Why Automakers Like Toyota Have To Unlearn How To Make Cars

Toyota’s founder, Sakichi Toyoda, started his company not by building cars but by building a better loom. Specifically, he built a loom that could sense when the fabric broke so the workers could stop production until someone fixed the problem. This concept is built into the fabric of Toyota’s successful car production and has been copied by the rest of the industry. Is it also why Toyota hasn’t built a good EV yet?

I try to mix up the sources in The Morning Dump because I like to give a broad view of the industry, but today I’m going to start with two Bloomberg pieces I think are nicely complimentary. One is a Bloomberg Businessweek feature on Toyota’s challenges in trying to build an EV. The other one focuses on Volkswagen’s similar troubles.

Where the two companies differ is in North America. Toyota’s problem is usually not having enough cars to meet demand and Volkswagen usually has the opposite problem. Both will be susceptible to credit availability for consumers, though, as mixed data means we’re probably in for more uncertainty as the year starts.

Tesla is an established automaker at this point, even if its processes differ from its competition. Another way that Tesla is different is its CEO, who manages to get in the news more often for things having nothing to do with his car company. This week it’s a last-minute SEC lawsuit alleging that Musk was underhanded in trying to purchase Twitter.

‘You Cannot Kaizen Yourself From An ICE Vehicle To A BEV’

The quote above is from former GM Exec Terry Woychowski, whose current job is working for a Munro-like company called Caresoft. The company buys vehicles, takes them apart in an old Japanese junior high school, and gives advice to automakers on how to improve systems and parts.

It’s part of this big Bloomberg Businessweek feature you should read, but I’m going to excerpt a little section here that I thought was important:

[C]onsider one component: Toyota part #55330-42410, a 20-pound steel bar, known by engineers as a cross-car beam. The beam holds the steering wheel and dashboard instruments in place and helps protect the cabin during a collision.

This part is inside the bZ4X, the Toyota brand’s only global, mass-market fully electric car, because it’s of a tried-and-true design used in countless other models. Today’s standard cross-car beam is the product of incremental improvements made across decades, and most versions of it have wound up under the hoods of internal combustion cars. This is a testament to the Toyota Production System, which continuously refines even the tiniest details of individual auto parts. Over untold iterations, the beam has been designed to keep the vibrations of an internal combustion engine from making their way to the passengers.

But electric motors don’t vibrate, and steel is heavy. These are among the reasons why Tesla Inc. and BYD Co., the top makers of battery-electric vehicles, manufacture similar beams out of plastic. Theirs weigh only about 14 pounds, according to Caresoft, and they’re cheaper and easier to install, too.

It seems obvious, and it is, but the company’s Toyota Production System philosophy is baked into that one part. Here’s how Toyota describes kaizen:

The English translation is, broadly speaking, continuous improvement. ‘Kai’ means ‘change’ and ‘zen’ means ‘for the better’. It is a philosophy that helps to ensure maximum quality, the elimination of waste, and improvements in efficiency, both in terms of equipment and work procedures.

Within the Toyota Production System, Kaizen humanises the workplace, empowering individual members to identify areas for improvement and suggest practical solutions.

This way of doing things, industrially, has been mimicked and adopted by almost every other automaker and plenty of non-automakers. It’s not exactly “lean manufacturing” but shares many of the same principles. There was a time when Japanese production efficiency scared Western automakers. Now it’s China and Tesla’s turn to advance industrial thinking.

Building an electric car is not like building any other car. Lucid’s CEO Peter Rawlinson, who also helped develop the Tesla Model S, has made this point many times. It requires a complete rethink because there are a lot of systems you need for gas-powered cars you don’t need for EVs, and vice-versa. Additionally, Toyota and other automakers rely heavily on suppliers for many common parts, but that means losing some of the secret sauce.

Here’s a clip above from the Fully Charged podcast, where Ford CEO Jim Farley talks about how there are 150 modules and semiconductors in one car with software written in different languages because it’s been bid out to different suppliers.

“The problem is the software is all written by 150 different companies and they don’t talk to each other. Even though it says Ford on the front, I actually have to go to Bosch to get permission to change the seat control software,” Farley explains. Even worse, none of this is Ford’s intellectual property.

Ford, for its part, has seen the writing on the wall and scrapped most of its next-gen EV products and focused on a skunkworks project in California that isn’t beholden to Ford’s old ways of thinking. Toyota? Not quite. The company’s BZ4X is a mediocre product and it’s not clear Toyota is going to dramatically change how it builds cars. It’s hard to argue with Toyota because, thus far, its reticence to invest in EVs has made it enormously profitable.

This isn’t to say that EV automakers have it all figured out, as they’ve had to learn how to make cars, often the hard way. Rivian made a simple mistake in ordering a single part and it set production significantly in 2024. Tesla customers have long complained about paint issues with the company’s cars (there’s even a Facebook group dedicated to this).

The question, as stated above, is whether or not iterative production can help you make a better electric car.

Volkswagen Will Have No New EVs This Year

Oof. That’s the only way to put it. Oof. Trying to build production electric cars has been difficult for Volkswagen, with issues ranging from software woes to the door handles on the ID.4. Because of this, the Volkswagen brand itself will have no new electric car models this year anywhere in the world.

