Skip navigation


Is Toyota Motor Corp. invincible? As the auto maker continues to set new records in sales and earnings, many think so. The numbers are impressive. In the fiscal year ending March 31, 2005, Toyota's global sales increased 10.5% to 7.4 million vehicles while profits rose 0.8% to 1.6 trillion ($11.1 billion), another record for a Japanese company and more than the combined earnings of General Motors

Is Toyota Motor Corp. invincible?

As the auto maker continues to set new records in sales and earnings, many think so.

The numbers are impressive. In the fiscal year ending March 31, 2005, Toyota's global sales increased 10.5% to 7.4 million vehicles while profits rose 0.8% to ¥1.6 trillion ($11.1 billion), another record for a Japanese company and more than the combined earnings of General Motors Corp., Ford Motor Co. and DaimlerChrysler AG.

Its current $140 billion market capitalization far exceeds that of Japanese rivals Honda Motor Co. Ltd. ($50 billion) and Nissan Motor Co. Ltd. ($49 billion), and nearly equals that of GM, Ford, DC, Volkswagen AG and PSA Peugeot Citroen, combined.

“The company has been very successful at introducing the right products. Toyota seems to be the only volume maker in the world whose sales are growing almost everywhere,” says Koji Endo, head of equity research, Credit Suisse First Boston Securities (Japan).

Depending on how you look at it, Toyota is either the second- or third-largest auto maker in the world. It trails GM but edges out Ford for the No.2 spot, if sales of affiliate Mazda Motor Corp. (33.4% owned by Ford) are excluded.

But if the current momentum is maintained, some analysts believe the company could slip past GM and become the world's leading auto maker as early as 2007 or 2008. At a January news conference, GM CEO Rick Wagoner ruled out that possibility. “We've been ahead for 73 years in a row. I think the betting is we'll be ahead for another 73 years.”

However, given the troubles that have emerged in the last several months, Wagoner no doubt is feeling a lot less confident.

In fact, many critics say GM is in bad shape now because it never fixed the problems that put it near bankruptcy in 1992. The main issue never resolved, they argue, was not how to design more attractive products or cope with legacy costs, but how to compete effectively with highly global Japanese auto makers, Toyota in particular.

The recent reshuffling of top GM executives such as Bob Lutz and John Smith to global positions, they say, is belated recognition of the company's need to globalize, possibly too little, too late in the unofficial competition with Toyota.

If Toyota doesn't become the world's top auto maker soon, it won't be for lack of trying. In a press conference last November, his first in four years, Chairman Hiroshi Okuda aimed to bolster Toyota's lackluster stock price by emphasizing for the benefit of Tokyo analysts some of the positive things the auto maker had done, was doing and planned to do to reach its long-term objectives.

For example, Okuda pointed out that from 2000 to 2003, when the world vehicle market grew by 2 million units, Toyota accounted for 45% of the increase. He also emphasized the following:

  • Only 30% of the world's population enjoys the convenience of automobiles, and annual vehicle sales, now around 59 million worldwide, are expected to reach 75 million within 10 years.
  • Toyota is investing ¥1 trillion ($9.5 billion) annually in plant and equipment and ¥500 billion ($4.7 billion) in R&D.
  • Toyota has reduced the average development time for domestic models, from final design decision to line-off, to approximately one year.
  • In 1980, Toyota had 11 production bases in nine countries. By 2004, it had 51 production bases in 26 countries and regions, with more under construction or planned.
  • When the San Antonio, TX, truck plant is completed next year, Toyota's North American capacity will be 1.66 million vehicles and 1.44 million engines.
  • European production capacity is expanding to 680,000, and a structure is being created to support annual Toyota sales of 1.2 million in Europe and Russia, combined.

“Starting in the 1980s,” says Toyota President Fujio Cho, “our business began to move at turbo speed — and it has been accelerating ever since.” He says the speed and scale of the company's production overseas are in “a territory we have never experienced.”

Almost half of all Toyota vehicles now are made outside Japan, and worldwide sales of 8.5 million are forecast for 2006, reportedly two years ahead of schedule. A Tokyo newspaper recently claimed the auto maker's production target for 2008 has been revised upward to 9.7 million units. And Toyota currently is aiming for about 15% of the global car market early in the next decade.

“Toyota's growth to date has been led by success in North America and revolutionary cuts in the cost of goods sold,” says Seiji Sugiura, a senior analyst with HSBC Securities (Japan). “Now the company has launched an ambitious strategy to expand its worldwide sales and become the leading auto maker in the world.”

There is nothing mysterious or magical about what has been achieved so far. Toyota's growth has been a product of intelligent and innovative managers, backed by employees who consider themselves partners in efficient production and are treated as such.

