Toyota Hegemony Fades as `Big Damage' Brings Sony-Style Decline

After owning several Toyota Motor Corp. vehicles over the past 17 years, Randy Sterling traded in his Tacoma pickup this month for Ford Motor Co.’s F-150 truck.

“The recent problems with Toyota caused me to have a closer look at Ford,” said Sterling, a contractor in Blenheim, Ontario, referring to record recalls of more than 8 million vehicles, most for defects tied to unintended acceleration. “The recalls, how they’d treated some of their customers, it just concerned me.”

Customers such as Sterling underscore the challenge Toyota President Akio Toyoda, in Detroit this week for the North American International Auto Show, faces as he seeks to put the recall crisis behind him. With its reputation tarnished, the Toyota City, Japan-based company’s 2010 U.S. sales dropped even as industrywide car demand rose. The loss of once-tried-and-true customers marks the beginning of the world’s largest automaker’s quest to restore its image and win back market share, said analyst Maryann Keller.

“In terms of quality, they were the default brand,” said Keller, founder of Maryann Keller & Associates, a consulting company in Stamford, Connecticut. “Now they’re just one of the pack.”

Toyota was the only large automaker to post a sales decline last year in the U.S., historically its most profitable market. Its deliveries fell 0.4 percent to 1.76 million Toyota, Lexus and Scion vehicles, in contrast to an industrywide increase of 11 percent, the first since 2005.

Photographer: Tomohiro Ohsumi/Bloomberg

Akio Toyoda, president of Toyota Motor Corp. Close

Akio Toyoda, president of Toyota Motor Corp.

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Photographer: Tomohiro Ohsumi/Bloomberg

Akio Toyoda, president of Toyota Motor Corp.

Sony Analogy

Just as Japanese electronics makers such as Sony Corp. lost ground in the past decade to Apple Inc. in music players and to Samsung Electronics Co. and LG Electronics Inc. in televisions, damage to Toyota’s brand has left it vulnerable to a growing challenge from rivals including Ford and Hyundai Motor Co.

“The reason Toyota became famous was one word, and that was ‘quality,’” said Jez Frampton, chief executive officer of Interbrand Corp. in New York “In the same way, you used to buy a Sony because you believed in something, and that something was quality.”

The recalls inflicted “big damage” on Toyota, Toyoda told reporters Jan. 10 in Detroit. Still, the carmaker’s Camry sedan remained the top-selling U.S. passenger car while its Lexus brand led luxury car sales, he said.

“Toyota cars are safe,” the chief executive said. “I’d like you to expect more good things to come from us.”

Rising Challengers

Toyoda’s job is likely to get more difficult this year. A resurgent General Motors Co. has emerged from bankruptcy and targeted Toyota’s Prius hybrid with the Chevrolet Volt while Nissan Motor Co. has introduced the all-electric Leaf, for which Toyota has no equivalent. Hyundai has climbed up the quality rankings to seize market share and in China, the world’s biggest market, GM’s and Volkswagen AG’s manufacturing capabilities and sales dwarf those of Toyota.

“Toyota’s real challenge will be in the coming years as new buyers, who do not automatically assume that Toyota is the safest and most reliable vehicle, put the Toyota products up against competitors,” said Alexander Edwards, president of San Diego-based market researcher Strategic Vision Inc.

Toyota dropped 17 percent in Tokyo trading in 2010, making the shares the biggest drag on Japan’s Topix index, which declined 1 percent. Nissan fell 4.6 percent last year, while Ford rose 68 percent in New York and Hyundai climbed 43 percent in Seoul. Toyota gained 1.6 percent to 3,510 yen as of 9:22 a.m. today in Tokyo.

Of the 25 analysts tracked by Bloomberg who cover Toyota, 8 recommend buying the shares, while 15 say to hold them and 2 advise selling.

Prius Hybrid

Toyota pioneered the hybrid car with the Prius. It hasn’t yet brought out an electric vehicle, falling behind Nissan and Mitsubishi Motors Corp. If the technology proves successful and Toyota doesn’t keep up, it will be similar to Sony’s failure to dominate the transition to compact discs from cassette players, according to Yuuki Sakurai, who helps oversee the equivalent of $8.4 billion as chief executive officer at Fukoku Capital Management Inc. in Tokyo.

“The key is whether Toyota can ride this wave,” he said. “More and more competitors will appear, and the question will be: Who can build it the cheapest?”

