Toyoda Asks How Many Times Toyota Errs Emulating GM Failures

By John Lippert, Alan Ohnsman and Kae Inoue, Bloomberg News

June 22 (Bloomberg) — On a mild day in February, Toyota Motor Corp.’s honorary chairman, Shoichiro Toyoda, summoned 400 executives to the redbrick factory in Nagoya, Japan, where his grandfather had built weaving looms a century ago.

The managers filed in for one of the customary updates from Toyota’s gray-haired, 84-year-old patriarch. What they got was anything but ordinary.

Two months earlier, Toyota had forecast its first operating loss since Shoichiro’s father began making cars in the same factory, now turned museum, in 1937. Then in January, about three months earlier than planned, the company announced that Shoichiro’s son, Akio, would replace Katsuaki Watanabe as president. Akio is scheduled to assume his new job at a shareholder meeting Tuesday in Toyota City.

Even with these signals, the managers were ill prepared for the normally reserved Shoichiro’s litany of the carmaker’s missteps and his dressing-down of Watanabe.

“How many times have you made a mistake?” Shoichiro grilled Watanabe, who sat silently among stunned audience members, according to a person familiar with the meeting.

Shoichiro scolded the president for being so anxious to boost sales and profits that he’d let Toyota emulate now bankrupt General Motors Corp. and Chrysler LLC. Toyota had become addicted to big, expensive cars and trucks and had forgotten the customers’ need to save money, Shoichiro said, according to the person’s account.

Toyota’s Rise

Shoichiro wasn’t just lashing out at Watanabe. He was railing against the threat to everything his family had struggled to create.

The Toyodas built their first car when Henry Ford was turning out almost 1 million a year in the U.S. During World War II, the family opened dry cleaning stores to get by. They adopted kaizen, the making of small and continuous improvements, to fine-tune manufacturing. They enhanced quality and squeezed costs to become one of the world’s most admired companies.

Across the Pacific, Ford Motor Co., Chrysler and GM were gorging on Americans’ car lust. They failed to heed sky­rocketing gasoline prices, declining workmanship and escalating pay. Last year, with help from its gas-electric Prius hybrid, Toyota pushed General Motors from its perch as the planet’s biggest carmaker.

In its June 1 bankruptcy filing, GM reported $172.81 billion of debt, more proof of the U.S. industry’s descent.

‘Risk Its Very Existence’

Toyota’s work isn’t done. To avoid the four-decade decline that humbled GM, the Japanese company must fend off rising competitors and adapt to the global reality of slowing sales growth and shrinking profits, says John Casesa, managing partner of auto industry consulting firm Casesa Shapiro Group LLC in New York.

“If Toyota is unable to react to a changing world, it will risk its very existence over time,” says Casesa, who’s covered the industry for two decades. “If the company internalizes the GM lessons, it can maintain its leadership.”

Akio’s challenge is to cut Toyota’s dependence on luxury cars and branch out from U.S. markets destabilized by easy credit. In its race to top GM, Toyota splurged on enough new factories to make 2 million additional cars a year. South Korea’s Hyundai Motor Co. targeted small-car buyers in China, India and other emerging countries, where it sold 55 percent of its vehicles last year compared with 31 percent for Toyota.

‘Scrappy Newcomer’

“Toyota went from being a scrappy newcomer to becoming convinced the market was just there for them to take,” says Maryann Keller, an auto analyst and president of Maryann Keller & Associates in Stamford, Connecticut. “Toyota wrote the playbook and Hyundai read it: Build great cars with great value, and people will come.”

Toyota investors won’t see a quick revival, says Christian Takushi, a portfolio manager in Zurich for Swisscanto Asset Management AG, which owns 1.7 million Toyota shares.

After reporting record net income of $17.7 billion for the fiscal year ended on March 31, 2008, earnings took a $22.2 billion nose dive. Toyota ended fiscal 2009 with a $4.5 billion net loss and the company says it expects to lose $5.7 billion more in fiscal 2010.

Earnings won’t recover for three years, even if sales rebound, since Toyota is still paying for its expansion, Takushi says.

“Toyota has overdone itself with capital spending because they really wanted to be No. 1,” he says. “They’re paying a high price.”

Cash Cushion

Not all investors are so pessimistic.