“Toyota management is collective, a politburo,” explains one Tokyo-based industry expert who asks not to identified. “There's no place for a Carlos Ghosn, Alfred P. Sloan Jr. or Henry Ford. The current managers grew up in harder times and are willing to set aside personal interest for the greater good of the company.”

Toyota's formula for success centers on integrated global operations that quickly can adapt to changes in market trends, elaborate research into consumer needs and preferences in each market, carefully planned production and steady cost-cutting.

A year ago, for example, Toyota announced plans to cut by 50% the cost of machining pistons, camshafts and other engine parts in order to save an estimated $400 per vehicle. It also went after die-casting, forged metal components and molded plastic parts. Toyota declines to provide details about progress so far in implementing these plans. The Toyota R&D centers in Japan, the U.S., Europe and Asia help coordinate its global planning, preferences and production.

The early years gave no hint as to whether Toyota would even survive, let alone succeed so well in the cutthroat automotive business.

The company was spawned by the loom works created by Sakichi Toyoda, a farm boy whose inventive genius included low-cost automatic weaving and spinning machinery that delivered dramatic increases in productivity. In 1933, three years after Sakichi died, his son Kiichiro began to explore the motor vehicle business and, in 1936, assembly of G1 trucks began with parts imported from the U.S.

Kiichiro's timing was impeccable. That same year the militarists in charge of Japan restricted local GM and Ford assembly plants to production of just 3,000 vehicles annually. Even so, from the end of 1936 until early 1937, Toyota vehicles could not be sold because the quality was so poor. What saved the company, formally established August 13, 1937, was military procurement.

In 1938, Kiichiro introduced a flow production system that eliminated the need to keep large stocks of parts and materials in the plant or warehouses, reducing capital requirements.

“The guiding rule is not to have goods shipped too early or too late,” he explained. This just-in-time concept, using pallet cards called kanban, was the root of the Toyota Production System now adopted by virtually all of the world's auto makers.

Kiichiro Toyoda's elementary lean production system was polished in the 1950s by his disciple, Taiichi Ohno, a strict taskmaster who intimidated associates at Toyota with analyses of how cars should be built and demands for ways to build them better.

His work inspired a report by Massachusetts Institute of Technology researchers that later was turned into the book: The Machine That Changed The World.

It may be hard to believe now, but Toyota's initial growth was slow. On at least three occasions, the company flirted with bankruptcy.

The Motomachi plant, completed in 1959, was a gamble that ended up giving Toyota an edge against Japanese competitors in what had been described as “a tournament of midgets.” It was not until 1962 that management-labor relations reached the level of mutual trust that persists today.

For years, Toyota was very cautious about growth. It began assembly in the U.S. after both Honda and Nissan already had built plants. Even then, it opted for a 50/50 joint venture with GM, New United Motor Mfg. Inc.

The project made great sense to both companies at the time. Toyota was reluctant to jump in alone in the U.S., and GM wanted an in-depth, first-hand look at the Toyota Production System.

The historic operation started up in an unlikely spot, a shuttered plant in Fremont, CA, that had a terrible quality reputation and one of the worst absenteeism rates among GM plants.

The facility re-opened as NUMMI in 1984. Former GM workers were hired and the United Auto Workers union agreed to severely shrunken work rules. Toyota management policies were imported, and the new formula was so successfully applied the Fremont plant eventually began winning high J.D. Power quality scores.

“NUMMI,” says Cho, “has proven to be a terrific ‘learning laboratory’ for Toyota, the cornerstone of new manufacturing growth to come.” The success in California eventually gave Toyota enough confidence to start investing billions in independent U.S. and Canadian operations.

“Toyota is a highly profitable company that does not have to husband resources,” says A.N.R. Millington, director general of the Tokyo office of the European Automobile Manufacturers Assn.

Such resources, referred to jokingly in Japan as “the Bank of Toyota,” include cash, time deposits and marketable securities that at times reportedly have been worth more than $30 billion and currently hover around $18 billion.

In the early 1990s, Toyota engineers were told to develop a vehicle for the 21st century. Nobody knew what they would create. The result was the hybrid Prius sedan introduced in 1997.

That year, only 323 Prius cars were sold, all in Japan. Last year, sales of six Toyota gasoline-hybrid electric vehicles reached 134,600, 93% of them the second-generation Prius. President Cho foresees worldwide sales of 300,000 in 2006 with the launch of Camry hybrid production in the U.S.

Last month, Toyota said it would add assembly of hybrid-powered Camry midsize cars at its Georgetown, KY, plant in the U.S.

The biggest payoff may be further in the future because, as Okuda explains, “Our hybrid system will also make up the heart of our hydrogen fuel-cell program.”