Rechargeable Cars

While Nissan and GM tout their new rechargeable cars as more efficient than the gasoline-electric Prius, the Leaf’s reliance on batteries alone limits its use mainly to urban commuting. The Volt is more efficient than the Prius on short drives, yet the Prius can deliver higher overall fuel economy on trips of more than 100 miles, according to data from the U.S. Environmental Protection Agency.

The Leaf can travel about 70 miles with its batteries fully charged. The Volt can get the equivalent of 93 mpg if frequently recharged, compared with an average of 50 mpg for the Prius, according to the EPA.

Price may also work to Toyota’s advantage as the Prius starts at $22,800, compared with $32,780 for the Leaf and $40,280 for the Volt. Buyers of the Leaf and the Volt are eligible for a $7,500 U.S. tax credit for rechargeable vehicles.

Owner loyalty, or the likelihood that current owners will buy the brand again, for Toyota fell to 57 percent last year from 63 percent a year earlier, based on data from Strategic Vision. Future consideration, or the rate at which buyers said they included Toyota on their shopping lists, dropped to 40 percent from 48 percent, Strategic Vision said.

Vehicle Consideration

Future consideration for vehicles from Dearborn, Michigan- based Ford, which boosted U.S. sales 17 percent in 2010, rose to 37 percent from 29 percent. The measure rose to 17 percent from 14 percent for models from Seoul-based Hyundai, whose sales in the nation surged 24 percent.

Ford outsold Toyota in the U.S. last year to reclaim its No. 2 ranking behind GM and gained on Toyota in a brand perception survey by Consumer Reports magazine. While Toyota remained the most favorably viewed auto brand by U.S. consumers in 2010, its score plunged 46 points in two years to 147. Ford’s jumped 35 points to 144, the magazine said Jan. 5.

Toyota’s brand image was at an all-time high in June 2009, said Bob Carter, the carmaker’s U.S. group vice president.

“We are not back there yet, but it’s far above where it was last January,” Carter said Jan. 10 in Detroit.

Toyota will remain the global market share leader in 2015 with sales of about 10 million vehicles, according to IHS Automotive, a research firm based in Lexington, Massachusetts. The automaker will rank third in U.S. share that year with 2.5 million deliveries, following GM at 3.1 million and Ford at 2.75 million, IHS said.

Hyundai Competition

Even as the Camry remains the top-selling U.S. passenger car and the Corolla the best-selling compact car, the models face rising competition from Hyundai, South Korea’s largest automaker. Hyundai’s Sonata sedan was revamped last year to win sales from the Camry, and the Korean carmaker released a redesigned Elantra compact targeting the Corolla.

The Sonata starts at $19,195, compared with $19,720 for the Camry, according to the carmakers’ websites. The Elantra starts at $14,830 and the Corolla at $15,450.

“Toyota is losing market share to the Koreans in the U.S.,” said Takashi Aoki, a fund manager at Mizuho Asset Management Co. in Tokyo. “But I’m more worried about Toyota’s profitability.”

Industry Shift

Given a potential industry shift toward battery-powered electric cars, Toyota needs to stay competitive by spending more money developing such cars with lower margins, Aoki said. His company sold 94,800 Toyota shares in July, according to data compiled by Bloomberg.

In Fortune magazine’s annual survey of the world’s most admired companies, Toyota dropped to seventh place in 2010 from third in 2009. Sony, which peaked at No. 6 on Fortune’s list in 2000, is now 38th. Its rival Apple leads the list.

In June, Toyota’s namesake vehicles, which accounted for most of its recalls, scored below average in J.D. Power & Associates’ study of new-car quality for the first time in the survey’s 24-year history. Defects rose to 117 per 100 vehicles, up from 101 a year earlier.

The Camry ranked near the bottom among 34 models in new U.S. crash tests released in October, trailing the Sonata, Ford’s Taurus and GM’s Chevrolet Malibu.

Consumer Reports has found a decline in the quality of interior finishes in Toyotas for the past three or four years, including the 2011 model year, said David Champion, the magazine’s director of automotive testing.

“The quality of the materials they’re using seemed to be much lower than the materials they were using in previous models,” said Champion.

Trailing in China

Adding to its U.S. sales drop, Toyota lags behind Detroit- based GM and Germany’s Volkswagen in China, which surpassed the U.S. to become the world’s largest auto market in 2009.

While GM and Volkswagen have increasingly relied on China’s surging demand to counter slowing or falling sales in their home markets, Toyoda, who ran the company’s operations there from 2001 to 2005, may not be able to count on the world’s most populous nation as his lifeline.