“Toyota is among the best,” says Wendy Trevisani, fund manager for Santa Fe, New Mexico-based Thornburg Investment Management Inc., which held 17 million Toyota shares in March. “They make every effort to address problems as seen by current initiatives including management shifts. Their balance sheet remains strong.”

Toyota’s $52 billion in cash and marketable securities give it a comfortable cushion, according to Moody’s Investors Service. And it will get some relief in the U.S. from the misfortunes of bankrupt rivals, says Kota Yuzawa, a Goldman Sachs Group Inc. analyst in Tokyo. The Japanese automaker may be able to boost American market share by a third to 21.3 percent by 2011 as GM and Chrysler shut plants and dealerships.

This prospect, which would make Toyota the top-selling carmaker in the U.S., helped send Toyota’s shares up 29 percent this year, to 3,690 yen on June 19. That’s still 56 percent below their 2007 peak of 8,390 yen.

‘Even Stronger’

“Toyota should emerge from the downturn in an even stronger position relative to competitors,” says James Hunt, who helps oversee $6 billion at Tocqueville Asset Management LP in New York, including 37,000 Toyota shares.

Hyundai’s shares surged 84 percent this year to 72,500 won on June 19.

Inside Toyota, some chalk up the recent stumble to the recession that’s sent global car sales down 20 percent since 2007. Shoichiro wasn’t buying that excuse. He told employees at the February meeting that Toyota fell victim to hubris, according to the person familiar with the gathering.

Beginning in 2003, Toyota pushed to expand manufacturing capacity by 25 percent to build 10 million cars a year. When Watanabe became president in 2005, he backed the growth plans and championed a $1.3 billion pickup truck plant in San Antonio, Texas, calling it “a dynamic symbol of our bright future.”

‘Next Great Automaker’

Watanabe, 67, sealed his fate by failing to predict that sales would plunge last year and not acting fast enough to recover, people familiar with the situation say.

In October, 2 1/2 weeks after Lehman Brothers Holdings Inc.’s bankruptcy deepened the global credit freeze, a key Toyota lieutenant, Executive Vice President Mitsuo Kinoshita, said sales could rise to 9.7 million vehicles this year. In May, the company predicted it will sell just 6.5 million vehicles in the fiscal year ending in March 2010.

“If Toyota can’t adjust to a market that will be smaller, with less-expensive cars, then somebody else will be heralded as the next great automaker,” Keller says.

It’s up to Akio Toyoda, 53, the first Toyoda in 14 years to run the company, to ensure that that prediction doesn’t come true. First, he’ll have to guide Toyota through unfamiliar times.

“We’re facing a once-in-a-century crisis,” Akio said, referring to the recession, in a January press conference after his appointment as president.

‘Consider Measures Quickly’

In a nod to Toyota’s new austerity, Akio, wearing a dark- gray suit with a pale-pink tie, spoke in the lobby of the company’s Tokyo office instead of at the Palace Hotel or one of the other upscale venues of previous years.

“I’ll try to make changes without being tied down by the past,” he said, reading carefully from a script. “I will consider measures quickly.”

Akio has been huddling in Japan with 11 department heads to discuss ways to slow Toyota’s expansion without completely killing it, people familiar with the meetings say. He’s planning to appoint five executive vice presidents in key regions such as North America. They’ll handle product development, manufacturing and sales locally. The heads of these departments currently report to executives in Japan, which slows decision making.

“Toyota has been addicted to U.S. profits these last five years,” says John Shook, a University of Michigan management instructor and former Toyota engineer. “They’ve been slow everywhere else, particularly in China, where the growth is. Hyundai could be the big winner.”

Racing Fan

The reorganization is just part of Akio’s makeover attempt. On May 18, he unveiled the latest Prius to the Tokyo media. The newest version of the hybrid boosts fuel economy by 8.6 percent, to 50 miles (80 kilometers) per gallon. Akio said he hopes to quadruple hybrid sales to 1 million annually during the decade starting next year.

“Our answer to how a car should be in the future is the new Prius,” he said.

Then on May 23, he traveled to Germany to drive a 500- horsepower black-and-white Lexus sports car in a 24-hour endurance race, finishing 87th in the 170-car field.

