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Supply Chain Management of Isuzu Motors, Ltd.
Supply Chain Management of Isuzu Motors, Ltd. - January 11th, 2011
One of the largest producers of medium- and heavy-duty trucks in the world, Isuzu Motors, Ltd. also produces sport utility vehicles, pickups, and diesel engines. Isuzu ventured into the passenger car market in the 1980s, but pulled out in 1991 after its passenger line dragged the company into heavy losses. With help from partial owner General Motors (GM), Isuzu returned to profitability in the mid-1990s, mainly by concentrating on its strong truck and diesel engine expertise. Becoming something of a manufacturing subsidiary of GM, Isuzu supplemented its strong Asian sales by building small trucks and components for distribution by General Motors. However, the Asian economic recession of the late 1990s, combined with declining truck sales in the United States, drove the company deep into debt, and in the early years of the 21st century Isuzu was forced to undertake a series of radical restructuring programs, in the hopes of reestablishing itself as a major, and profitable, truck manufacturer in the global automobile marketplace.
Isuzu Motors has its origin in a 1916 diversification plan undertaken by the Tokyo Ishikawajima Shipbuilding and Engineering Company. The company, established after the Meiji Restoration to build heavy ships on Ishikawajima Island near Tokyo, hoped to insulate itself from cyclical downturns in the shipbuilding industry. Tokyo Ishikawajima initiated the venture as a partnership with the Tokyo Gas and Electric Industrial Company, which had the engineering expertise necessary to design vehicles. In fact, Tokyo Gas produced its first vehicle, the Type A truck, in 1918, using engines from Tokyo Ishikawajima. The partnership manufactured a variety of designs under license from the English firm Wolseley, including the model A9 car, which went into production in Japan in 1922. In 1929 the enterprise was incorporated separately as Ishikawajima Automobile Manufacturing, Ltd.
The company developed an air-cooled diesel engine in 1934. Its pioneering efforts in this area established the automotive group as a leader in diesel technologies during the 1930s. Through its association with Tokyo Ishikawajima and Tokyo Gas, the company became a supplier to the military. Under a government mobilization scheme in 1937, the automotive interests of Tokyo Ishikawajima and Tokyo Gas were formally merged into a new company called Tokyo Motors. Mass production of the air-cooled diesel engine began that year.
World War II and Postwar Recovery
In 1938 Tokyo Motors began production of a truck under a new nameplate, Isuzu--Japanese for "50 bells." By this time, however, the military had gained control of the government and launched a war against China. As a result, Tokyo Motors came under government production plans and much of its output was earmarked for the military. In 1939 Tokyo Motors developed a new diesel model, the DA40, representing another advance in the company's diesel technologies. But by 1942, the United States and Britain were at war with Japan. With the war raging and the economy operating under emergency conditions, the operations of Tokyo Motors were split up to effect greater rationalization of the automotive industry. The company's truck business was spun off into a new company called Hino Heavy Industries (later Hino Motors). Tokyo Motors continued to operate as a frame manufacturer, but resumed production of engines in 1943.
A year later, Japan was exposed to bombing raids. As a military resource located in a major industrial center, Tokyo Motors was exposed to these raids. The company's production was completely disrupted until the war ended in September 1945. Yet Tokyo Motors was quick to recover from the war and resumed production before the end of the year. In 1946 the company introduced a new diesel truck called the TX80. This product helped Tokyo Motors fund major investments in its facilities and expand the scope of its product research.
The company changed its name to Isuzu Motors, Ltd. in 1949. Like many other Japanese companies that had emerged from the war, Isuzu went back into the business of supplying the military, but this time the customer was the U.S. Army. These large, stable supply agreements were instrumental in helping Isuzu recapitalize and grow. The company became an important resource for the Americans, particularly in late 1950, after hostilities erupted on the Korean Peninsula. Isuzu supplied a variety of trucks and other industrial products to the forces fighting North Korean aggression, helping to further advance the company's position in the diesel engine market. After an armistice was concluded in 1953, Isuzu reestablished licensing agreements with the British. The company signed an agreement to build automobiles designed by the Rootes Group (later named Talbot, and part of the French firm PSA). Under the terms of the agreement, Isuzu manufactured the Hillman Minx.
In 1959 Isuzu introduced a new two-ton N-series truck called the Elf. This was followed in 1961 by an attempt to equip an Isuzu automobile with a small diesel engine. While economical and reliable, the diesel Bellel car was uncomely, noisy, and, ultimately, a commercial failure. Consumers clearly favored a more cosmopolitan, if less practical, car. In 1962 Isuzu opened a new factory at Fujisawa. With expanded production capacity, the company introduced the Bellett automobile in 1963, followed by the Florian model in 1967. The next year Isuzu rolled out the sporty two-door 117 Coupe, a luxury model resembling the Ford Mustang. In 1970 Isuzu introduced two new trucks, the medium-sized Forward (named for its forward control) and a 12-ton diesel model.
