Hiroshi Okuda is retooling the company in an all-out bid to turn Toyota into the world's premier carmaker
Amid the towering pine trees and white stone courtyards of the Ise Grand Shrine, Toyota Motor Corp. played out a familiar corporate ritual last November. As they do most every fall, a handful of top executives, with their newest domestic models in tow, made the three-hour journey from their headquarters just outside of Nagoya to the spiritual home of the Shinto sun goddess Amaterasu, nestled along a dazzling stretch of Japan's Pacific coastline.
Since the mid-1980s, this meant bringing a modest five or six new cars to call down the blessings of the gods for a prosperous year ahead. But this time, an entire caravan pulled up to the 2,000-year-old shrine. Rolling in were the Ipsum and Noah minivans, the Mark II sedan, and the Windom, the domestic version of the luxury Lexus ES 300 in the U.S., plus seven other brand-new or redesigned offerings. It was one of the biggest product outpourings ever at Toyota. "We couldn't find space in the courtyard to park them all," one Toyota insider recalls with a grin.
It's an engineering tour de force that chieftains from Detroit to Stuttgart would die for. The product speedup is just one facet of President Hiroshi Okuda's broader strategy to rekindle the killer instinct at Toyota. That means extending Toyota's edge in high-speed, flexible carmaking. It means shaking up the company's insular, consensus-driven culture. It means pursuing perhaps the most aggressive overseas expansion in automotive history. It means outflanking Detroit in emerging markets and going after the Big Three in the U.S. And it means using new designs to create excitement about the Toyota brand, which has long stood for well-built blandness. "In all sorts of areas, a big change is going on sharply and quickly," says Okuda, who at 64 still exudes the energy of a V-8 engine.
The crusade is costly. Toyota is spending $13.5 billion on global expansion through 2000. Then again, Okuda has a cash hoard of $20 billion to fuel the drive. He has just wrung new savings out of Toyota, and he can profit from a weak yen to boost exports. If he spends wisely, he will create the industry's first real globally organized player, a company that can use its vast manufacturing clout to customize vehicles for regional markets. Manufacturing hubs in Asia, North America, and Europe will rely on locally based suppliers and design teams to tailor vehicles to local tastes. Not only will Toyota be able to pounce faster on consumer trends and bypass regional trade barriers, it will rely on its network of cheaper dollar-denominated parts and materials when the yen is strong and stoke up its exports from home when it is weak.
Okuda isn't the only one who thinks speed and range are critical. Ford Motor Co. is pursuing a global makeover, while General Motors Corp. is piecing together an assembly-and-parts network in Southeast Asia. In China, where Toyota lags behind its rivals, Volkswagen boasts a 55% market share. And Korean carmakers are adding plant capacity from Kazakhstan to Indonesia. "Our rivals are speeding up, so we have to accelerate our thinking," says Okuda. Toyota is already well-entrenched in the booming car markets of Asia, while Detroit's Big Three have the lion's share of their capacity in the overcrowded North American and European markets.
Toyota is also turning up the heat in the U.S. Under the leadership of the founding Toyoda family, Toyota tended to be hypersensitive about its American pricing for fear of worsening trade relations. By the early 1990s, with U.S. trade officials constantly harassing the Japanese government, Toyota execs stopped talking about Global 10, a code referring to Toyota's goal of grabbing 10% of the global market. That would have meant ramping up U.S. share, which the diplomatic Toyodas shied away from doing.
Yet Okuda is unflinching in his drive to win back territory from Detroit and get much more globally. He will not be satisfied with his current global share, which is around 9.5% and which puts him behind General Motors' 17% and Ford's 13%. "Okuda's intent, by the middle of the next decade, is to see Toyota with 10% to 15% of the global auto market," figures Christopher W. Cedergren, managing director of Nextrend, a consultant in Thousand Oaks, Calif. Thanks to pricing incentives and aggressive sales to car- rental fleets, U.S. sales of Toyota's Camry sedan have vaulted 46% so far this year, making it the best seller through February. It could beat the Chevrolet Cavalier, Ford Taurus, and Honda Motor Co.'s Accord for top-selling honors by yearend.
The Toyota Corolla, and the 4Runner and RAV4 sport-utility offerings are also selling briskly. Alarmed, Ford and Chrysler are preparing small sport-utility models to counter the RAV4. But Okuda is already planning to invade Detroit's cash-spinning minivan and large pickup-truck categories over the next several years. "The Japanese are tough competitors in any segment, " says Jacques A. Nasser, president of Ford's auto operations. Exploiting the yen's weakness, Toyota has boosted exports by 17% to the U.S. from its factories in Toyota City, Japan. Detroit is howling. Yet even though Toyota recently announced an average price hike of $57 on most models, the momentum is unlikely to slow. U.S. sales are up 32.8% this year and may reach 1.2 million vehicles. That would come to some $24 billion.