Two years earlier, in a blog he writes for Toyota’s racing unit, Akio said he admired Ulrich Bez, chief executive officer of Aston Martin Lagonda Ltd., maker of fictional spy James Bond’s preferred car. He praised Bez for competing in contests that underlings called too dangerous.

“Because such a CEO leads the company, Aston Martin is able to offer an emotional sports car,” he wrote.

Beer Party

After another race, Akio described a beer party with fans. “We were shaking hands, waving hands as if our arms would be torn apart,” he wrote. “It felt like it was the best moment of my life!”

Cliff Cummings, who owns two Toyota dealerships in the foothills of the San Gabriel Mountains near San Bernardino, California, says Akio is starting to shake things up inside Toyota. He credits the incoming president with pricing a no- frills Prius at what Cummings considers a reasonable $21,000, almost $11,000 less than fully equipped models. At $19,800, Honda Motor Co.’s Insight helped force Toyota’s price down, Cummings says.

“Akio is taking Toyota back to its fundamental values of dependability and economy,” he says.

Obama’s School

Akio, who is fluent in English, learned Toyota’s ways from the ground up. On Oct. 30 of each year, he visits the Kosai, Japan, birthplace of his great-grandfather Sakichi, who received the family’s first loom patent in 1891. During his freshman year in 1973 at Tokyo’s Keio University, Akio spent six weeks at the Punahou School in Honolulu, where U.S. President Barack Obama was a seventh-grader.

Akio graduated from Keio with a law degree in 1979. Three years later, he got a Master of Business Administration from Babson College in Babson Park, Massachusetts.

Akio joined Toyota in 1984. After factory and finance jobs, Shoichiro, then Toyota’s president, tapped Akio to make the Japanese sales office more efficient by cutting inventories of unsold vehicles. In 1996, Akio spearheaded a service called G- Book that uses mobile phones and Web browsers to provide traffic updates to drivers.

Two years later, he left Japan to become vice president of a Fremont, California, manufacturing operation. Toyota, feeling the stirrings of international ambitions, had begun the venture 14 years earlier to gain experience in the U.S. By 2002, Akio was running Toyota’s China unit. He headed purchasing in 2005 and moved to global sales in 2008.

‘Really Earnest’

Some suppliers and dealers resisted Akio’s ascension to president, saying he’ll have a hard time breaking from Watanabe, people familiar with the situation say. For one thing, managers Akio is promoting supported Watanabe’s expansion, including Yoshimi Inaba, 63, who’ll head North American operations, and Yukitoshi Funo, 62, who’ll run global sales.

During Watanabe’s tenure as president, both Akio and Shoichiro backed major decisions such as building new factories, the people say.

“I don’t think anybody sees Akio as a highly original kind of guy, but he’s really earnest,” says James Womack, chairman of the Lean Enterprise Institute in Cambridge, Massachusetts, which trains companies on the automaker’s methods for cutting production costs. “He’s been in the Toyota system all his life. He doesn’t know anything else but to go back to the basics.”

Watanabe, a Keio graduate like Akio, joined Toyota in 1964. He rose through the purchasing staff with a reputation as a cost cutter. From 2000 to 2005, he achieved 1 trillion yen ($10.3 billion) in savings by streamlining Toyota’s use of 173 components, from headlights to horns to steering wheels. The savings helped pay for Toyota’s new plants. By 2005, he was running the company as president.

‘More Kaizen’

Watanabe opened the newest factory in Woodstock, Ontario, on Dec. 4. Three weeks later, he delivered Toyota’s second major profit warning and even then avoided acknowledging that he’d made a strategic mistake.

“We should have arranged a little bit more kaizen when we were on a growth path,” he told reporters. “On the other hand, many customers bought our cars, so it’s really a difficult judgment.”

Akio’s quest to fix Toyota will take him to the scene of one of its biggest setbacks: a former cattle ranch in San Antonio where 600-pound (270-kilogram) wild pigs roam the underbrush.

Back in 2003, Toyota announced the factory in an effort to undermine Detroit’s last great profit bastion: pickup trucks. The Texas plant opened in November 2006, just months before cracks emerged in the U.S. subprime mortgage market and gasoline prices began their rise. Timing was just one issue.

‘Kind of Crazy’

“There was a lot of non-Toyota thinking,” says Shook, the former Toyota engineer. “San Antonio seemed kind of crazy.”

