Toyota Unbound

Can the carmaker transform itself into a paragon of the New Economy?

It was a skunk-works project Toyota Motor Corp. executives found hardly worth mentioning. In 1996, in a small office in Toyota city, engineers Shigeki Tomoyama and Akio Toyoda, son of Honorary Chairman Shoichiro Toyoda, constructed a rudimentary computer network that enabled the company's dealers to display photos of used Toyota models in cyberspace. By hooking into the Net, Tomoyama and Toyoda dramatically increased the number of consumer eyeballs checking out those cars: In test markets the average stay of a used car on the lot dropped from 90 days to 10.

Nice job. But that was just the start. Now called, the Toyota site has become one of Japan's most popular cyber gateways, peddling everything from brake pads to hit compact discs to horoscopes. Toyota's division boasts more than 50 vendors, 500,000 members, and 2,000 new subscribers every day. It's so popular that almost 13,000 convenience stores want terminals to go in their locations: Consumers will order stuff at Gazoo kiosks, then pay and pick up their deliveries later at the store. " is becoming the of Japan," says Yasushi Tachikawa, a manager of DigiCube, which sells CDs, DVDs, and videos on the site.

That may be a bit of a stretch: has plenty of tough rivals. But there's no denying something momentous is happening at Toyota. The steady-as-you-go maker of some of the world's most popular, blandest cars is turning into one of Japan's most daring New Economy players. is bold enough--could anyone imagine General Motors Corp. running one of America's hot Web sites? But there's plenty more. The giant will be the second-biggest shareholder in a new telecom company now being formed in Japan, KDDI. And the pace of change is picking up. On Apr. 18, the company announced the creation of a finance arm to manage Toyota customers' credit cards, arrange loans and mortgages, and peddle higher-paying bond funds to clients. The stock, up 24% since December, to 52, is an outperformer. Analysts now estimate that in five years, Toyota could be earning up to 20% of its profit from nonauto businesses worldwide.

Because of Toyota's high-tech and financial assets, the market is awarding it a market capitalization of $192 billion. That makes Toyota worth more than General Motors and Ford Motor Co. combined, even though its vehicle sales trail far behind both players. Indeed, Toyota's moves are being taken so seriously that one local report carried the headline: "The day when the word Motor will disappear from Toyota's name."

But wait a minute. Toyota the dot-com? A car company mixing it up in the phone wars? To longtime investors in U.S. auto makers, at least, these strategic thrusts bear an uncomfortable resemblance to the plans of Detroit's Big Three to diversify. General Motors bought Hughes Electronics and Electronic Data Services. Ford ran First Nationwide, the big savings and loan. Chrysler, maker of the lowly K cars, peddled luxury Gulfstream jets. We all know what happened. Ford and Chrysler aren't in those businesses anymore. Even GM, whose investments prospered, has spun off EDS and is reducing its stake in Hughes to concentrate on the car business. And back in Japan, Toyota's earlier forays into housing and riding clubs (yes, riding clubs) were duds. "We have made many mistakes," says Executive Vice-President Tadaaki Jagawa.

TERRIFYING FORCE. Yet here's Japan's biggest carmaker, with $120 billion in sales, getting ready to spend big money, possibly billions, on dot-coms, cell phones, and financial services. And it will be years before the company sees substantial returns on these investments. Toyota certainly runs the risk of losing its tight focus on the car business that has made it a terrifying force to compete against. "I hope they do end up working more on dot-coms than cars," says one rival auto executive.

But Hiroshi Okuda, Toyota's chairman, sees plenty more opportunity than danger. "In the past, we overconcentrated on making cars," says the 67-year old executive. He wants to have a big, visible presence in different businesses, even while the auto company rolls out better, more stylish models.

As Okuda sees it, Toyota has a rare opportunity to ride the wave of several major changes. The Internet is starting to affect the way ordinary Japanese live, shop, and work. Deregulation is giving dramatic openings to new players in telecom and financial services, just when individual Japanese investors are searching for higher yields.

Next, technology is transforming the auto business. Soon, consumers will be consulting onboard computers for everything from traffic directions to e-mail. "Until now, Toyota has sold 1.8 million vehicles per year," explains Gazoo's Tomoyama. "But from now on, it will sell 1.8 million computers [in its cars]." Navigation systems already operate in a third of the cars Toyota sells. The day is fast approaching when a car's electronics performance may count more for customers than the engine under the hood. And Toyota does not want Microsoft Corp. or Sony Corp. dictating to Toyota what shape its onboard PCs will take.

Finally, Okuda knows Toyota has one of the best customer bases anywhere: 20 million affluent consumers in Japan alone, with perhaps an additional 30 million abroad. To Okuda and his top execs, there just has to be a way to coax more revenues out of these customers.

Take all these factors, and you can see where Okuda and his lieutenants are going when they instruct their troops. The Internet is a big new opportunity: Grab a piece of the action. Cell-phone use is exploding in Japan: Get into the game with the telecom venture. Individual investing is accelerating: Set up a finance operation Japanese can trust.

Most important, Toyota wants to tie all these ventures back to the core car company. Take Gazoo. It has yet to turn a profit, and it's still improving its shopping service, which lags that of Rakuten, a rival site. "I've gone to the Gazoo shopping mall, but the prices aren't low," comments Shuichi Okabe, a 46-year-old civil servant.

Nonetheless, Okabe loves Gazoo's chat rooms, which have spawned fan clubs nationwide. More important, Gazoo has hooked consumers like Okabe, who already knows Toyota as the owner of a Toyota Hi-Ace station wagon. Gazoo will be able to alert Okabe to new cars he might be interested in buying--and car insurance policies or car loans from Toyota's new finance arm. And the day will come when Toyota has installed in all the onboard PCs in its cars. "We want to reach e-commerce customers who will be watching the Internet in their cars," says Tomoyama.

