The Americanization of a Japanese Icon

Toyota's quandary: Should it concentrate on its U.S. success or shift focus to markets sorely in need of help?

Since moving to the U.S. 15 years ago, Nicaragua-born Roberto Castillo has had a series of jobs at car dealerships--first Ford, then Pontiac, and eventually Hyundai. But two years ago, he landed the job he really wanted: selling Toyotas. "Toyotas are easier to sell than any other car," he says. "Everyone knows the reputation, so you never have to sell [people] on the benefits." Nowadays, Castillo works at Longo Toyota in the Los Angeles suburb of El Monte. Castillo isn't Longo's top salesman, but last year he piled up commissions worth more than $80,000. As he says: "You can make good money with Toyota."

Tell that to Tetsuo Kawano. He runs a Toyota dealership in a beachfront Yokohama suburb in Japan. Recently Kawano held a promotion featuring FM deejay Haruhisa Kurihara. The event drew about 75 young Japanese with bleached hair, baggy pants, and goatees. The idea was to move a few Toyota Vitz subcompacts; the crowd enjoyed the music and free doughnuts, but there wasn't much interest in the product. "I'm here because I like the deejay," said Kidokoro Katsumi, 21. And the cars? "I just bought a Honda." Says a rueful Kawano: "We're selling into a shrinking market."

Booming in the U.S., but running out of gas in Japan? That was never Toyota Motor Corp.'s (TM ) global strategy. Ten years ago, Japan's foremost auto maker had a multipronged attack plan: grow steadily at home, make modest gains in the U.S., make money in Europe, and take over Southeast Asia. Well, things have changed. Japan has become the incredible shrinking market. The European conquest, though still possible, is a dream deferred. And Southeast Asia has stalled out. That leaves the U.S., the one market where sales remain robust. Toyota's American strategy, in short, has become Toyota's lifeline.

The importance of the U.S. raises questions about what kind of company Toyota will become. How far will the Japanese leadership let the Americanization of Toyota go? How will the importance of the North American market affect Toyota's international thrust? And most important, with future profits so dependent on the U.S., how easy will it be for Toyota to drive its current 10% share of the U.S. market to 15%--or even 20%?

Toyota, the world's third-largest auto maker--2001 sales are expected to hit $108 billion and operating profits $4.2 billion--will struggle with these and other questions over the next few years. Still, despite trepidation about the company's increasingly American tilt back at headquarters in Toyota City, about 100 km east of Nagoya, the way forward seems clear. Says Toyota Chief Executive Fujio Cho: "We must Americanize."

The process is already well under way. Consider the following facts, including some statistics that scare the wits out of Toyota's rivals in Detroit:

-- Last year, Toyota sold more vehicles in the U.S. (1.74 million) than in Japan (1.71 million). Although Toyota doesn't break out foreign-derived earnings, analysts figure that almost two-thirds of the company's operating profit comes from the U.S.

-- Toyota's U.S. factories and dealerships currently employ 123,000 Americans--that's more than Coca-Cola (KO ), Microsoft (MSFT ), and Oracle (ORCL ) combined.

-- Toyota's top U.S. execs are, increasingly, local hires. The recently appointed manager of the key Georgetown (Ky.) plant, which makes the Camry, is Ford Motor Co. veteran Gary Convis. "Thirty years ago, we were more dependent on Japan," says James Press, chief operating officer of Toyota Motor Sales USA Inc. in Torrance, Calif. Now, "there's not much Japanese influence on a day-to-day basis."

-- Toyota's biggest hits in the U.S.--the Camry sedan, Tundra pickup, and Sequoia SUV--were all designed with the American consumer in mind with significant input from U.S. design teams. Now, Toyota is launching a much-anticipated third brand: Scion, aimed at America's youth.

-- With its 10% U.S. market share, Toyota is within striking distance of DaimlerChrylser's (DCX ) 14.5%. Some auto executives think it's only a matter of time before Toyota steals DaimlerChrysler's place in the Big Three.

It's easy to see why Toyota has become so focused on the U.S. market. While the company has never forfeited its dominant position in Japan, its market share is slipping steadily, while profit margins per vehicle are now an estimated 5%, vs. 13% in the U.S. In recessionary Japan, Toyota failed to shift production quickly enough into minivans and cheaper subcompacts, sticking instead with pricier sedans. Its rivals, by contrast, have adapted to changing demand, putting unaccustomed pressure on Toyota. "The Japanese market has gotten much more competitive, with Nissan back on track and Honda on a roll," says Chris Richter, an analyst at HSBC Securities Inc. in Tokyo. And Toyota's move into Europe has been slower than expected. While Toyota is doing better than Honda and Nissan, it still loses money on nearly every car it sells there.

Which brings us back to the U.S. Toyota's top brass won't discuss market-share goals: The last thing the company wants to do is ruffle feathers in Washington by publicly targeting DaimlerChrysler. But top Toyota officials are emphatic about where Toyota will direct its energies. "The American market is our top priority, bar none," says Cho, who in February became the first foreign exec to be inducted into the U.S. Automotive Hall of Fame. "We'll do whatever it takes to succeed there." The company is already planning to ramp up production capacity in the U.S. to more than 1.45 million units by 2005, from 1.25 million now. And in the next two to three years, it hopes to be selling a total of 2 million vehicles a year, including imports, in the U.S. market.