Starting with its first U.S. factory in 1988, Toyota built the Camry midsize sedan and others that had first proved their popularity in Japan, Shook says. It designed each assembly line to accommodate many models. In Texas, Toyota broke these rules by dedicating a whole plant to the largest pickup the company had ever conceived, the Tundra. Toyota wanted to attract new buyers on their home turf, Shook says.

Watanabe authorized $3 billion for the effort, a person familiar with the situation says. He planned to turn out 250,000 Tundras a year in San Antonio and Princeton, Indiana. Today, Toyota builds 100,000 annually, only in Texas.

Detroit’s Turf

Toyota was challenging Detroit where it was strongest, says Eric Noble, president of research firm Car Lab in Orange, California.

As Toyota was learning the truck-building ropes, Ford redesigned its F-150 pickup. The new regular-cab F-150, with its 3,030-pound payload and 20 highway miles per gallon for the midsize engine, was an exemplary achievement in the same way that the Prius is Toyota’s best, Noble says.

By comparison, the Tundra had a 1,990-pound payload and got 17 mpg. Even better for Ford, the F-150 won a five-star safety rating from the National Highway Traffic Safety Administration compared with Tundra’s four stars.

U.S. carmakers are catching up in quality too. Chevrolet customers reported 113 quality complaints per 100 vehicles in 2008, compared with 104 for Toyota, according to J.D. Power & Associates, which tracks consumer satisfaction. In 1981, GM had seven times the complaints of Toyota.

On the luxury end, Hyundai is chasing Toyota’s Lexus GS with its Genesis, a premium sedan that sells for $10,000 less. Hyundai also is preparing to bring its top-end Equus to the U.S.

‘Charging Too Much’

For the Tundra pickup, the killer was price, dealer Cummings says. Toyota charged $29,568 for a typical Tundra in 2007. That was $4,000 too much based on what potential buyers told him, Cummings says.

“By charging too much, we forced customers to look elsewhere,” he says.

When Honda’s retiring CEO Takeo Fukui looks at San Antonio, he says he sees a clear difference between Toyota and Japan’s No. 2 automaker.

Honda builds factories in stages, adding the capacity to make 50,000 vehicles at a time, instead of 250,000 at once.

“Toyota makes big investments,” Fukui, 64, said in Detroit, where he was attending an April engineering conference. “Our idea is to start small and grow. We consider ourselves a small company, and the idea of having extra capacity is very scary.”

Yoga and Pilates

A foggy March Tuesday in San Antonio proves Fukui’s point about idle space — and shows Toyota’s determination to learn from its miscues.

Dozens of Toyota workers, wearing green or orange vests that signify they’re on temporary assignment, inspect unfinished trucks. These same workers cleaned parks and enjoyed yoga and Pilates on company time when a 15.6 percent sales drop forced Toyota to shut the plant for three months starting in August and then cut a second shift.

Ray Tanguay, executive vice president for manufacturing in North America, sees a silver lining in the downtime. The company is using its kaizen process to build vehicles with fewer workers, aiming for more profit when sales pick up.

“We have to go back to our core values,” he says. “This might well make us stronger.”

Kaizen-sparked improvements are taking root in San Antonio. Production manager Dan Antis says employees studied everything from workplace diversity to how to hold a screwdriver.

When you’re chasing volume, you don’t have time to teach people,” Antis says. “The kaizen we’re capable of doing after the shutdown is endless.”

Saving 11 Seconds

Standing near the assembly line’s end, team leader William Steubing says he wanted a better way to handle a 20-pound plastic box that carries parts alongside unfinished trucks.

Initially, Steubing’s team attached the box to metal frames holding the trucks. As the Tundras moved along the line, workers reached into the box for headlights and other parts. When they emptied the box, they’d lift it off the carrier and carry it back for refilling.

During the shutdown, workers designed a conveyor to do that job. Now, as a truck moves forward, the conveyor tilts up a corner of the empty box and snaps it off the carrier. The box falls onto the conveyor and rolls back for refilling. The change saves 11 seconds of walking per truck.

Steubing and his co-workers also got training in welding and metal cutting. Then they recycled old conveyors, spending $2,000 compared with $90,000 that Toyota engineers had planned for a motorized conveyor.