As the rest of the automotive world is quickly learning, Okuda isn't your typical, self-effacing Toyota man. For one thing, he's not one of the Toyodas, the clan that founded and ran the company almost nonstop for decades. In 1995, family elders tapped Okuda to take over the company from 68-year-old Tatsuro Toyoda, who had been waylaid by a stroke at a time when the company seemed to have lost its vaunted edge. Now, the betting is that Okuda will not step down until some time after 2000.
A six-footer with longish sideburns and a jaunty manner, Okuda conveys a slightly quirky air. After spending his entire career at Toyota in jobs ranging from accounting and purchasing to international and domestic sales, he has few rivals in his knowledge of the business. Nor in his intensity. He's a nonstop manager who test-drives every Toyota under development and many of his rivals' products, makes about 10 trips a year overseas to conduct his own "intelligence gathering," and personally vets every television ad before it airs.
He also has a penchant for blunt talk. "He doesn't mind if his points are very clear, which is different from the hazy communications we are used to hearing from Japanese executives," says auto analyst Maryann Keller of Furman Selz Inc. Two years ago, Okuda called his Detroit rivals "stupid" for trying to import bulky cars ill-suited to Japan's narrow side streets.
In January, Okuda set off a furor in London by suggesting that Britain's reluctance to join the European Monetary Union might prompt Toyota to consider looking elsewhere in Europe. That's not an idle threat. Toyota is figuring out where on the Continent it will build a $1.6 billion plant. The investment, which will let the company bypass stiff tariffs on imports, will produce Toyota's "Europe Car." It will compete in the region's fast-growing micro-car segment against Ford and Fiat. A possible site for Toyota is the rust-belt town of Lens in northern France.
Those who know Okuda aren't surprised by this warrior spirit. Back in the mid-1950s, at Hitotsubashi University in Tokyo, Okuda--a black belt in judo-- won a 10-school competition with his uchimata move, a side kick to the lower legs. It was a good way to bring a bigger man down. "He was our hero," says teammate Teruhiko Suzuki.
Toyota has needed Okuda's in-your-face approach for some time. In the early 1990s, Toyota was developing what the Japanese call "big-company disease." Glacial decision-making and companywide arrogance were resulting in major mistakes. Toyota stuck with a gaggle of conservatively styled sedans when everybody in the U.S. and Japan wanted the sexy, off-road stuff. It also botched some key product launches. It introduced the T100 pickup truck in the U.S. with an underpowered engine, and a 1995 redesign of the Corolla for the Japanese market made the car look flimsy and cheap. Worse, costs were climbing as the yen strengthened and profits dropped as Japan's recession deepened.
ULTRAFRUGAL. Toyota started cutting costs before Okuda took command, but he is not letting up. Since 1995, the company has wrung nearly $2.5 billion in costs from the system, mostly by figuring ways to use fewer parts and stripping waste out of production. This is an astounding feat, considering how frugal Toyota was to begin with: To save on lighting bills, for example, it has long been policy to cut the power to company dormitories during working hours.
Yet Okuda has also ordered Toyota managers to come up with $800 million a year in extra cuts every year for the foreseeable future. Now, with the yen having fallen 50% vs. the dollar, it's payday. Pretax profits are expected to rise 82%, to $5 billion, on $97 billion in sales. And even if the yen strengthens again, analysts figure Toyota has lowered its breakeven point on manufacturing to at least 80 yen to the dollar. Little wonder the stock has climbed 80% from its 1995 low.
The rebound may be the start of a new nightmare for Detroit. Okuda now plans a "Great Leap Forward" in North America. The goal: double total vehicle capacity, to 1.2 million units, by 1998. Toyota is expanding capacity at its Georgetown (Ky.) plant, the production base of its Camry and Avalon sedans. And this fall, it will also serve as the launching pad for the Sienna minivan, based on the Camry's V-6 engine and chassis parts. Analysts think the Sienna will be the first credible Japanese entry in this $28 billion minivan segment. With sliding rear doors and front-wheel drive, it will probably be priced below $24,000.
In 1999, Toyota's new $700 million plant in Evansville, Ind., will start pumping out 100,000 T100 pickup trucks. J. Michael Losh, GM's chief financial officer, remembers how poorly the original T100 did. "So far, it has been an abject failure for them," Losh says. "But having learned how not to do it, they'll learn and be tough." The new T100 will have the roomy cabin, rugged suspension, and extra horsepower Toyota pickups have lacked.
