From nonconsumption to market creation: How Toyota became an economic powerhouse for Japan

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Jan 23, 2020

If you had predicted decades ago that Toyota would someday become the world’s largest car manufacturer, many would have laughed at you. Yet today, the company is not only responsible for the world’s best selling car of all time—the Corolla—but sells more than ten million cars annually, surpassing American behemoth General Motors and Germany’s Volkswagen in sales. To learn how Toyota went from obscurity to the world’s largest automaker, we must go back to the beginning.

In the beginning, there was nonconsumption

Toyota Motor Company was founded in Japan in 1937, at a time when there were few cars on the roads and more than 400,000 horse- and ox-drawn vehicles on Japanese streets. Roughly 80% of the country’s roads were unpaved, which made driving both expensive and risky, as the few cars on the roads broke down often. These circumstances contributed to the immense nonconsumption of cars—that is to say, people who would have benefited from purchasing them were unable to do so due to cost, access, and other factors.

With a GDP per capita of roughly $2,300, Japan was by no means the prosperous nation it is today. The United States, even at the tail end of the Great Depression, was still almost three times wealthier than Japan. But instead of Toyota looking to take advantage of low wages in the country to serve export markets in wealthier countries, its president, Kiichiro Toyoda, declared that Toyota cars should be developed as “economical vehicles that can withstand poor roads and [be] more practical for the people of East Asia.” In other words, Toyoda decided that the young motor company would focus on serving the vast nonconsumption in Japan and East Asia. 

This strategy caused the company to make a myriad of investments that have led to its dominance in the auto industry today, and have created a foundation for sustained development in Japan. First, in order to create a local auto market in Japan, Toyota had to invest in manufacturing, research and development, marketing, sales, distribution, and other supporting components in the auto value chain. For example, Toyota invested heavily in the Chubu Nippon Drivers’ School in Nagoya and spent as much as 40% of the company’s capital on it. The school became a model for other driving schools in the country, promoted motorization in Japan, and ultimately helped Toyota sell more vehicles. To keep up with demand, the school expanded in 1958 to house a college for training new employees on the Toyota sales method. An export-based strategy that takes advantage of low wages in a region wouldn’t have required these investments. 

Second, the decision to target nonconsumption created tens of thousands of long-term jobs. As Toyota built new plants and sold more cars to Japanese customers, naturally, it needed more employees. For example, as more companies set up auto manufacturing in Toyota City—a city that was given its name after the budding business built a plant and offices there—the ratio of job openings for every applicant rose from 2.7 in 1962 to 7.1 in 1970. By 1980, the company had increased the number of Toyota dealerships in Japan tenfold, to more than 300. Toyota now employs more than 340,000 people globally, with more than 70,000 based in Japan.

Third, by targeting nonconsumption in the auto industry, Toyota was able to help Japan create a more relevant and contextual regulatory and institutional framework. In Jeffrey Alexander’s book, Japan’s Motorcycle Wars, he explains that as more and more vehicles found themselves on Japanese roads, there became “a pressing need for coherent government policies on road traffic, vehicle and driver licensing, and the policing of city streets.” In essence, the proliferation of vehicles led to policies that made sense in Japan’s specific circumstances. Significantly, our research at the Christensen Institute has uncovered that market-creating innovations typically precede regulations. Without innovations that increase tax revenues, governments aren’t able to enforce them.

Toyota impacted Japan in countless other ways. The company enabled a growing logistics and transportation sector, increased demand for the country’s steel manufacturers, and helped shape a culture of entrepreneurship that enabled Japan to become an innovation powerhouse. Because of Kiichiro Toyoda’s nonconsumption strategy, and the resulting execution, Toyota is now the 10th largest company in the world by revenues.

More than ever before, today’s innovators and investors have options when it comes to how they invest their resources. Choosing a strategy to target nonconsumption, and deliberating executing on it, can result in significant financial and social impact.

Efosa Ojomo is a senior research fellow at the Christensen Institute, and co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. Efosa researches, writes, and speaks about ways in which innovation can transform organizations and create inclusive prosperity for many in emerging markets.