‘Good Position’

These and more than 400 kaizen projects are making an impact. Defects that workers reported in an internal audit fell to 0.2 per truck from 1.2, comparable with Toyota’s best worldwide. Productivity measured by trucks made per worker per day, not including temporary laborers, rose to 0.91 from 0.73.

Toyota’s North American factories need to run at 70 percent to 75 percent of capacity to break even, Tanguay says. They were at 60 percent in March. He says he’s cutting hundreds of millions of dollars per year in costs. Starting in September, the North American factories will break even, he says.

“If the market comes back, we’re going to be in a very good position,” Tanguay says.

While money-saving kaizen improvements may help Akio on the factory floor, the recession has made strategic planning harder, U.S. sales chief Jim Lentz says.

In his office in Torrance, California, adjacent to the I- 405 freeway and its crush of thousands of cars, Lentz says he can’t predict with certainty how many vehicles Americans will buy in coming years. Nor can he tell what kind of cars people will want or which technologies governments will allow.

Green Challenges

Lentz takes out a black-and-gray chart based on Toyota’s economic and consumer research. It shows that U.S. auto sales may rebound from an annualized rate of 9.6 million this year to 17.4 million by 2015. He draws a line with a blue pen showing that, conversely, sales could total 11.5 million in 2015 if the recession lingers. If that happens, Toyota may lay off full-time workers, not just temporaries.

Even with President Obama’s push to lift fuel efficiency for new vehicles to a nationwide average of 35.5 mpg by 2016, environmental challenges are hard to plan for. California’s zero-emission-vehicle mandate means Toyota and other automakers must build tens of thousands of electric cars, fuel-cell vehicles and plug-in hybrids starting in 2012.

“Product planning is riskier than ever,” says Bill Reinert, Toyota’s U.S. manager for advanced technology. “You’re betting five years out on whether the public will adopt very different forms of transportation.”

Lexus Lust Cools

Amid the upheaval, Toyota is making concrete strategic shifts. It’s building more compact cars and setting up factories in emerging markets and countries with large reserves of resources like oil, Watanabe told reporters in May.

It doesn’t have much choice. Sales at the Lexus luxury unit had generated more than half of U.S. earnings, with 12 percent of sales, in the middle of the decade. Consumers’ lust cooled when the average U.S. price for regular gasoline topped $4 a gallon in July 2008. During the first quarter of 2009, Toyota’s U.S. pickup, minivan and SUV sales plunged 40 percent. Lexus sales dropped 37 percent.

The danger is that Toyota’s moves toward smaller vehicles may cut earnings in half, even after the recession ends, says Koji Endo, an analyst at Credit Suisse Group AG in Tokyo. And nobody’s sure how the price of gas, which has fluctuated by more than $2 a gallon in the past year, will affect consumer desires.


Even so, Toyota is banking on such cars as the iQ. At the New York Auto Show in April, a lime-green model of the micro- compact descended from the ceiling amid strobe lights and techno music. The iQ fits sideways in a normal parking spot, travels 65 miles per gallon and has nine air bags. Toyota sells the iQ in the U.K. for $15,000.

Such premium small cars will help maintain profits as fuel prices rise, Lentz says.

Hyundai has already claimed some turf that Toyota is targeting with smaller cars.

Along with affiliate Kia Motors Corp., Hyundai sold 4.2 million vehicles last year, more than half of them in emerging markets. Hyundai and Kia’s combined profit dropped 7.9 percent to 1.56 trillion won ($1.2 billion) in 2008, partly because the South Korean currency fell 26 percent against the dollar.

Combined sales rose 0.5 percent in the U.S. during the January-March quarter and 50 percent in China.

“Toyota faces an identity crisis,” Casesa says. “Their spectacularly successful business model is not working, and they are undergoing profound internal change with the new president.”

Shoichiro’s retirement from Toyota’s board in June means Akio may be the next Toyoda to speak to managers in the redbrick Nagoya factory.

By then, investors will have more signs of how quickly — and how thoroughly — Akio has acted on Shoichiro’s February warning about the dangers of emulating Detroit.

To contact the reporters on this story: John Lippert in Chicago at; Kae Inoue in Tokyo at; Alan Ohnsman in Los Angeles at

Last Updated: June 21, 2009 13:00 EDT

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