Alliance with General Motors in the 1970s
Although Isuzu was a recognized leader in the truck market, its rapid development of new models had left it financially weakened. When it appeared to the company's bankers that the market would be unable to support Isuzu's new product line, they began negotiations with the company's competitors, hoping to arrange a merger of Isuzu with a more stable firm. Although companies such as Fuji Heavy Industries, Mitsubishi Corporation, and Toyota Motor Corporation were probably approached, it was General Motors that emerged with the greatest interest in Isuzu. The automotive giant was impressed with Isuzu's promise in export markets in the United States and Asia and hoped to include the company in its own global strategies. In 1971 General Motors purchased a 34.2 percent share of Isuzu. As part of its marketing tie-up with General Motors, Isuzu's KB pickup truck was sold through GM dealerships in the United States beginning in 1972. In 1974 General Motors employed Isuzu to manufacture the Kadett, a model designed by its German Opel subsidiary, under the Isuzu nameplate as the Bellett Gemini.
Isuzu introduced a fuel-efficient direct-injected diesel engine in 1974 in two new truck models, the Forward SBR and Forward JBR. Rising fuel prices made these models especially popular with inflation-weary consumers in Japan. General Motors saw the fuel efficiency of Isuzu models as a distinct competitive advantage in the American market. In 1976 it began importing the Gemini into the United States as the Buick Opel. Few consumers suspected that the German design, sold through the dealerships of an American company, was actually manufactured in Japan. But, as GM had suspected, the Gemini/Opel was an attractive alternative to gas-hungry American models, particularly as a second household car. In this role, the car displaced competitors such as Toyota, Datsun, and Volkswagen. Isuzu gained additional growth in the American market with a diesel-powered pickup sold in the United States as the Chevrolet Luv beginning in 1977. Also that year, Isuzu delved back into the diesel car market in Japan with a new Florian sedan.
The energy crisis took a rising toll on GM models in the United States, including those built by Isuzu. A consumer revolt against little, underpowered vehicles such as the Opel, Ford Pinto, and Gremlin placed Isuzu in a declining market at the wrong time. Despite a short-lived spike in fuel prices in 1979, the Isuzu product line fell increasingly out of step with American tastes. Dismayed by the poor quality of many American models, consumers were drawn to Toyota, Honda Motor Co., and Nissan in growing numbers.
Isuzu's production for General Motors declined steadily from 1979 to 1981. Responding to what it felt was a loss of synergy with GM, Isuzu established its own dealer network in the United States, American Isuzu Motors, Inc., which technically operated in competition with GM at the wholesale level. Commensurate with the formation of the new group, Isuzu undertook a complete design change of its Luv truck. General Motors' CEO Roger Smith laid a bombshell on Isuzu Chairman T. Okamoto in a landmark 1981 meeting. He announced that Isuzu had lost its favorable potential as a global partner for GM. But rather than abandon their partnership, Smith asked Okamoto to help GM buy a stake in Honda, one of Japan's fastest growing auto manufacturers.
Okamoto was stunned by the sudden change of events, but could not refuse the request of Isuzu's single largest shareholder. Ultimately, Honda expressed no interest in an alliance with General Motors, seeing its own prospects for global growth as excellent even without such a partnership. General Motors settled instead for a 5 percent stake in Suzuki Motors--a small consolation. General Motors may have intended to use this new partnership to leverage Suzuki against Isuzu, hoping the two companies would compete for the right to supply GM. Whether or not that was the case, General Motors had little choice but to expand its relationship with Isuzu. The company established new contracts with GM, building a model called the Storm under an entirely new nameplate, Geo. Once again part of General Motors' international strategy, Isuzu built new joint production facilities in the United Kingdom and Australia. Isuzu also concluded a long-term marketing agreement with Suzuki and Yanase & Company, under which Isuzu provided parts for assembly by Suzuki.