Meanwhile, sales of the present product lineup are red-hot. The Camry sells for about $1,500 less than last year's version. And Toyota is now supplementing its stock of U.S.-made Camrys with Japan-made models, thanks to the cheaper yen. "If they start importing, there's no way we can beat them," says Ross H. Roberts, general manager of the Ford Div. of Ford Motor Co. The success of the newly redesigned Lexus ES 300 made it hard for Cadillac to get its new rival entry off the ground (page 114). After years of stagnation, Toyota's U.S. market share so far this year has advanced more than two points, to 8.6%, and likely will head higher when the Sienna debuts.
If Toyota has a problem in the U.S., it's customer service: Buyers may love the products, but they aren't happy with the way they're treated. Apart from Lexus, consumers rank Toyota dealers just average, citing everything from indifferent or shabby treatment to repeated trips to the service bay to fix simple problems. Only 42% of Toyota buyers go back for another one, while General Motors manages to keep 62% of its buyers in the fold. So Toyota is embarking on an ambitious program to woo its U.S. buyers. It's changing incentives to reward agents for customer service, teaching staff how to diagnose mechanical problems swiftly over the phone, and speeding up delivery time of vehicles. Toyota will even sell over the Internet to those who hate walking into a showroom.
In Asia, the company will sell sturdy, simply designed cars to withstand the rigors of local roads. To boost Asian output by 30%, to 600,000 units, by 1998, Okuda wants a low-cost network of regional supply lines and assembly hubs. For instance, Toyota Motor Thailand's plant in Samrong takes in power-steering components from affiliated suppliers in Malaysia and engines in Indonesia for the Corona and Corolla sedans the company sells to the whole region.
Toyota's strategy of customizing its cars to suit local tastes is off to a strong start as well with the successful January launch of its Soluna four-door sedan. Built in Thailand with 700 locally made parts, it boasts the kind of fuel efficiency and compactness that will appeal to the swelling urban working class in Bangkok. So should its price, starting at about $13,000, which undercuts Honda's City. Toyota's market-leading share in Southeast Asia should rise from 21% to 25% by 2000 even as the competition heats up.
BOTTLENECK. Of course, throwing gobs of money at problems is one thing. Pulling off a cultural overhaul to make tradition-shackled Toyota more multinational in outlook is far trickier. Okuda concedes it might take years. He has intensified efforts to flatten the corporate pyramid at headquarters, to tether pay to performance rather than seniority, and to promote a legion of frustrated thirtysomething managers hired during the 1980s boom. Many older executives have been stripped of fancy titles and given narrower responsibilities to make way for younger execs.
Yet old ways die hard. Toyota hasn't managed to hire as many foreign designers as Okuda would like. And the company's 50-man board is still packed with elders reared in the ways of nemawashi, where consensus is built up slowly and big decisions made glacially. There's precious little of the spirited kind of debate that can take a good idea up another notch or head off problems early. "To be honest, I'd like to do away with nemawashi entirely," says Okuda.
Still, over his long career, Okuda has won the deep respect of many insiders. He spends a third of his time at Toyota City, often chatting it up with the company's 10,000-plus engineers about their latest work. He makes a special point of meeting with the younger engineers, who appreciate how well Okuda, an accountant by training, can grasp the technical details. Toyota's 5,000 Japanese dealers love him for his recent moves to boost advertising spending by 30% and to get their advice on marketing.
Okuda has never benefited from any family connections. The Okudas grew up outside of Nagoya, where Hiroshi's father managed a smallish securities company. Hiroshi was very self-motivated. "After everyone in the family fell asleep, he often got up in the middle of the night to study," recalls his brother Tsutomu Okuda, now president of Daimaru Inc., a department-store chain.
Early on, Okuda developed a deep intellectual curiosity. At judo club weekend retreats, while his pals guzzled down sake, Okuda would be engrossed in some book, his friend Suzuki recalls. Even these days, Okuda manages to devour about a dozen or so books a month. He likes piling through political memoirs, particularly the translated works of Henry Kissinger and Margaret Thatcher. And "when I'm bored, I go back to my favorites by Goethe," he says. Okuda can also act in unorthodox ways. In the early 1970s, when he ran Toyota's Philippines operations, he once crossed a jungle to meet with leftist guerrillas to hear what they had to say.