The affordable ID.2all for Europe isn’t coming out until 2026, and the company’s key VW-Xpeng SUV for China is also not scheduled to go on sale until next year. The new Scouts, in the United States, aren’t coming to 2027. We did get the ID. Buzz, which technically went on sale last year, but is basically new this year. Also, see Jason’s ID.Buzz review for a better understanding of why that’s not likely to save the company.

Here’s the money quote from a Bloomberg story on VW’s issues:

“For the next year or so, VW is forced to sell old technology to new customers,” said Matthias Schmidt, an automotive analyst based near Hamburg. “That’s going to be difficult.”

Damn, Michael Kors, that’s harsh.

It’s a weird situation for Volkswagen to be in, because it needs to sell more electric cars and, yet, its current electric cars aren’t that great or that popular. Here’s another harsh-yet-true analyst quote:

“The main issue with VW is the product,” said Stephen Reitman, an analyst at Bernstein. “They have this production capacity for battery-electric vehicles that people aren’t buying.”

Volkswagen still sells a bunch of profitable cars, so it’s likely better the company takes a beat to align product with demand than it is to try and suddenly force a bunch of ID.4s and ID.7s on customers.

Credit Is Looser, But The Future Is Mixed

Viewed merely from the perspective of automakers, it would be excellent if we were in a zero-interest rate environment. Having low interest rates and a supply shortage during the pandemic meant that automakers could sell cars for high prices and help customers afford them by giving them somewhat artificially low car payments (over long terms).

Now, there are plenty of cars in production, but credit availability became a lot tougher as governments raised rates in response to inflation. This credit-tightening from 2023 into 2024, it’s widely assumed, caused people to delay buying cars.

According to Cox Automotive’s/Dealertrack Credit Availability Index, credit was more available in December, with the All-Loans Index hitting 95.5, which is the best credit access since March 2023. What’s driving this change?

Approval rates are up, which makes sense now that yield spreads narrowed. Overall, auto loan rates have dropped by 175 basis points since March of this year. Loan terms are also improving, slightly, with 72-month loans becoming less popular/necessary. The number of loans that came in with negative equity dropped by 120 basis points, but were still up year-over-year (the same with subprime loans).

What should we make of this? Here’s what Cox says:

The December Dealertrack Credit Availability Index illustrates mixed results in credit access for auto loans. Consumers benefited significantly from tightening yield spread, higher approval rates and more favorable loan rates, which played critical roles in pushing the index slightly upward. Meanwhile, the persistence of certain tightening factors – like shorter loan terms, higher down payments, and a reduced share of subprime loans – was not enough to reverse the loosening trend.

For consumers, this means better borrowing conditions and easier access to auto financing, particularly when purchasing used vehicles from franchised dealers. Lenders are also navigating a mixed environment as credit demand intersects with loosening policies for credit unions and auto-focused finance companies but tightening at banks and captives.

It’s assumed that more cuts are coming from the Fed, though the economy remains stubbornly hot, with employment strong. The Fed wants to get to the semi-mythical “neutral rate” that keeps people employed and inflation stable. It doesn’t feel like we’re there yet.

The SEC Claims In Lawsuit That Elon Musk Acquired Twitter In Underhanded Fashion

The Federal Government is basically in garbage time, with the Republicans having prevailed and various departments looking at President Trump and Elon Musk’s incoming DOGE commission and trying to do as much as possible before Monday.

That includes a lawsuit from the Securities and Exchange Commission against Elon Musk. Here’s how CNBC explains it:

Musk, who is also CEO of Tesla and SpaceX, purchased Twitter for $44 billion in late 2022 and changed the name to X the following year. Prior to the acquisition, he’d built up a position in the company of greater than 5%, which would’ve required disclosing his holdings to the public within 10 calendar days of reaching that threshold.

According to the SEC’s civil complaint, filed in U.S. District Court in Washington, D.C., Musk was more than 10 days late in reporting that material information, “allowing him to underpay by at least $150 million for shares he purchased after his financial beneficial ownership report was due.” Investors may have bid up the stock had they known about Musk’s purchases and interest in the company.

This is a strange one. As soon as Musk disclosed his purchase of Twitter the stock did go up 27%, as the SEC points out. The government claims that delaying his filing by 11 days while he accrued stock in the underperforming company allowed him to underpay shareholders by $150 million.

Musk himself has called this “lawfare” and his lawyer calls it “ticky tack.” It’s been a few years, but I don’t think it was a secret that Musk wanted to buy Twitter (now X) at the time. I remember him frequently threatening to do so in order to free the company from what he considered political influence and an overwhelming preponderance of bots. Glad he fixed all that…

What I’m Listening To While Writing TMD

I hope to keep writing The Morning Dump for many moons, so I’ve selected “What They Do” from The Roots because “Illadelph Halflife” is probably where you should enter The Roots if you haven’t listened to them before. It’s not my favorite album, that would be “Things Fall Apart.” It’s not the one I’ve listened to the most, which is probably “Phrenology.” It’s the classic, though, and it doesn’t make sense if you don’t start with this album. Later, when I have time, I have a story about The Roots that involves organic vodka and a lot of fresh fruit. Remind me to tell you about it sometime.

The Big Question

Which traditional automaker will end up being the biggest maker of electric cars in 10 years?

Lead photo: Toyota