That's where telecom comes in. To morph into a mobile commercial hub, Toyota will take a 13% stake in a newly forming telecommunications player called KDDI. It's a merger of a tiny but profitable telecom company, IDO Corp., which Toyota controlled, with several other players. The result will be Japan's second-biggest telecom company, which should have revenues of $31 billion and profits of almost $2 billion its first full year of operation. But some analysts believe Toyota may have to spend as much as $1 billion annually for the next several years to build the new company into a viable competitor to Japanese telecom conglomerate Nippon Telegraph & Telephone Corp.

To Okuda, it's worth the big bucks. The investments in telecom tie into Toyota's plans to develop wired cars, which will sport built-in cell phones tuned to KDDI signals, and wireless Internet access provided by KDDI. All told, Jardine Fleming Securities Ltd. expects that in three years, Toyota's telecom business will have a 14% operating margin, up from the 8% it earned from its stake in mobile-phone services provider IDO. "Toyota's active participation in telecom will set it apart from its competitors," says Stephen Usher, automotive analyst with Jardine Fleming.

VASTLY AMBITIOUS. And of course, there's finance. Toyota next year will introduce its own credit card, as opposed to a card it now jointly offers with local partners to almost 3 million Japanese. Toyota wants to issue an independent card so that it can keep track of fast-changing consumer preferences and handle online settlements. "Toyota has concentrated on engines and components," says Takaki Nakanishi, car analyst at Merrill Lynch & Co. "But it basically doesn't know its customers' faces. It needs to." Eventually, Toyota could offer even more financial services over the card, such as loan and insurance products. And could offer Toyota customers a way to buy life insurance and mutual funds online.

It all makes for a vastly ambitious plan. Inside the company, executives are starting to compare Toyota's aggressive moves to the company's momentous decision in the 1930s to switch from making textile looms to manufacturing cars. Okuda has publicly reckoned that no company can flourish longer than 100 years, and he's defying his managers to prove the conventional wisdom wrong. Indeed, about the only great leap Toyota is not making is the one most of its rivals are pursuing--merging with a foreign auto maker. Toyota isn't looking. "Every 5 or 10 years we're asked if we're interested in buying BMW," Okuda notes. "But I think it's difficult to proceed with a different culture."

There's plenty happening in Toyota's auto business to keep the company busy. Toyota's cars will still drive its operating profits. While Okuda has been racing around pushing managers to think beyond cars, recently named President Fujio Cho has been relentlessly raising the bar in the core auto business. "The base of the car is manufacturing," says Cho. "We cannot forget that."

The strategy is starting to pay off. Two years ago, Toyota's bland sedans weren't moving from its Japanese showrooms, and domestic market share had slipped below 40% for the third year in a row. Mild-mannered engineer Yasuhiko Ichihashi received orders to turn Toyota's fortunes around by producing a killer compact with a fresh design. When Ichihashi showed his design for the Vitz to Okuda, Toyota's chief thought it looked like a squashed bug. Says Ichihashi: "Everyone in the older generation in the company was worried."

The quirky compact turned out to be a trendsetter, especially with younger Japanese. Now, dealers are scrambling to get their hands on Vitz, which is selling at the rate of 14,000 a month for about $10,000 each. Dealers are also clamoring for four other distinct models developed from the Vitz platform, ranging from a boxy compact minivan called the bB to a futuristic compact for Tokyo trendsetters called the Will Vi. All sell in the $12,000 range. The Will Vi, vaguely reminiscent of the Volkswagen Beetle, comes in six metallic shades, including pink. "It doesn't look like a Toyota," says Kimiyo Fujiwara, 33, an office worker checking out the lineup at a showroom in Tokyo's chic Omotesando district. That, of course, is the point.

"IMPRESSIVE." The experience with the Vitz is paving the way for future strides in manufacturing and cutting costs. After designing an engine with 15% fewer parts than its predecessor, and eliminating nuts and bolts from the car's new transmission and suspension, Ichihashi was able to cut 70 kilograms from the Vitz's weight. "Toyota could not make money [on the Vitz] up to 5 years ago," observes Koji Endo, automotive analyst at Credit Suisse First Boston. "Somehow, they reduced production cost by as much as 25%."

Toyota is also dramatically cutting down the time it takes to design cars. It broke its own record when it took only 12 months from settling on the bB's final design to launching the minivan into the mass market. "That's impressive," admits Tohru Arisawa, president of Honda's advertising affiliate, Comntec. To pick up the pace, Toyota plans to cut its passenger car platforms from 28 to 7 while pumping out the same number of models annually, if not more.

Toyota now has its 40% share in Japan back. In North America, Toyota has used its Tundra pickup to launch a light-truck offensive that could prove a new nightmare for Detroit. This year, Toyota's total share of the auto market is up nearly a point, to 9%, fueled by a 22.5% jump in car and light-truck sales. Right now, light trucks account for 38.5% of Toyota's U.S. sales. But Toyota division general manager Don Esmond wants the North American product mix to be half cars, and half minivans, sport utes, and pickups.

Ultimately, Toyota hopes to respond better to fast-changing consumer preferences by tapping into the zeitgeist through its Web site and other services. The goal is to be the first auto maker to build cars to order and deliver them to the customer within two weeks. And of course, these cars will come with every high-tech gizmo and service offering possible. You want a cell phone with that? How about a mutual fund? The possibilities are endless.

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