Your Father's Toyota?

Japanese consumers are underwhelmed

Parked near the Back to the Future ride at the Universal Studios theme park in Osaka are a pair of eye-catching Toyotas with tinted windows. The two cars--a muscular Verossa sports sedan and a menacing Will VS compact--each bear vanity plates that proclaim: "Outatime." Toyota Motor Corp. (TM ) is trying to get a lift from Universal's blockbuster Back to the Future film franchise, in which the hero's time-traveling DeLorean boasted the same license plate. But given the lackluster sales performance of the much-hyped Verossa and Will VS, the Outatime plate might as well be a commentary on the ailing giant's domestic strategy.

It's hard to believe that Japan's No. 1 auto maker is ailing. Consider the record earnings it just reported: operating profits of $8.8 billion on sales of $118 billion. Trouble is, those fat profits come almost entirely from the U.S. Japan, which accounts for 41% of vehicle sales, is contributing less and less to the bottom line. That's bad news because Toyota has long relied on robust Japanese earnings to finance its global expansion. To keep those ambitions alive, Chief Executive Fujio Cho and his team must fix the problems at home--or take painful steps to restructure the domestic operations.

There's plenty to fix. Let's start with Toyota's youth strategy. In 1999, the company made a splash in this market with the affordable Vitz subcompact. But Toyota waited three years to launch a follow-up--the recently introduced ist (pronounced "east"). In the meantime, Honda and Nissan have grabbed share with their Fit and March cars and now lead the subcompact market, the only auto niche with significant growth in Japan these days. "We have to try harder," says Executive Vice-President Ryuji Araki. "We have too many [large] sedans in our lineup."

That's quite a reversal of strategy. Only a year ago, Toyota launched six sedans in Japan with the express intent of stealing upwardly mobile customers from BMW and Honda. It didn't happen. Despite aggressive marketing, the Verossa and Will VS flopped. The Verossa, supposedly a BMW 3 Series killer, is selling half as well as expected. The Will VS, despite its eye-catching Stealth fighter design, has hit its 1,500-per-month sales target only once since its launch a year ago.

Tough times call for tough measures. As part of an effort to get market share back up to 43% this year, Toyota is offering cash rebates: $800 each to buyers of five flagging models, including the Verossa and Will VS. Toyota also could be ready to swallow its pride and sell mini-cars (made by affiliate Daihatsu Motors) in its showrooms--a move long resisted by execs who worried the utilitarian people movers would hurt the brand.

Some industry watchers say Toyota needs to get even more radical. They are calling for the auto maker to streamline both its lineup and its distribution network. When Japan's economy was growing, Toyota blanketed the market with myriad models. Over the years, it opened five separate dealer chains, each supposedly aimed at a different niche. In fact, they were never very well targeted. The upshot: There is no real brand strategy in Japan--unlike the clearly defined Lexus and Toyota marques in the U.S. With Japan's auto market expected to shrink 0.7% this year, Toyota's broadbrush approach is no longer relevant. Says Toyota director Hiroshi Takeda: "Too many dealer chains are chasing too few buyers."

For now, Toyota is making only minor changes. For instance, its new ist will be sold simultaneously by two sales chains--a first for the auto maker, which usually assigns each new model to one distributor. The plan is to get younger buyers into more showrooms. But investors will need more convincing. They have helped push down Toyota's stock price 12% in the past year, even as the share prices of Honda and Nissan have jumped 9% and 22%, respectively. Toyota officials note that the product line is at a low point in its renewal cycle. But it's also true that Japanese are no longer as enchanted with the sedans at the core of the auto maker's lineup. Toyota needs some new hits--fast.

By Chester Dawson in Tokyo

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