Of course, deep inside Toyota, ambivalence lingers about the growing clout of the American division. Toyota traditionalists are reluctant to stray even an inch from the Toyota Way, a philosophy set forth by the company's legendary founder, Kiichiro Toyoda, a zealot for consensus-style decision-making, merciless cost-cutting, and fanatical devotion to quality and customer satisfaction. Toyoda's focus on such basics has guided Toyota's growth over the past 65 years. In fact, it has been U.S. auto makers who learned from the Japanese, not the other way around.

To ensure that Toyota doesn't lose the essence of what makes it great, the company in February opened the Toyota Institute, an internal, MBA-style program near Toyota City whose faculty will comprise Toyota execs and visiting professors from the University of Pennsylvania's Wharton School. "We don't have the bench strength to rely solely on Japanese managers anymore," says Takashi Hata, Toyota's global human-resources guru. "But we must remain faithful to the fundamentals that got us where we are today as a company."

Fact is, Toyota and its U.S. subsidiaries don't always see eye to eye, especially when it comes to making design choices for the American market. Sometimes the conflicts are over small issues; one Toyota official in Japan, for example, says interior color schemes are a constant source of friction. At other times, there are clashes over crucial product-strategy decisions. "They have to be dragged kicking and screaming into bigger products," says Jim Olson, a senior vice-president at Toyota Motor North America Inc. in New York City.

In the late 1990s, Japanese product planners resisted their U.S. colleagues' idea that the company should produce a V8 pickup truck for the American market. To change their minds, U.S. execs took their Japanese counterparts to a Dallas Cowboys football game--with a pit stop in the Texas Stadium parking lot. There, the Japanese saw row upon row of full-size pickups. Finally, it dawned on them that Americans see the pickup as more than a commercial vehicle, considering it primary transportation. Result: the red-hot Tundra, which sells for about $25,000.

Now, it's harder than ever for executives in Japan to second-guess their American colleagues. "Once we started building products [in the U.S.] and we were responsible for keeping those factories running," says Donald V. Esmond, senior vice-president of the Torrance sales arm, "then the chief engineers started listening a lot closer in terms of what products we need in the market." The proof that American marketers know their business is in the numbers. March sales of the $20,000 Camry, a sedan revamped for the U.S., surged 24.1% over the same month last year. Sales of the Highlander SUV were up 28.4%.

However successfully Toyota blends the essence of the Toyota Way with a dash of American salesmanship, increasing market share in the U.S. from now on will be a bigger challenge. "Toyota [has] very complete product coverage," says George Peterson, president of AutoPacific Group Inc., a market-research company in Tustin, Calif. "There are very few holes in its lineup." More ominously, Toyota could face in the U.S. the same problem it does in Japan: smaller rivals taking daring design steps that attract new customers. Already, Nissan Motor Co.'s redesigned Altima and Infiniti G35, with their head-turning styling, are luring Americans from the Camry and Lexus line. And South Korea's traditionally no-frills Hyundai is moving inexorably upscale with such cars as the XG350, a family sedan that is thousands of dollars cheaper than the Camry.

Still, given Toyota's U.S. momentum, even stiffer competition from Honda and Nissan won't have a dramatic impact in the short term. Indeed, to increase market share, all Toyota need do is crank up U.S. production. Right now there is more demand for such models as the Lexus RX 300 and Highlander SUVs than Toyota can fill. "They could get a full share point just by bringing Highlander production to the U.S.," says a well-placed analyst. The company already plans to make the RX 300 in Canada. As a result, Toyota should have no trouble "dialing up their U.S. sales through the remainder of the decade," says one analyst.

But Toyota does have an Achilles' heel: its aging customer base. The average age of a Toyota buyer in the U.S. is 45, the highest among Japanese carmakers. Press says Toyota has already halted the aging process by revamping the Celica coupe and MR2 Spyder roadster. Yet neither sold well last year. Nor did the Echo, the first Toyota subcompact aimed at Generation Y and younger. A moderate hit in Japan, it is a flop with young drivers in the U.S., who prefer the Ford Focus or any Volkswagen.

It's too early to tell, but the new $15,000 Matrix subcompact could be the winner Toyota is hoping for. The company's strongest prospect to close the generation gap, however, will be Scion, the new brand to be launched in California next summer. The first Scion models will be the bbX, a modified version of the bB--or black box--a blocky van now being sold in Japan, plus a car rumored to be derived from the Japanese-market Ist (pronounced "east"). In 2004, Scion will go national in the U.S. and roll out models designed specifically for the American market. One prospect: the ccX, a sporty coupe with more cargo space and two sunroofs to provide an open-air feeling.

Will Scion work? Many analysts say Toyota should have launched its youth-oriented line as part of the Toyota marque--and in doing so bring some verve to the whole brand. But AutoPacific Group analyst James N. Hall believes Scion has "no downside." With luck, he says, the brand will bring a new breed of buyers into Toyota showrooms. If it doesn't, he adds, the core Toyota franchise won't suffer. Besides, while the bbX may look bizarre to older buyers, some analysts are convinced American kids--who, thanks to the Internet, are increasingly attuned to foreign car design--will like Scion products.

Toyota Chairman Hiroshi Okuda jokingly said last year that his company should move its headquarters to the U.S. That is extremely unlikely. Nonetheless, this most Japanese of Japanese auto makers knows its U.S. strategy is crucial to future prosperity. The company that Kiichiro Toyoda founded still has its roots in Japan, but its destiny is all-American.

By Chester Dawson in Toyota City, with Larry Armstrong in Los Angeles and Joann Muller and Kathleen Kerwin in Detroit

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