In an effort to raise consciousness of the Isuzu name and boost sales of the company's trucks in the United States, Isuzu launched a revolutionary ad campaign featuring the comedian David Leisure. The performer was portrayed as a spokesman named Joe Isuzu who made outrageously false claims about Isuzu products. A series of subtitles provided factual corrections as well as punch lines to Leisure's statements. The campaign easily could have failed had it not been for the comedian's wry delivery and obviously contrived smile. In one ad, Joe Isuzu concludes by saying, "May lightning strike me if I'm lying." At this point the actor is incinerated by a blinding light, leaving only a puff of smoke. Seconds later, the irrepressible spokesman falls out of the air and into the bed of an Isuzu truck. The ads were very effective in promoting Isuzu and launching Leisure's career, but they had only a limited impact on Isuzu's sales. (The company experienced no gain in passenger car sales.) The situation was exacerbated by appreciation of the yen, in effect, artificially raising the price of Isuzu products.
Global Joint Ventures in the 1980s
To eliminate the impact of currency fluctuations and stabilize product demand forecasts, Isuzu began studying the possibility of locating a factory in the United States. Other Japanese manufacturers, including Toyota and Honda, had already established American factories. But for Isuzu, the start-up costs were high and the company's sales volumes were too small to justify the badly needed move. Fortunately for Isuzu, Subaru, the automobile manufacturing subsidiary of Fuji Heavy Industries, suffered the same problem. The two companies operated in slightly different areas of the American market, so a joint venture between them was plausible. Isuzu and Subaru agreed to build, jointly, a factory in Lafayette, Indiana, in 1987. The facility went into operation two years later, providing Isuzu with a steady supply of American-built vehicles for distribution through its American sales organization.
Isuzu's export sales surpassed three million units in 1986, but again, much of this growth occurred in Asian markets and was accounted for in truck sales. That year, Isuzu formed a joint venture with Kawasaki Heavy Industries called IK Coach, Ltd. to manufacture coach bodies. Building on its Asian franchises, Isuzu established a subsidiary in Thailand to manufacture engines and a joint venture in Australia with General Motors the following year. These efforts helped to establish Isuzu as the world's largest truck manufacturer (on a per-unit basis) in 1987. The company marked several technological advances that year, including the development of a ceramic Adiabatic Engine and the NAVI electronically controlled transmission system, which was the first of its type.
Isuzu completed several other joint business arrangements in 1990, including an agreement with P.T. Gaya Motor of Indonesia to build pickup trucks in that country. This factory joined Isuzu plants in other developing country markets, including Thailand, Malaysia, and Egypt. The company also entered into agreements to market Isuzu's multipurpose vehicles in Japan through the Jusco Car Life Company and to handle sales of GM Opel models and Volvo trucks in Japan. These expansion efforts helped Isuzu to maintain its position as the world's largest truck maker. But the company's balance sheet indicated a high price for this leadership. The company lost $500 million in 1991 and was faltering financially.
Refocusing in the 1990s
This deeply concerned General Motors, which was unable to abandon its investment in Isuzu because of plummeting market value. Isuzu was GM's main source of imported light commercial vehicles and heavy trucks, and 37.5 percent of its shares were held by the American company. Isuzu continued to lose money into 1992, prompting the company's board to appeal to General Motors for help. As a condition, GM asked that one of its strategic planning experts, Donald T. Sullivan, be installed as executive vice-president of operations, with responsibility for revamping Isuzu's business, engineering, and manufacturing plans. This was an unprecedented move. No Japanese manufacturer had ever involved a non-Japanese speaking manager in such a high position, or given an American such wide-ranging latitude to rewrite the business plan.
Sullivan's first moves were to raise production at the company's Subaru-Isuzu Automotive facility in Indiana. He slimmed down the Isuzu's line of commercial vehicles, hoping to realize greater production efficiencies from fewer models and eliminate cannibalization within the product line. In a retrenchment strategy virtually unknown in Japan, Sullivan summarily reduced capital budgets by 12.5 percent, hoping to eliminate waste through budget-induced cost savings. Stopping short of employee layoffs, a tactic that was seen to breed only employee disloyalty in Japan, Sullivan ordered a reduction in Isuzu's temporary workforce.
Perhaps most dramatic was Sullivan's conclusion that Isuzu was not profitably competitive in the automobile market. Rather than continue to invest huge sums in an unpromising segment of the market, Sullivan recommended that Isuzu exit the automobile market and concentrate on what it did best. For Isuzu, this came down to only three products: trucks, recreational vehicles, and engines. Because GM relied on Isuzu for production of its Geo Storm model, the response back at GM was uneven. "The marketing guys at Chevrolet were disappointed," Forbes quoted Sullivan in 1994. "But the business people at GM looking at the financial liability at Isuzu had a different feeling."
