Toyota Retooled

Last December, a group of Toyota Motor Corp. parts suppliers invited Eiji Toyoda, the company's honorary chairman, to speak at their association's 50th anniversary celebration in Nagoya. In that half-century, the suppliers had helped transform Toyota from a struggling carmaker into the world's third-largest auto manufacturer. For that, they might deserve congratulations.

But Eiji, 80, who has been the company's driving force for most of those five decades, was in a starkly different frame of mind. Seated before two shimmering Japanese folding screens, Toyoda admonished the suppliers to "get back to basics."

Costs had spiraled during Japan's late-1980s "bubble economy," he warned. Toyota cars were overengineered and too expensive. The company had lost sight of what its customers wanted. "We need to put our house in order," he said. Then, he closed with an emotional call to rekindle the company's "zealmus founding spirit." The suppliers filed out to a sushi buffet and whisky, duly chastened.

HIDEBOUND? That relentless intensity is one reason Toyota is pulling out of Japan's economic slump in fighting shape. For nearly three years running, Toyota has been battered by a strong yen that has cut profit margins as well as market share abroad. At home, sales are off 18% from their 1990 peak of 2.5 million vehicles. The company, once the world's most profitable auto maker, is expected to squeak through its current fiscal year with a gain of about $1 billion on sales of $90 billion (charts). Critics are saying that its hidebound management style, as well as uncertainty over the founding family's future in the company, has caused Toyota to lose focus.

But suddenly, Toyota is beginning to demonstrate its underlying strengths. The recession has cornered competitors such as Nissan, Mazda, and Honda into model-sharing agreements. And with Nissan and Mazda deeply in the red, many analysts predict further cuts to their model offerings and dealer outlets. That's sure to hurt when the market turns up again.

In contrast, and without closing a single factory or laying off a single worker, Toyota is muscling through on the strength of its $14 billion in cash holdings--enviously dubbed "the Bank of Toyota." That cash hoard is building again after dwindling during the crunch period. "The longer the recession has continued, the better relative shape Toyota finds itself in," says Andrew Blair-Smith, an analyst at Barclays de Zoete Wedd Ltd. in Tokyo.

Profits should rebound starting this fall, he predicts, as cost savings kick in and the Japanese economy turns up. At that point, Toyota's commanding 42% market share will mean big revenue growth at home. There, the company is staking its hopes on the RAV-4, a sport-utility vehicle aimed at city dwellers, which is scheduled to debut in April. A newly revamped Celica is already out, and spiffed-up versions of the Tercel and Camry are planned for Japan this fall.

Internationally, the company will succeed this year in doubling its overseas production from just five years ago, easing the sting of a strong yen. On Mar. 1, Toyota dedicated its second auto plant in Georgetown, Ky., at a cost of $800 million. That plant is a milestone for several reasons. First, it will produce the Avalon, a U.S.-designed four-door sedan expected to allow Camry owners to "step up" to a larger, more luxurious model. The six-cylinder Avalon will be priced around $25,000 when it goes on sale this fall, overlapping with the Lexus ES 300.

The new plant also means that Toyota's total investment in Kentucky now exceeds $2 billion, giving it the second-largest manufacturing presence of any Japanese auto maker, just behind Honda's Ohio operations. Moreover, the Georgetown plant guarantees that Toyota will soon produce and sell more cars in the U.S. than it imports, giving the company a crucial measure of protection against the vagaries of trade friction and yen-dollar movements.

But further growth in the U.S. is expected to come only gradually. The company suffered through a dreary opening to the year, with Lexus sales off 16% and Toyota cars and trucks off 2% in a market that gained 15% overall. But few doubt that a turnaround will come. New offerings, such as the Avalon and the redesigned Tercel this year, at a base price of about $10,000, are expected to tilt sales upward again. The LS 400, the flagship of the Lexus division, is being redesigned from the ground up and will go on sale this fall.

Meanwhile, Toyota has two of the hottest image-building cars around. Its year-old Supra, which costs from $37,000 to $50,000, continues to sell well against other imported sports cars. And the $35,000 Land Cruiser, a luxury sport-utility vehicle, is in chronic short supply. Overall, in the U.S., "we will sell more this year than last year," says Yale Gieszl, executive vice-president for Toyota Motor Sales U.S.A. Inc. in Torrance, Calif. Bigger gains will come with remodeled offerings, such as the Camry in 1996 and the Corolla in 1997.

