Will Toyota Play Sugar Daddy?

Sakura Bank needs a rescue, but the carmaker is balking

It all started way back in 1949, when a little Japanese auto maker called Toyota Motor Corp. almost went broke. Vicious labor disputes crippled the company just as it was struggling to pull itself up from the ashes of World War II. Needing cash, the auto company borrowed $1.7 million from Teikoku Bank, a Toyota stockholder and the sugar daddy of the Mitsui keiretsu. Toyota was saved from oblivion, and Teikoku went on to became Sakura Bank Ltd.--to this day a major Toyota shareholder and creditor.

Now the shoe's on the other foot. It's Sakura that's struggling, racked by $5.6 billion in securities losses and carrying $10 billion in bad loans. The bank wants to tap Toyota, which holds a 2.4% stake in Sakura, and other Mitsui keiretsu members for $2.6 billion, probably by issuing additional shares. To the bank, it appears that Toyota, with $19 billion in cash, can more than afford to return the favor.

STRATEGIC PLANS. Sakura's squeeze on Toyota underscores a new reality for Japan Inc.: Keiretsu ties that once gave Japan's best corporations a valuable competitive edge have now become liabilities. In a string of investments offering minimal returns, Toyota has poured more than $1 billion into struggling affiliates over the last year or so (table). "If Toyota continues to spend money [from its cash reserves] at this pace, in two or three years it may all be gone," warns Takaki Nakanishi, automotive analyst at Merrill Lynch Japan Inc.

Toyota President Hiroshi Okuda is trying to draw the line. He has plans to expand his company's financial services, but he wants to do it on his own terms. So rather than having Toyota pony up money to bail out Sakura, Okuda wants the bank to seek help from the government first, using Tokyo's new bailout scheme. "We are an auto maker," he says. "We are not a bank." At a time when Japan's No.1 auto maker is struggling with sluggish sales at home, squeezed margins in North America, and evaporating markets in Asia, Toyota needs lots of cash. To stay ahead of rivals, it must continue to spend big on promotions and new models.

Yet although Okuda is talking tough to Sakura, the old habits die hard. Throngs of affiliated companies are trying to use their connections with Toyota to secure financial aid. It has already propped up nine key parts suppliers, including Denso Corp. and Aisin Seiki Co., by buying their shares--some unloaded by troubled banks. Toyota also tightened its grip on compact-car maker Daihatsu Motor by becoming a majority owner in August.

While those investments are at least production-related, others are more questionable. Take the brokerage house Kokusai Securities. Toyota upped its holding from 8% to 10% last March at an undisclosed price. And why was the deal done? Well, for the sake of an old Japanese practice known as otsukiai, or keeping connections. Even Okuda admits that Toyota did the deal simply to keep up Toyota family ties. In another recent move, Toyota has increased the amount of its holdings in Chiyoda Fire & Marine Insurance Co. from 37.1% to 47.1%. Chiyoda is profitable, but some of its larger shareholders have wanted to sell out, presumably because they are short on cash. The insurer sees Toyota as a friendly place to park some of those shares.

There's a chance, of course, that these investments in brokerage houses and insurance companies could turn out to be strategic. Optimists see Toyota's investment in Chiyoda as a chance for the company, after aggressively diversifying into telecommunications, to metamorphose into a financial powerhouse as well. Making use of its ties to Chiyoda, Toyota hopes to steal a march on its competitors: It plans to develop a wide variety of auto-insurance policies designed exclusively for Toyota vehicles. Right now, it offers free one-year policies that cover up to $869 in repairs on accidental scratches. Eventually, Toyota wants to establish a worldwide network of auto insurers, possibly under the umbrella of a financial holding company.

But in the global auto wars, Toyota needs a sizable war chest if it is to slug it out with the likes of cash-rich Ford Motor Co. or DaimlerChrysler. Okuda is not yet ready to rule out giving some financial assistance to other companies in the Mitsui keiretsu. "But we must not fail as a result," he says. Sounds as if Sakura may have to look elsewhere for its bailout money.