David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

If there's a secret behind Toyota Motor Corp.'s rise to become the world's biggest carmaker, it's been getting the unspectacular basics of manufacturing right more effectively than anyone else.

Whereas Tesla Inc. claims a grand overarching purpose to help move the global energy industry away from fossil fuels, the 14 principles of the famed Toyota Way are so dryly process-oriented that many are all but incomprehensible to those who aren't supply-chain managers.

That strategy has often paid off in the past. In the 1960s and 1970s, the vogue in Detroit was for high-performance muscle cars like Ford Motor Co.'s Mustang and General Motors Co.'s Chevrolet Camaro. Toyota broke through offering something less exciting, but ultimately more effective: cheap, sensible family cars that didn't break down.

By the 1980s, the success of entry-level luxury vehicles like BMW AG's 3-series suggested a new audience was opening up in mass-market premium cars. Toyota, following its principle of nemawashi (roughly speaking, "be circumspect about change") took its time to catch up: It wasn't until Honda Motor Co. established its Acura brand that the company responded with the Lexus.

The same pattern has played out over the past decade: While the likes of Tesla, GM and Nissan Motor Co. have been rushing to develop fully electric cars, Toyota has settled for updates to the Prius's hybrid technology plus the promise of hydrogen fuel cells.

In Recovery
Toyota's net income won't regain its 2016 level until 2020
Source: Bloomberg, analyst estimates

The problem for Toyota now  is that the global auto market appears to be bifurcating -- as indicated by its annual results Wednesday, which showed a 21 percent decline in full-year net income to 1.83 trillion yen ($16 billion), combined with a forecast of a further fall to 1.5 trillion yen over the coming 12 months.

Since hitting 10 million cars in 2014, retail vehicle sales are stagnating, with a forecast of 10.25 million for 2018 that's 1,000 less than the past 12 months. Something at Toyota isn't working.

That's a difficult situation for a carmaker that's always done well from being thoroughly middle-of-the-road.

What's gone wrong? On one hand, regular and crossover SUVs are swallowing up the automotive market, with sales volumes overtaking those of conventional passenger cars in the U.S. and, soon, China. Toyota, despite its traditional association with sensible sedans, is far from immune to this shift: In the U.S., the RAV4 crossover is starting to overtake the Camry and even the Corolla -- the best-selling car in history.

Bigger Is Better
Toyota's RAV4 crossover SUV is starting to outsell the Camry and Corolla in the U.S.
Source: Bloomberg Intelligence

On the other hand, carmakers are investing billions in countering the triple threat presented by plug-in electric vehicles, autonomous cars, and ride-sharing. Toyota is hardly a slouch on this front -- its R&D budget is among the top 10 of all global companies, and only Volkswagen AG spends more among automakers -- but relative to what it could spend, it's coasting.

As a percentage of net sales, only BMW, Subaru Corp., Kia Motors Corp., Fiat Chrysler Automobiles NV and Mitsubishi Motors Corp. spend less among large automakers in developed countries. 2018's forecast of a 1.05 trillion yen R&D budget would be the third consecutive year in which expenditure has essentially stood still.

The cars customers increasingly want to buy are large, often less fuel-efficient SUVs and crossovers. Governments, meanwhile, are encouraging a switch toward electric vehicles, whether through aspirations (India, Germany and Norway), mandates (China and California), or the fleet vehicle standards that are encouraging the likes of GM to invest heavily in zero-emission vehicles (to offset the emissions from booming sales of gas-guzzlers).

This middle way has been so effective for Toyota over the years that it feels presumptuous to suggest it might have outlived its usefulness. Analysts don't expect it to regain 2016's profit levels for another three years, but investors are so enamored of Toyota's strategy that the company still has the industry's richest valuation after Tesla.

Still, these are strange times in the global auto market, even before considering the effects of President Donald Trump's proposed rollback of U.S. fleet vehicle standards and the threat of penalties on cars imported from Mexico. If there's a time to abandon moderation, it's a moment like now when the automotive industry is in the grip of a once-in-a-century revolution.

This Car Ain't Cheap
Toyota's blended forward 12-month EV-to-Ebitda valuation is still among the highest among global peers
Source: Bloomberg
Note: Shows only automakers in North America, Europe or developed Asian countries with at least $5B in trailing 12-month sales.

One of the cornerstones of the Toyota Way is hansei -- a continual process of self-reflection, and willingness to admit and learn from mistakes. It's possible that the rest of the industry has got it wrong about the way the auto industry is changing, in which case Toyota will again get the last laugh. If they're right, however, President Akio Toyoda has little room left for error.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. These are a measure of fuel economy across all the vehicles a manufacturer sells.

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David Fickling in Sydney at

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