Taken together, the company's moves at home and abroad suggest that it's ready for the next leg of growth. "When Toyota comes out of this current crunch, they're going to be leaner, meaner, richer, and tougher," says James C. Abegglen, chairman of Gemini Consulting (Japan) in Tokyo.

Also bigger. Higher-ups may have dropped talk of "Global 10," Toyota's aggressive-sounding 1980s drive to capture one-tenth of the world auto market. But its seemingly less threatening goal of selling 6 million cars by 2000 would accomplish much the same thing. "We may not see the rapid growth of the past," says a soft-spoken President Tatsuro Toyoda in a spacious conference room overlooking Tokyo. "But there will be opportunities for steady growth."

Not everyone is convinced Toyota is back on track. Some say the company that invented lean production and cut manufacturing costs to the bone needs a dramatic restructuring of a white-collar workforce even it admits is bloated. Auto analyst Maryann Keller argues that Toyota should fire several thousand white-collar workers and close two or three factories that represent excess capacity. "They've got to reinvent the company," she says.

REVOLUTIONARY FUSS. But Toyota isn't listening. Lifetime employment, promotion based on seniority, and consensus decision-making will remain at the heart of the company's culture. Toyota will tinker, experiment, modify, and try to change gradually. It has "flattened" its corporate pyramid by eliminating ranks and has tried to introduce a promotion-and-pay system that depends more on performance. It's even looking to hire a handful of midcareer designers whose compensation will be based entirely on performance--without guaranteed lifetime employment. The initiatives sound new, even revolutionary by Japanese standards. But they're only attempts to fuss with the system around the edges.

Far from viewing Japanese traditions as a ball and chain, Toyota is out to prove they remain viable. "The Japanese way of business is still competitive," asserts Executive Vice-President Iwao Isomura, one of a handful of professional managers considered candidates to eventually become the company's first non-Toyoda family president in decades.

Instead of slashing white-collar ranks, Toyota's solution to its cost dilemma is distinctly old-fashioned: seeking savings through relentless manufacturing-and- design frugality. As a result, the company is racing past its own cost-cutting goals and expects to shave $1.5 billion this year. Toyota is determined once again to design and build the no-frills, reliable, workaday, "value for money" cars that made its reputation.

The cost-cutting effort started by trimming excess from cars already in production--an inch of extra wire here, a plastic attachment there. And the new Corona and Carina share front- and rear-door panels and windshield glass, and both use the same interior dashboard as the Celica. The cost savings from redesigning cars from the ground up is finally showing results. By cutting the cost of the Celica by approximately 10%, for example, the company saved $660 million on materials and factory expenses in the first half of this fiscal year. Toyota is shooting to save $950 million more in the second half.

Fewer than half of the company's models have undergone this kind of scrutiny. Currently, for example, bread-and-butter offerings such as the Corolla and Corona are under the knife in preparation for release next year and the year after. "Where Toyota has to put its efforts is the high-volume core products," says Christopher W. Cedergren, senior vice-president at AutoPacific Group Inc., a Santa Ana (Calif.) market researcher. "But it wouldn't surprise me to see them take a full 15% or 20% out of the cost."

Toyota's grind-it-out approach is creating more believers these days in Tokyo. Long-term enthusiasm for the company remains strong on the stock market. Its share price has climbed 60% since last March, based largely on the theory that Toyota will come back strong when the market turns up again.

After all, it is emerging as Japan's only true full-line car manufacturer. That's the underlying message in Toyota's introduction of the sport-utility RAV-4 at a time when other manufacturers are narrowing their product offerings. "The consumer still wants diversity," says Barclays de Zoete Wedd's Blair-Smith. "The question is, how much can you afford to supply?"

No one is arguing that Toyota is going to return to the heady days of the 1970s and '80s, when it seemed unstoppable. This time around, the field will include more than just the Japanese. General Motors Corp.'s Saturn and Chrysler Corp.'s Neon (dubbed the "Japanese Car Killer" in Japan) are proof that the Big Three do not plan to leave Toyota unchallenged.

But Toyota's tough sledding in the past three years shouldn't mislead the world into thinking it's out of the race. Early signs of a revitalized Toyota should serve as a sober warning for Detroit, however justified its recent crowing over gains in quality and market share. Says Kleinwort Benson International Inc. analyst Steve Usher: "If Detroit thinks, 'that's it, we've done it,' they're in for another rude awakening." As usual, Toyota is doing what it has always done--only better.

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