These efforts appeared to have a positive effect on Isuzu's business, stemming losses while reversing a gradual decline in sales. By the end of Isuzu's 1993 fiscal year, the company reported a loss of only $39 million. Sullivan, however, had even higher hopes for the company. "I am proud of our success at Isuzu," he told Forbes. "But we are still defining success as eliminating failure." Although the 1994 fiscal year ended with even greater gains, Isuzu still carried a heavy debt burden, at $7.4 billion.
The actions taken by Isuzu under the tutelage of Donald Sullivan once again placed Isuzu thoroughly within General Motors' global strategy. Although GM lost its supplier of Geo Storms, it shifted its focus to incorporating Isuzu's expertise in other areas. For example, the General Motors European division began buying more Isuzu diesel engines. Michael Nylin, brought by Sullivan from General Motors to help lead Isuzu's strategic planning, tried to match Isuzu's product development with GM's needs. One result of that effort was a joint venture between Isuzu and General Motors to produce light trucks. Begun in 1994 in Janesville, Wisconsin, the venture called for Isuzu to supply the cab and chassis, shipping them from Japan, and General Motors to produce the gasoline engine, a technology in which GM had more expertise than Isuzu. Sullivan also hoped Isuzu would fit into GM's global strategy by providing General Motors with an entree into Asia markets. GM hoped to piggyback their passenger cars on Isuzu's strong sales of pickups in Asia by convincing Asian car dealers to sell them side by side.
The company's future had come to depend on its ties to other auto manufacturers, particularly General Motors, and on its ability to mark gains in the sales of its own products. Chief among these were the F-series (Forward) medium-duty trucks, the C-series heavy trucks, tractor trucks, and N-series (Elf) pickups. Light-duty trucks to be manufactured in China were planned in 1993 when Isuzu agreed to a joint venture with Jiangxi Automobile Factory and ITOCHU. The company expanded its relationships with other carmakers when it signed an agreement with Nissan in 1994 to cross-supply commercial vehicles, particularly Isuzu's two- and three-ton Elf trucks and Nissan's Caravan.
The company's progress in the United States, however, was hurt in 1996 when Consumer Reports judged the Isuzu Trooper "not acceptable." The Consumers Union (CU), publisher of Consumer Reports, issued a safety alert about the sport utility vehicle, claiming the Trooper "showed a pronounced propensity to roll over during our avoidance-maneuver tests." Isuzu disputed the report's findings; it pointed out that the Trooper met all applicable federal safety standards and that the company had received no reports of rollover accidents involving the Trooper. It also denounced the Consumers Union test as unreliable. The Consumers Union stood by its claims, but its petition for a defect investigation to the National Highway Traffic Safety Administration (NHTSA) was denied. The NHTSA explained: "Because of deficiencies in the CU short course testing and since none of the other information reviewed by [NHTSA] indicates that a safety-related defect exists, there is no reasonable possibility that ... a safety-related defect in the subject vehicles would be [found]." In mid-1997 Isuzu filed a lawsuit against the Consumers Union, alleging defamation and product disparagement. Although the company sought millions of dollars in damages, Isuzu presented the suit as a means to restore the company's good name.
Entering 1998 the company's future was uncertain because of the economic crisis in Asia. In November 1997 slow sales in Japan and constricting markets in Thailand led Isuzu to close its Thai factory, which had produced 120,000 trucks in 1996. With Asian truck sales the backbone of Isuzu's business, the company was greatly threatened by the economic turmoil in the region.
Entering the 21st Century
In order to survive in this troubled economic climate, Isuzu began to seek ways to strengthen its ties with General Motors. Since the company's diesel engine manufacturing operations offered it the greatest opportunity for long-term growth, Isuzu entered into a joint venture with GM in September 1998, to begin mass-producing diesel engines in the United States. The new company, dubbed DMAX-Ltd., was formed with an overall investment of $300 million, with the aim of turning out 100,000 engines a year by 2004. The new, 650,000-square-foot manufacturing plant in Moraine, Ohio, the most state-of-the-art facility of its kind in North America, would allow Isuzu to capitalize on its award-winning 4JX1-TC direct-injection diesel engine. Although Isuzu produced more than 800,000 diesel engines worldwide in 1998, it hoped to be able to increase this figure to 1.8 million by 2005, with the aim of becoming the world's largest diesel engine manufacturer. In December 1998 GM also invested an additional $456 million in Isuzu, increasing its stake in the Japanese automaker to 49 percent.
However, in the short term the company was still in a serious slump, and significant cost-cutting measures became inevitable. To this end, the company launched a series of restructuring plans beginning in December 1998. The most comprehensive came in May 2001, when the company announced its intention to reduce its workforce by nearly 10,000 employees over a three-year period, in addition to consolidating a number of its divisions and subsidiaries. The most radical measure, however, was the company's decision to transfer its principle manufacturing operations to Thailand, where production costs were significantly lower than in Japan. At the same time, Isuzu increased its collaboration with GM even further, forging an agreement that would enable the company to begin supplying GM with diesel engines. In order to meet this goal, the company increased the production capacity of its operations in Poland, which was already responsible for the bulk of its diesel engine manufacturing, from 100,000 to 200,000 units annually.
These radical streamlining efforts were intended to reverse the company's recent poor financial performance, with the aim of achieving profits of ¥30 billion by 2004. In spite of these measures, however, Isuzu still suffered losses of ¥23.6 billion for the first half of 2001, compared to a ¥22.1 billion loss for the same period in the previous year, and in November 2001 the company was forced to slash an additional 3,300 jobs. During this difficult period Isuzu even began to contemplate shutting down its truck manufacturing operations in Lafayette, Indiana. In January 2002, with the hope of further streamlining its operations, Isuzu merged its Japanese bus-manufacturing business with Hino Motors.
In spite of a continued drop in sales during the early years of the 21st century, there were some signs of recovery. Although the company still lost ¥43 billion in fiscal 2002, this figure marked a significant improvement over the previous year's losses of ¥67 billion. At the same time, a 30 percent increase in domestic sales allowed the company to keep its Kawasaki plant operational. Still, the losses were of grave concern to General Motors, which began to reconsider its relationship with the troubled Japanese firm. Although initially reluctant to invest further in the beleaguered company, GM eventually set its sights on acquiring some of Isuzu's key businesses. In August 2002 GM announced plans to acquire a 60 percent share in Isuzu's Polish diesel engine operations, in addition to increasing its stake in the DMAX Ltd. Business from 40 to 60 percent.
Unfortunately, this fresh infusion of capital could do nothing to reverse the company's fortunes in the present, and losses for the fiscal year ending in March 2003 were in excess of $1 billion. By late 2002 Isuzu launched its fourth restructuring scheme in five years, and even began to consider dropping out of the truck business altogether. After watching its North American sales drop 36 percent in one year, the company formally announced its intention to terminate its U.S. manufacturing operations by the end of 2004. In spite of these cutbacks, Isuzu remained hopeful that it would be able to remain a player in the lucrative U.S. market by importing less expensive trucks from its Thailand plant. Although still mired in debt in the summer of 2003, Isuzu had high hopes that its revised business strategy, with a heavier emphasis on promoting its diesel technology, would soon restore the company to profitability.
Principal Subsidiaries: Isuzu Motors Asia Ltd.; Isuzu (China) Holding Co. Ltd.; Quingling Motors Co. Ltd.; Jiangling-Isuzu Motors Co. Ltd.; Guangzhou Isuzu Bus Co. Ltd.; Isuzu (Shanghai) Tradetech Co. Ltd.; Beijing Beiling Special Automobile Co. Ltd.; Isuzu Philippines Corporation; Isuzu Autoparts Manufacturing Corporation; Isuzu Vietnam Co., Ltd. (IVC); P.T. Mesin Isuzu Indonesia (MII); P.T. Pantja Motor (PM); P.T. Astra Isuzu Casting Company (AICC); Isuzu Motors Co., (Thailand) Ltd. (IMCT); Tri Petch Isuzu Sales Co., Ltd. (TIS); Isuzu Engine Manufacturing Co., (Thailand) Ltd. (IEMT); Isuzu Technical Center of Asia Co., Ltd. (ITA); Thai International Die Making Co. Ltd. (TID); IT Forging (Thailand) Co., Ltd. (ITF); Isuzu (Thailand) Co., Ltd.; Isuzu Operations (Thailand) Co., Ltd.; Malaysian Truck and Bus Sdn. Bhd.; Anadolu Isuzu Otomotiv Sanayi Ve Ticaret A.S.; Isuzu Motors Europe Ltd.; Isuzu Truck (UK) Ltd.; Isuzu Motors German GmbH (IMG); Isuzu Motors Polska Sp zo.o. (Poland); General Motors Egypt S.A.E.; American Isuzu Motors Inc. (U.S.A.); Isuzu Motors America Inc. (U.S.A.); Subaru-Isuzu Automotive Inc. (SIA); DMAX, Ltd.; General Motors Isuzu Commercial Truck, LLC (GMICT); Isuzu-General Motors Australia Ltd. (IGM); International Auto Co., Ltd.; Taiwan Isuzu Motors Co., Ltd.
Principal Competitors: Ford Motor Company; Honda Motor Co., Ltd; Toyota Motor Corporation.
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