Toyota’s growth in China failed to keep pace with that of GM and Volkswagen last year. The Japanese company’s sales in the nation grew 19 percent to 846,000 vehicles, eclipsed by GM’s 29 percent increase to 2.35 million units and Volkswagen’s 37 percent jump to 1.92 million. The Wolfsburg, Germany-based carmaker’s sales figure includes Hong Kong.

GM and Volkswagen offer a broader range of vehicles in China compared with Toyota, which is more focused on profit margins than volume in that market, said John Zeng, a Shanghai- based senior analyst at researcher J.D. Power & Associates.

‘Narrow’ Lineup

“In the long term, it’s not good for them,” Zeng said. “With a narrow product lineup you can’t build up your market share, and if you lag behind competitors too much, that could be dangerous.”

In Japan, where Toyota commanded a 32 percent market share last year, industrywide auto sales are projected to drop 10 percent in 2011 after a government subsidy for fuel-efficient cars ended in September, according to the Japan Automobile Manufacturers Association.

Japan’s auto demand has declined in four of the past five years as its aging population shrinks from a peak of 127.8 million people in 2004.

“They’re down in the U.S., sales are falling in Japan, and they’re growing at a slower pace in China than their biggest competitors,” Maryann Keller, the analyst, said of Toyota. “That’s not encouraging.”

Toyota’s situation marks a reversal of seven decades of steady gains since Kiichiro Toyoda founded the automaker in 1937 as a spinoff of the family’s loom works.

World’s Largest

Fifty years after entering the U.S. in 1957, the company passed Ford in U.S. sales in 2007, trailing only GM in what was then the world’s largest auto market. In 2008, Toyota surpassed GM in global sales to become the world’s largest automaker.

Toyota’s founder initiated its focus on continuous improvement and just-in-time production that was credited for its rise. His grandson Akio, who took charge at the carmaker in June 2009, has said he will decentralize the company and shift authority to regional units, enabling them to resolve customer complaints more quickly.

Along with repairing pedals and fixing other flaws cited in its recalls, Toyota is adding brake override software to all models to ensure vehicles can be stopped in the event of unintended acceleration.

Development Time

The recalls prompted the company to lengthen development time for new models to allow quality reviews and open more regional quality centers in North America to check defect complaints more quickly. Toyota also carried out reviews of suppliers to ensure parts are produced to meet its standards.

“We are going to put our heart and soul in each individual vehicle,” Toyoda said Jan. 10 in Detroit.

To reassure customers, Toyota began running U.S. television and Internet commercials touting its commitment to safety and quality, saying “everyone deserves to be safe.” In October the company began its “Toyota Care” program for U.S. buyers, making two years of free maintenance and roadside assistance standard on new models.

The carmaker’s efforts will yield results over time, said Edwin Merner, president of Tokyo-based Atlantis Investment Research Corp., which manages $3 billion.

‘Very Big Ship’

“Toyota is a very, very big ship,” Merner said. “It turns very slowly, but it’s already turning. By the end of the year, you should start to see some solid results.”

Merner and Fukoku Capital’s Sakurai both compared Toyota’s recall troubles to those of Japanese tiremaker Bridgestone Corp.

Bridgestone’s market value plunged 54 percent in 2000, the year it recalled 6.5 million tires for tread separations linked to at least 271 highway deaths. The company’s revenue grew for the next seven straight years, data compiled by Bloomberg shows.

“People forget over time,” Merner said.

It may take one or two years for Toyota to regain customer trust, “but they will recover,” Sakurai said. Fukoku Capital added 21,100 shares in July.

Toyota will continue to be a leader in hybrids, Merner said. In Detroit, the company is showing a wagon-type version of the Prius, the world’s best-selling hybrid.

Plug-In Prius

The carmaker has said it will sell a plug-in version of the Prius by 2012. Creating a Prius line is part of plans to shift attention to new products while building on the vehicles’ environmental appeal.

Even the Prius may no longer be an automatic choice for buyers seeking an alternative to traditional gasoline-powered cars.

Thomas Franklin, a San Diego patent attorney, listed his 2006 Prius for sale this month after buying one of the first Leafs in December. Franklin was interested in an all-electric model as he drives only about 20 to 30 miles most days, he said.

“From an environmental perspective, Prius was the best thing out there,” Franklin said. “Now, especially for people with small commutes, there’s no reason they should be buying a Prius.”

To contact the reporters on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net; Jeff Green in Southfield, Michigan, at Jgreen16@bloomberg.net; Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net

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