Toyota, It's Tough at the Top

About to become the world's biggest car company, the Japanese juggernaut will find out that it's not easy staying at the top of its game

The coming year should bring some notable changes to the automotive world, starting with the likelihood that king-of-the-hill General Motors (GM) will tumble from its throne. Ever since Henry Ford ceded leadership more than 70 years ago, GM has reigned supreme as the world's largerst auto maker. But without an unlikely reprieve, Toyota (TM) is poised to punch past GM in 2006.

The Japanese giant aims to boost global production to 9.2 million vehicles, an 11% increase. GM barely built 9 million vehicles in 2005 and isn't revealing its 2006 target. The increasingly cautious GM has been loath lately to make forecasts, and for good reason: It has repeatedly fallen short on everything from sales to market share to the depth of its bottom-line losses. Toyota, on the other hand, consistently delivers what it promises.


  Toyota's official line, as laid out by former CEO Fujio Cho, is that global leadership "is not a part of our strategy." Maybe not, but it certainly has good reason to avoid boasting. As the obvious pretender to the throne, Toyota has come under increasing scrutiny. Just one "bad decision," Cho stressed during an appearance at last year's Detroit Auto Show, "can destroy your reputation." That's especially true if you're the one in the spotlight.

Here in the U.S., Toyota has done a masterful job positioning itself as a leader. It has expanded into virtually every niche of the market -- and invented a few segments of its own, with products like the RAV4. After a slow and cautious start, Toyota has dotted North America with assembly plants that now produce the bulk of the vehicles it sells in this market.

And Toyota's PR machine has been equally on top of its game. Its corporate ad campaign emphasizes that Toyota now employs tens of thousands of Americans. Recently, commuters passing through New York's Lincoln Tunnel were greeted by a block-long billboard promoting Toyota's unquestioned dominance in the emerging hybrid vehicle market. While GM has developed a reputation for resistance among environmentalists, Toyota has worked hard to be seen as the industry's Kermit the Frog, proud to be green.


  Then, of course, is Toyota's reputation for quality, the foundation upon which the empire has risen. Even its rivals admit Toyota changed the nature of the game, and while critics deride the appliance-like nature of many models, owners take pride in the seeming indestructibility of products like the Camry and Lexus LS.

So why should Toyota worry? Even as it gains global leadership, it's facing a series of unsettling problems. There are quality issues and the challenge of grooming new managers to recognize and resolve them. Then there's the arrogance factor. Those of us who follow this industry sense a subtle yet noticeable shift in attitude. Dominance may not be the official goal, but it's certainly making a lot of folks cocky. And that can lead to some of the bad decisions Cho so feared.

Several years ago, when Toyota was gaining fast on GM and rivals that were stumbling, Toyota began receiving reports of engines seizing up on models including Camry, Avalon, Sienna, and Lexus. As the numbers mounted, the company responded -- by accusing owners of improper maintenance. Eventually, Toyota did acknowledge a minor design change probably led to the build-up of damaging oil sludge, even in well-maintained vehicles.


  Companies run best when they're running scared, not convinced of their own infallibility. Yet that's the inevitable challenge accompanying unbridled success. A Toyota insider recently confided to me that as the company expands, it can no longer feed the need for managers organically. Yet hiring in outsiders who don't naturally eat, breathe, and sleep the Toyota way is risky. And quality, that bedrock of its success, is suffering.

Tellingly, the number of Toyotas recalled in the U.S. during 2005 more than doubled from the 1.1 million brought back for mandatory repairs the year before. And that has happened even as the auto industry's overall number of U.S. recalls was halved, to around 17 million.

Even more disconcerting, Toyota has steadily slipped in some critical quality tracking measures, such as J.D. Power's Initial Quality Study, and the Customer Satisfaction Index. True, the luxurious Lexus division remains dominant, but the flagship Toyota marque lagged behind such GM brands as Buick and Cadillac in the latest study.


  Then there's the environmental front. Consumers may see the Prius hybrid-electric vehicle and think green, but any environmental gains are more than offset by expanded truck production. Toyota will soon open a new assembly plant near San Antonio, Tex., specifically to built larger, more powerful gas-guzzling pickups.

Toyota has begun taking hits from normally sympathetic environmentalists. The Bluewater Network, a San Francisco-based nonprofit, has run ads in publications from Mother Jones to the New York Times, arguing that while Toyota "had the best fuel economy in the industry 20 years ago [it] has worsened dramatically since then."

My own experience found the Lexus model getting barely 21 mpg, even when driven gingerly. Other publications, including Consumer Reports, have likewise reported that some Toyota hybrids, such as the Highlander Hybrid and Lexus RX400h, get no better mileage than their gas-powered counterparts. A chastened Toyota has promised to put more emphasis on mileage, but its Lexus brand is readying a high-performance subbrand using hybrid technology for performance, not fuel economy.

Toyota's Cho was wrong. It usually takes a number of bad decisions to destroy your reputation. GM is living proof, blundering through decades of bad moves and only now facing the ascendancy of its Japanese usurper. Belatedly recognizing this likelihood last year, GM Chairman Rick Wagoner acknowledged that GM has "no god-given right" to be No. 1. Nor does anyone else possess that right. Toyota may be the new king of the hill, but plenty of challengers are waiting, including the impatient Koreans and Chinese.

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