Section 4. Responding to the Oil Crisis

Item 1. Response to the First Oil Crisis

During the period following the Second World War, the global economy enjoyed rapid economic growth made possible by an abundance of low-cost oil supplied from extensive oil fields in the Middle East. In the early 1970s, however, as the pace of discovery of new oil sources slowed and little progress was made in the development of new energy that could take the place of oil, the sense of crisis concerning energy steadily rose. As global concerns regarding an energy crisis heightened, oil producing countries raised the price of oil and resource nationalism movements gained momentum with the nationalization of foreign oil capital.

The Fourth Arab-Israeli War broke out in October 1973, and Arab countries announced reductions in oil production and exports as an anti-Israeli strategy. Later, oil-producing countries unified under the Organization of the Petroleum Exporting Countries (OPEC) to cut oil supplies and drastically increase prices. Posted prices for Arabian light1 skyrocketed from 2.59 dollars per barrel2 in January 1973 to 11.65 dollars in January 1974, an increase of more than four times.3 This was an oil crisis.

The decrease in oil supply and increase in prices also further spurred shortages of various products that were occurring at that time. The sense of shortage of various consumer products including toilet paper and detergent gave rise to chaos in distribution processes. The Japanese government attempted to limit consumption and to control the disorder by adopting two oil-related laws: the Petroleum Supply and Demand Optimization Act and the Act on Emergency Measures concerning National Livelihood Stabilization. In 1974 and 1975, the Japanese economy experienced abnormal inflation under severe recession conditions and posted negative growth in 1974 for the first time in the post-war period.

Japan and nearly every other advanced industrial country suffered from declines in gross national product (GNP) and high inflation during 1974 and 1975-a condition known as stagflation.

Toyota experienced difficulty obtaining a growing number of materials and parts necessary for automobile production and hastily searched for countermeasures. In addition, the prices of many materials rose in conjunction with higher oil prices, and the increases exceeded strenuous corporate efforts to cut costs and limit consumption. As a result, the prices of all vehicle series sold in Japan were unavoidably revised in January 1974.

Automobile sales volumes also plunged as a result of falling consumer confidence, gasoline shortages, and rising prices. Monthly sales volumes posted year-on-year declines of 10-plus percentage points starting in December 1973. In response, Toyota decided to curtail production from January to March 1974, and dealer inventory adjustments were generally completed by March.

Production was increased starting in April of that year. President Eiji Toyoda made the following comment concerning conditions before and after the oil crisis:

Somehow or other, we managed to scrape together enough materials to maintain full production through the end of 1973, but the following year we immediately began to cut back on our output. Sales had come tumbling down partly as a result of our two recent price hikes, one in December 1973 and the other at the start of 1974. The sluggish sales had driven up dealer inventories, so we steadily lowered production starting shortly after New Year's and continuing through March.

Just as Toyota was beginning to trim its production, some of the other domestic automakers were giving the go-ahead for big production increases. I believe we were the first to cut back on our output. We completed inventory adjustments with our dealers in March and again raise production the following month. The situation didn't turn out as bad as we feared, in part because we'd been able to cut production so quickly.

Priority for increased production went to the Corolla. Domestic sales hit a peak in 1973 and declined somewhat in 1974. Yet the Corolla alone was selling well. We also were concentrating more on our exports, which continued to rise rapidly from 1974 to 1975.

(Eiji Toyoda, Toyota: Fifty Years in Motion, p. 146)

Toyota adopted bold measures and implemented the T23 Strategy in June and July 1974 in collaboration with all dealers. The aim was to restore sales, which had fallen during the January to May period to 63.5 percent of the level during the same period of the previous year, to 80 percent of the level of the previous year in June and July by selling 230,000 Toyota vehicles during those two months. Actual sales during June and July were slightly more than 233,500 units, reaching the 230,000 unit target and achieving a level of 80.6 percent of sales during the same period of the previous year. In July, sales were just over 135,000 units, reaching 86.5 percent of sales in July the previous year. Moreover, sales were up year-on-year in September of that year for the first time since the oil crisis, putting an end to the pessimistic mood that had prevailed.

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