Who's That in GM's Rearview? Toyota

The carmaker's plans8,000 new engineers and a North American ramp-up of 470,000 autosattest to its campaign to leave Detroit in the dust

Toyota (TM) would like nothing better than to surpass struggling General Motors (GM) to become the world's largest automaker. And ambitious new global sales targets announced on Sept. 20 by Toyota suggest that day is fast approaching. Just a week after Ford (F) announced a management shakeup and a buyout involving 75,000 workers, Toyota CEO Katsuaki Watanabe announced plans to hire 8,000 engineers and gun for group global sales of 9.8 million units by 2008.

Toyota watchers think the Japanese automaker is moving in for the kill and could overtake GM (which sold 9.2 million units globally in 2005) as early as this year given the Detroit automaker's sales slide and retrenchment plans. Toyota does have a habit of conservative forecasting and probably doesn't want to invite any political backlash in the U.S. by trumpeting its burning ambition to be tops.

Already, Toyota is hugging GM's bumper. Toyota's sales increased 7.1% to 4.36 million in the year's first half, while GM's fell 2.3%, to 4.6 million. Toyota projects sales will reach 8.85 million during 2006 and get close to the 10 million-a-year level two years later. Some believe that milestone could be reached earlier. "I believe Toyota will reach 10 million unit sales in 2008—their projection seems very conservative," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo.


  One reason: The growth targets outlined through 2008 in Toyota's latest expansion plan seem out of sync with its global sales performance in recent years. That slight slowdown could be to ensure quality levels are maintained. But the modest projections may also be a diplomatic move designed not to "irritate Detroit," adds Matsumoto. In Tokyo trading on Sept. 21, the first after the announcement, Toyota stock closed up 1.7% at $54.40.

Whenever Toyota leaves GM in its rearview mirror, its growth plans are another wake-up call for the rest of the auto industry. At a time when Ford and GM are losing sales and domestic scaling back of production and high oil prices are hurting many automakers' profits, Toyota sees growth in just about every region. The only area where it makes a prediction of more or less flat growth is Japan, which has a contracting auto market and some of the world's pickiest customers (see BusinessWeek.com, 8/31/06, "A Tough Ride for Japan's Carmakers").

Watanabe outlined a commitment to increase market share in Japan. That's no mean feat given that Toyota's market share in 2005 was 44%. "Maintaining competitiveness in the Japanese market will accelerate our global business." Watanabe said at a press conference in Tokyo.


  Elsewhere, expansion underpinned by new factories and models is the norm. In the vital North American market, where Toyota will increase its production capacity by 470,000 by the end of 2008, sales are projected to grow about 25% to 3 million in 2008. In Europe, where sales topped a million for the first time last year, 30% growth is expected.

In the rest of Asia, fast-growing China sales, where Toyota currently lags rivals, are projected to spur unit sales by 70% to 1.7 million during the same period. To help meet the production goals, Toyota will also add 8,000 technical staff to its workforce.

What really sets Toyota's growth goals apart from the crowd, is that it's aiming to do it while ramping up profits and slashing costs. As for profitability, Watanabe yesterday outlined a new 10% target for operating margins. In other words, Toyota wants to overtake Nissan, led by CEO Carlos Ghosn, as the profit margins leader in the industry. Ghosn's Nissan managed operating margins of 9.2% in the fiscal year ended in March, vs. Toyota's 8.9%.


  However, while Nissan's margin is likely to fall this year on slow U.S. and Japanese sales, Toyota's appears to be rising. Aided by rising overseas sales and a weaker than expected yen, