NUMMI Closes and is Crushed by N.Y. Times Columnist Bob Herbert
New United Motor Manufacturing, Inc. closes its doors for the final time this Thursday, April Fools' Day. It is a sad occasion for anyone who has been touched by NUMMI over the years. It is a time for testimonials, such as the outstanding treatment by Frank Langfitt for an hour-long special "NUMMI" on National Public Radio's "This American Life". I can't remember hearing a better documentary radio show, featuring interviews with many individuals who have played key roles in the NUMMI story over the years. I suggest - no, I insist - that you give it a listen.
Unfortunately, for every yin there's a yang, in this case in the form of an article by Bob Herbert in the New York Times: "Workers Crushed by Toyota." I would like to give Herbert the benefit of the doubt. Surely he simply received bad counsel and was erroneously informed - otherwise he would never write such nonsense. But, upon closer reading, his nonsense is no one's responsibility but his own.
Herbert attacks Toyota for the closing of the NUMMI plant in Fremont, California. In previous columns ("Arigatou NUMMI", "Was NUMMI a Success?", "How NUMMI Changed Its Culture") I've written about the significance of this historical venture, and in my Sloan Management Review article I shared some lessons I learned while working there. Herbert's column merits a response because it reflects a fundamental misunderstanding of what NUMMI was all about. Both NUMMI and Toyota deserve better.
NUMMI Closing Misrepresented
Herbert's hollow outrage is evidence of how extreme the Toyota-bashing party has gone. I concur wholeheartedly with Herbert's wish that NUMMI remain open. Having played a role in NUMMI's beginning over 25 years ago, I am sure that I am saddened far more than Herbert by the unfortunate turn of events. But he totally misrepresents the situation.
Toyota was in fact lambasted (due to ignorance) when they moved in, and lambasted (due to ignorance) again as they exit - after being left holding the bag by GM. A federal lawsuit in 1984 almost prevented NUMMI from ever even happening. Even then, the judgment handed down by a federal judge limited the life of the GM-Toyota joint venture to 12 years. NUMMI only survived beyond that because Toyota (not GM) petitioned 10 years later to vacate the order, a request that was granted.
Bottom line: no one in the auto industry can make a business case to produce automobiles in California. Toyota - not GM which wanted out of the JV for years and was able to use Chapter 11 as an excuse to ditch Fremont - has tried to do the right thing fighting against the unfriendly economics for years.
I can't claim to know all the facts weighed by Toyota or GM in making their business decisions to exit NUMMI. Neither can Herbert. But that doesn't prevent him from outrageous statements such as, "The company could keep the plant open and profitable if it wanted to." Herbert can't possibly know that to be true. What is most outrageous here is the double-standard Herbert brings to lay all the blame on Toyota. If we want to speculate on the business case for all the parties here, an equally strong or stronger case can be made to "blame" GM, or even the state of California for NUMMI's unfortunate closure.
Herbert blames Toyota for "crushing the workers", but the fact is that this is the second time for GM to pull out of the same community, each time with no regard for the community or the workforce. Where was Herbert when GM pulled out of Fremont in 1982? Or when Ford pulled out of Milpitas, ten miles away? Or when GM closed Van Nuys, or Oakland, or South Gate, all also in California? There are no other auto factories in CA today because the business case hasn't been there to justify it for 30 years. Toyota stayed this long IN SPITE OF the lack of business case, and in spite of the fact that GM has long desired its second exit from the plant.
Let's not forget that Toyota's decision to enter the JV in the first place salvaged a mess left by GM in Fremont two years earlier. The plant had been a disaster prior to its first shuttering. A Wall Street Journal article from the time reported: "When GM closed its Fremont plant in 1982, laying off about 5,000 workers, an extraordinary 800 grievances were pending and absenteeism regularly passed 20%. Beer bottles littered the parking lot and even a union request for a fan in a plant telephone booth had to go to the negotiating table." ["GM, Toyota, UAW Are Nearing Their Goals," John Bussey and Mike Tharp, Wall Street Journal, May 20, 1986] By the way – after Toyota introduced its production and management systems, that absenteeism reduced to a steady 2%.
Gold Rush in Reverse
What does Herbert mean by "California has been very, very good to Toyota."? Last July, BusinessWeek ran an article ["Toyota, GM End Long, Costly Marriage," David Welch, Business Week, July 1, 2009] that said "Then there is the higher cost of doing business in California. Since 2000, the Golden State has lost 456,000 manufacturing jobs mostly due to rising costs. Corporate tax rates are double the national average, according to Jack Stewart, president of the California Manufacturers & Technology Association; electricity rates are one-third more." Toyota is following the same business logic that chased all of those manufacturing jobs out of the state. Why single out Toyota to blame for that?
At the time GM and Toyota made their respective decisions, Toyota was losing money and market share. Volumes were falling. A recovery of both profitability and volume had just begun for GM, which was already starting to look for more volume at about that same time. Yet GM backed out of the plant while Toyota continued to produce cars and employ workers.
Note the timeline. In July 2009 - AFTER filing for bankruptcy - GM announced that "as part of its long-term viability plan, General Motors has decided that its ownership stake in the New United Motor Manufacturing Incorporated (NUMMI) joint venture with Toyota will not be part of the 'New GM'." Clearly, they didn’t believe they could make a positive business case for the plant. In August, Toyota announced that it had lost $819 million for the first quarter. At the end of the month, Toyota announced that it would end production at NUMMI at the end of March 2010. In other news that August, GM announced that it planned to raise its overall U.S. production 20% in the third and fourth quarter, and that it would reinstate 1500 jobs. "'The uptick is an encouraging sign that vehicle sales are turning around,' said Tim Lee, GM group vice president of global manufacturing and labor." ["Toyota Weighs Shutting California Site," Norihiko Shirouzo, Wall Street Journal, August 19, 2009.] By the way, in that same announcement, GM said that it would be adding shifts to plants in Lordstown Ohio and Ontario Canada.
$280 Million of Ingratitude
Herbert also attacks Toyota's business logic. But, regarding NUMMI's profitability and productivity (the plant's biggest contributor to profitability), relatively speaking, for Toyota, I'm guessing that NUMMI would have had easily the lowest productivity of any of its plants in North America. For GM, I believe that NUMMI has lately been middle of the pack. GM didn't choose to close ALL plants, just some, so just because they were in Chapter 11 does not automatically mean they had to pull out of NUMMI. With risks and some costs shared with a joint venture partner, good (for GM) productivity, growing volumes, an ongoing need for small, fuel efficient vehicles, you could argue that GM could easily have made the decision to stay with NUMMI.
In fact, GM's bankruptcy filing, far from offering justification for closing NUMMI, makes a strong argument to keep it open. GM's bankruptcy filing emphasizes the importance, moving forward, strategically, for the company to maintain its strength in environmental technologies, to focus on fuel-efficient vehicles, and to seek cost efficiencies through greater productivity. For GM, 1) NUMMI was a relatively efficient, productive plant. 2) It produced fuel-efficient vehicles. 3) It could have been a source of new more environmentally-friendly cars (as it could have for Toyota). Given the specific wording and spirit of the filing, how does Chapter 11 justify GM's action?
Further, even granting (as we should) GM its right to make business decisions as they see fit - in this case pulling out of NUMMI - what is the justification for how they exited? Twenty-five years of partnership with Toyota (50/50) and with the UAW and the local community and they simply walk away, for the second time from the same community, workforce and union local.
"Toyota is paying the state back with the foulest form of ingratitude," charges Herbert. The facts say otherwise. On March 18, Toyota announced that it will pay $280 million to fund transition support for NUMMI's salaried and hourly team members. This is in contrast to the payment from General Motors of, let's see, that would be precisely $0. I don’t know but that's probably the same they offered the workers when they laid them off in 1982.
Herbert condemns Toyota for its "ingratitude." What did the state of California do to take advantage of the incredible gift (new production paradigm; new model of labor-management relations) that NUMMI/Toyota gave them? Did they build an industry-friendly environment to attract more businesses and auto suppliers? No. They sat and watched as company after company fled the area, fled the state. Instead of being vilified for bucking the trend (self-inflicted by the state) of exiting, Toyota should be lauded for staying long after every other automaker fled.
As long as we're passing around blame, let's not forget the national and international levels of the UAW. Instead of learning from the outstanding success of its outstanding brothers and sisters at the UAW Local 2244, UAW leadership remained suspicious of the innovative and successful model of labor-management relations pioneered by NUMMI. NUMMI and UAW Local 2244 signed their first collective bargaining agreement in June 1985, with the company and union committed to resolving problems together and seeking mutual trust. But, UAW national and international leadership remained skeptical, stuck in a 1950s mindset of adversarial labor-management relations, as they watched their membership plummet over the years.
Imagine if the State of California and the UAW had together embraced the NUMMI model and made CA into the land of the world's best environment for businesses and workers to work together for mutual prosperity! Instead they chose years of business-unfriendly policies and inaction rather than aggressive action to retain and attract business. Now they expect Toyota to now do FOR them instead of asking what they could do for themselves.
Toyota's ongoing involvement as GM's JV partner at NUMMI has been a matter of loyalty as much as anything else. Under ordinary circumstances, Toyota would never close an operation it had invested in. Toyota has a track record of proving time and again the lengths to which it will go to preserve jobs well past the apparent business need for them. When NUMMI opened, Toyota didn't receive ANY of the product from the plant, so NUMMI wasn't even part of Toyota's marketing plan. Toyota added its own product to the mix when GM couldn't sell enough to keep the plant running at anywhere near capacity. Until Toyota added the dowdy Corolla FX hatchback in about '88, the plant was running at about 70% capacity. GM would've laid off the extra workers; Toyota gave them additional training.
In the beginning, Toyota had many concerns about transplanting perhaps the most important aspect of its production system - its way of cultivating employee involvement - in getting started. How could workers with such a bad reputation support us in building in quality? How would they support the concept and practice of teamwork?
As it turned out, the "militant" by reputation workforce of the old GM Fremont plant was not an obstacle. Of course, problems cropped up but they were overcome through the effort of all involved. In fact, UAW Local 2244 members didn't just accept Toyota's system, they embraced it with passion. They took the quality of the plant from GM's very worst to GM's very best - not just bad to good, from worst to best - in only one year. The exact same workers, including the old supposed "troublemakers." (Again, see my Slaon Management Review article.)
The fact is, for either GM or Toyota, we don't know and won't know all the facts around their respective business decisions to exit. But, it is certainly a stretch to hold Toyota more culpable than GM just because they were left holding the bag.
Remember the Alamo
Herbert states that NUMMI was de facto a Toyota production facility, quoting production figures carefully chosen from the years 2002 to 2009, when sales (and therefore production) were down for GM and strong for Toyota. But, percentage of product per partner is incidental to responsibility as a 50/50 joint venture partner. Investment in a factory - whether joint venture or wholly-owned - means investment in the people and assets with an eye to their value beyond product mix allocation at a given point in time. Probably Herbert didn't know that initially Toyota received no product at all from NUMMI, with all of the production going to GM. Over the course of the 25 years of the joint venture, a little over 25% of the product went to GM. Note, however, that in recent years the low volume of GM product was not due to anyone's strategic intent - GM just couldn't sell the product in the volumes they would have liked. The increase in percentage of production the past few years wasn't because of any long term plan for Toyota to take over NUMMI - it was simply because Toyota could use capacity that GM didn't want at that time.
That ignorance did not prevent Herbert from calling "a cold and irresponsible act on Toyota's part, a decision that was not necessary from a business standpoint." I guess Herbert knows a lot more about Toyota’s business situation than I do. What I do know is that Toyota was facing fundamental challenges in terms of excess capacity at a time of lower demand. It was faced with owning the remaining automobile production plant in California - a state that had witnessed the exodus of more than a dozen other plants over the years. As Herbert states, "Shutting down the plant will be another milepost in the long erosion of California's once-thriving auto industry."
That is the one statement that Herbert makes with which I can agree, in both fact and sentiment. It is indeed a sad state of affairs that a once-proud industry is now a thing of the past. But, don’t blame losing the battle on the last-standing soldier at the Alamo.
NUMMI was hugely important to American manufacturing. NUMMI proved that the best, supposedly "Japanese," production methods in the world could work on American soil with American labor. An early motto at NUMMI was "Best of Both Worlds." I truly believe NUMMI in its heyday embodied that motto in principle and in practice. And, if lean production and lean thinking and the lean enterprise are the way forward for American organizations in all industries, NUMMI was the most important lens for the world outside Toyota to see it up close.
The story of NUMMI is a hugely important one in the history of American industry. In the mid-1980s, NUMMI offered the first close-up look at what later became known as lean production. While many visitors in the 1980s marveled at the technical details of the Toyota Production System, others raved about the new model of labor-management relations that NUMMI spearheaded.
If NUMMI made business sense for Toyota as a solely-owned operation, Toyota would surely stay and keep the plant open. Without a joint venture partner, we can only assume that the numbers just don't add up. It's as simple as that. Rather than outrage at Toyota for leaving due to a situation that makes for an impossible business case, Herbert would serve his readership better to encourage the building of business environments that attract and keep good employers. With such an environment in place, I'm sure both Toyota AND General Motors would have made different decisions.
Agreement - and Closure
The closure of NUMMI is indeed unfortunate and I am joined by thousands of others in lamenting its demise. The employees of NUMMI didn't care about the geopolitical environment that brought about the creation of the joint venture 25 years ago, and they don't much care about the macro-economic trends that have contributed to its termination today. The employees - hourly and salaried - of NUMMI did their part to show a better way of working together. They deserve better treatment now, from all parties, not just Toyota.
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