Okuda has the backing of the powerful Toyoda clan, particularly the 83-year-old patriarch, Eiji, and current chairman, Shoichiro. Okuda pushed hard to pry loose spending to build a plant in Taiwan. It involved protracted negotiations, and Eiji had his doubts. But Okuda prevailed, and Toyota's midsize Corona has been a big hit in Taiwan. Okuda was also the architect behind the 1986 construction of Toyota's Kentucky plant, now its biggest in the U.S.
QUIET MOVES. Okuda, together with Shoichiro Toyoda, also played a big behind-the-scenes role in defusing the U.S.-Japan auto-trade row back in 1995. With Washington trade warriors ready to slap a 100% punitive tariff on Japanese luxury vehicles, the two quietly disclosed Toyota's future purchasing plans for U.S. parts. Other companies followed. The move infuriated hard-liners at Japan's powerful Ministry of International Trade & Industry, but it ended the crisis.
Yet Okuda can't focus simply on the U.S. and Europe. He has his hands full at home, where Toyota has been blindsided by Honda, a company one-third its size. Always a potent rival in the North American market, Honda has taken a big bite out of Toyota's Japanese sales with its Odyssey minivan and CR-V four-wheel-drive sport utility. Last year, Toyota's market share fell below 40% for the first time in 15 years as buyers flocked to the CR-V and other trendy vehicles. "Everybody wants a car they can drive around the foot of Mt. Fuji," laments Yatsuhiro Itakura, general manager of Toyota Tokyo Corolla.
Convinced that losing even a few points of share is a dangerous development, Okuda has thrown down the gauntlet. The company's three major design studios in Toyota City have pumped out an array of rival entries, such as the Ipsum minivan and Spacio station wagon. And he has stepped up dealer incentives, estimated at $1,500 per vehicle, to send these offerings flying out of the showroom. In February, Toyota's market share jumped to 39.5%, still shy of Okuda's 40% goal. Still, few doubt he will pull out all the stops to recover this mark by yearend. "Toyota will not just sit back and do nothing," vows Kanji Kurioka, executive vice-president for domestic sales.
To make sure Toyota is never caught off guard again, Okuda keeps pushing his engineers to speed up the time it takes to turn a styling concept into the real thing. Until recently, Toyota's 24-month product-development cycles were the gold standard. Ford and others had been scrambling to reach the same level.
WARP SPEED. But Toyota terrified rivals last year by announcing the development of its recently launched Ipsum in a record 15 months. "Actually, it was 14 1/2 months," brags Akihiro Wada, an executive vice-president, head of research and development, and one of the most respected executives at Toyota. To speed things up, Wada and his team focused on the underbody development first--including the powertrain and chassis--and worked off of only one prototype instead of two. Also, Okuda and Wada made sure the design-and-production engineers collaborated early in the process, saving months of time.
Unless there's a breakthrough in engineering, Wada figures his designers have probably hit the human limit for product development. That's why Okuda is spending big on the company's PC 21 program to produce an engine with fewer parts made at a cost one-third lower than current engines. Wada is mum on the subject, but a top finance official created a stir late last year by suggesting Toyota is close. Okuda is doing everything possible to make it happen. Some observers in Detroit think this may simply be a low-tech, push-rod engine. But others suspect that Toyota will figure out how to make its superefficient, high-tech overhead cam engine with far fewer parts. Such a feat would significantly widen the efficiency gap between Toyota and Detroit. The company has also announced a breakthrough in making affordable hybrid engines that rely on both electric batteries and gasoline.
If all this weren't enough, Okuda recently shocked analysts by vowing to generate 10% of company sales from nonauto businesses by 2000--some $10 billion in revenue. Toyota already has a sizable prefabricated-housing business and stakes in 30-odd telecommunications and broadcasting outfits. The company is also making a big push into leisure boats and looking seriously at producing engines for the small-aircraft industry. It seems dicey, considering all the competition in autos. But Okuda figures that industries prosper and then decline in half-century cycles. If that holds true for autos, he wants Toyota to be prepared.
Add it all up, and it's clear that Okuda has Toyota moving at uncharacteristic speed. The burning question is how long Toyota can keep it up. Okuda admits he's worn out from his travel schedule and often complains about the heavy security entourage that can cut him off from the rank and file. "I really don't enjoy being accorded all this careful treatment," he says. But don't expect this dedicated workhorse to let up. Better to count on this most unusual Japanese executive to cast a meticulous eye on the thousands of tiny details that make a great car company.By Brian Bremner in Tokyo, with Larry Armstrong in Los Angeles, Kathleen Kerwin and Keith Naughton in Detroit, and bureau reportsReturn to top