Another gamble was establishment of the youth-oriented Scion division to tap deeper into the U.S. Marketing of the xA and xB began in California in June 2003. The next year, more than 700 dealers throughout the U.S. began selling the xA, xB and the new Scion tC, designed exclusively for America's Gen Y buyer.

Scion sales, less than 11,900 in 2003, reached 99,259 in 2004, and the t2B, short for “tall two-box,” concept model may go into production to extend the lineup and broaden the appeal. (Ironically, the Scion brand is not marketed in Japan, where most of the young consider Toyota vehicles unexciting and unappealing.)

Toyota globalization was kick-started again in a different way last August with the launch in Thailand of the HiLux Vigo pickup truck, first of five models in the Innovative International Multipurpose Vehicles project (IMV). In September, an IMV minivan was launched in Indonesia, and this year two more pickups and an SUV will follow in South Africa and Argentina.

All of these newly developed vehicles will be produced outside Japan to take advantage of regional trade pacts, such as the Association of Southeast Asian Nations Free Trade Agreement. Parts will be made in 10 different countries, and IMV vehicles will be sold in 140 different countries.

“The IMV project has already resulted in substantial cost reductions by consolidating volumes and realizing a global optimum production and supply network,” says Okuda, who expects IMV sales of 500,000 units next year.

More innovative gambles are likely in the years ahead, even as the going gets tougher. Chairman Okuda likes to say the companies that survive in the long run are not necessarily the strongest or smartest but those that adapt best to change.

“Any company not willing to take the risk of re-inventing itself is doomed,” Cho said in a speech that electrified an automotive industry audience last August in Traverse City, MI. “The world today is changing much too fast. Our industry has never been more competitive.”

Toyota's hard-earned reputation for producing high-quality, dependable vehicles has spurred sales virtually everywhere. Last year, the auto maker's global production rose 10.8% to 7.5 million units.

In the U.S., the company broke its own record in 2004 for the ninth straight year, increasing sales 10% to 2.06 million vehicles and garnering a market share of 12.2%, up from 11.2%, with the Camry the nation's best-selling car.

Counting NUMMI and San Antonio, Toyota now operates six North American assembly plants. Two more reportedly are under consideration for completion by 2010, including a new facility rumored in Woodstock, Ont., Canada, near its current Cambridge operations.

CSM Worldwide predicts Toyota will replace DaimlerChrysler as the third-largest automotive producer in North America in 2009, with sales of 2.5 million vehicles and market share of 14.1%, concluding, “Robust growth will stem from an unrelenting product offensive, intensified efforts in the luxury market, incremental volume from Scion and strong brand equity.”

For Toyota, the North American market is the most critical, accounting for what industry analysts estimate at about 70% of total company profits worldwide.

An editorial in the Nihon Keizai Shimbun, Japan's leading business journal, says, “By plowing a big portion of the profits from North America into research and development and new production capacity in China and Europe, Toyota is creating a virtuous cycle to power further growth.”

More appealing models and diesel engines are improving sales in Western Europe, where Toyota controls 5.3% of the market through the first four months of 2005 — more than BMW AG (4.3%). This year, a joint venture with PSA will begin production of the Aygo, a small car aimed at the lowest end of the market.

“Armed with a broad lineup and big volumes, Toyota is on its way to becoming a core European brand,” says Takaki Nakanishi, an industry expert with UBS Securities in Tokyo.

In resurgent India, where socialist policies have been buried and private initiative is overcoming governmental inertia, the overall automotive market is expected to produce 2 million vehicle sales by 2010, when Toyota is aiming for a 10% market share. Says Cho: “India is a key market in Toyota's future growth plans.”

No company can avoid mistakes and Toyota has made its share, especially in China where it arrived late and currently ranks 10th or 11th with about 5% of the market.

Back in 1994, the auto maker turned down the chance to replace Peugeot as a joint venture partner in Guangzhou; lost out to GM as a JV partner with Shanghai Automotive Industry Corp.; and ended up in a JV with Tianjin Motor Corp. with onerous conditions attached.

But better alliances subsequently materialized, including a JV with Guangzhou Automobile Group to start producing the Camry in mid-2006. By 2010, Toyota expects to be among the major players in China, with 10% of the market.

The chief danger for the company today is a “medium-term stumble,” says HSBC Securities analyst Sugiura. He believes Toyota is growing too fast, with heavy investment and intensifying competition in the U.S. and Asia likely to hurt profitability.

After nearly six successful years at the helm, Cho, 68, soon will be replaced as president (in one of the routine management renewal shuffles that Toyota orchestrates every few years) and become vice chairman.

Unfortunately for competitors, this is unlikely to mark any change in Toyota's attention to quality — or slow its momentum.

As GM Vice Chairman Bob Lutz admits candidly, it “may be impossible” to stop Toyota from becoming the world's No.1 auto maker.

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.