once again review key aspects of work tasks, and individual employees to be aware of the fact that your work is closely connected to the world. With great courage and confidence and the carefulness required to leave not a single screw untightened, I want us all to move forward and aspire to become Global Toyota. Source: Toyota Shimbun (an in-house Japanese-language publication), No. 814 (July 5, 1969)

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Appendix 1 Toyota Share Price vs. Japanese Automotive Index, Nikkei Index, S&P Brent Crude Oil

Index (January 2005-July 2015)

Source: S&P Capital IQ, indices, accessed 28 July 2015; Japanese Car Index consists of eight publicly traded automotive companies on the Japanese Stock Exchange: Daihatsu Motor Co. Ltd., Hino Motors Ltd., Honda Motor Co., Ltd., Isuzu Motors Ltd., Mazda Motor Corporation, Mitsubishi Motors Corporation, Nissan Motor Co. Ltd., and Suzuki Motor Corporation.

Appendix 2 Toyoda Family Tree75

75 https://en.wikipedia.org/wiki/Akio_Toyoda, accessed 23 November 2015

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Appendix 3 Toyota Motor Financial Data (2001-2015)

Fiscal Year

Cash and Short-Term Investments

Total Assets Total Debt Total Equity Market

Capitalization (in Japanese Yen)

Total Revenues

Net Income

2001 16 528 137 367 17 624 57 122 15 550 689.42 106 030 5 447 2002 17 094 144 884 22 396 54 515 12 738 491.25 107 443 4 177 2003 18 743 167 662 25 946 59 243 10 527 433.82 128 965 6 247 2004 21 258 208 537 31 358 77 383 14 687 374.10 163 637 10 995 2005 19 466 226 604 32 896 84 225 12 876 231.02 172 749 10 907 2006 19 193 244 587 40 495 89 899 18 899 446.03 179 083 11 681 2007 20 013 275 941 49 686 100 263 24 496 195.06 202 864 13 927 2008 23 012 323 968 62 163 118 470 16 250 284.04 262 394 17 146 2009 30 386 295 857 64 311 102 425 11 352 041.17 208 995 (4 448) 2010 43 380 324 939 58 865 117 029 9 831 345.40 202 901 2 243 2011 42 412 360 297 71 917 131 948 10 300 770.19 229 503 4 932 2012 35 682 371 933 72 361 134 286 9 753 774.04 225 502 3 441 2013 34 735 376 841 72 153 135 651 18 218 300.97 234 327 10 218 2014 41 447 402 384 75 553 147 786 18 895 218.47 249 484 17 704 2015 43 481 397 881 74 721 147 110 26 593 015.25 227 030 18 117

All figures except for Market Capitalization are in millions of US$. Market Capitalization is in millions of Japanese Yen.

Source: S&P Capital IQ. Accessed 6 November 2015

Appendix 4 Toyota Motor Financial Data (2001-2015)

Fiscal Year

Return on Assets

Return on Equity

Dividend Per Share (in Yen)

2001 2.7% 8.8% 25.00 2002 3.6% 7.4% 28.00 2003 4.2% 10.7% 36.00 2004 4.9% 15.9% 45.00 2005 4.7% 13.5% 65.00 2006 4.2% 13.5% 90.00 2007 4.6% 14.3% 120.00 2008 4.7% 15.5% 140.00 2009 (0.9%) (4.0%) 100.00 2010 0.3% 2.3% 45.00 2011 2.7% 4.5% 50.00 2012 3.6% 3.4% 50.00 2013 4.2% 8.5% 90.00 2014 4.9% 13.6% 165.00 2015 3.6% 13.0% 200.00

Dividends are in Japanese Yen

Source: S&P Capital IQ, accessed 6 November 2015

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Appendix 5 Toyota Motor Executives (1937-Present)

Name President/CEO Chairman Honorary Chairman Note Risaburo Toyoda 1937 – 1941 1941 – 1949 Adopted-son-in-law and

the Patriarch Kiichiro Toyoda 1941 – 1950 Died in 1952; younger

brother of Risaburo Toyoda

Taizo Ishida 1950 – 1961 1961 – 1971 Salaryman Fukio Nakagawa 1961 – 1967 Salaryman Eiji Toyoda 1967 – 1981 1981 – 1994 1994 – 1999; and

supreme advisor until 2013

Nephew of Kiichiro Toyoda

Shoichiro Toyoda 1982 – 1992 1992 – 1999 1999 – The first son of Kiichiro Toyoda

Tatsuro Toyoda 1992 – 1995 Younger brother of Shoichiro Toyoda

Hiroshi Okuda 1995 – 1999 1999 – 2006 Salaryman Fujio Cho 1999 – 2005 2006 – 2013 2013 – Present Salaryman Katsuaki Watanabe 2005 – 2009 Salaryman Akio Toyoda 2009 – Present First son of Shoichiro

Toyoda

Note: Salaryman are listed in red

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Appendix 6 Toyota Motor Major Shareholders (1962-2015)

Source: Osiris for data 2000, 2010, 2015; Adoptive expectations paper for all data before 2000.76

76 Adoptive expectations: Rising sons in Japanese family firms, Vikas Mehrotra, Randall Morck, Jungwook Shim, Yupana Wiwattanakantang, Journal of Financial Economics 108 (2013) 840–854, p. 843

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Appendix 7 Toyota Industries Major Shareholders (1952-2015)

Source: Osiris for data for years 2000, 2010, 2015; Adoptive expectations paper for all data before 2000.77

77 Adoptive expectations: Rising sons in Japanese family firms, Vikas Mehrotra, Randall Morck, Jungwook Shim, Yupana Wiwattanakantang, Journal of Financial Economics 108 (2013) 840–854, p. 843

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Appendix 8 Denso Major Shareholders (1952-2015)

Source: Osiris for data for years 2000, 2010, 2015; Adoptive expectations paper for all data before 2000.78

78 Adoptive expectations: Rising sons in Japanese family firms, Vikas Mehrotra, Randall Morck, Jungwook Shim, Yupana Wiwattanakantang, Journal of Financial Economics 108 (2013) 840–854, p. 843

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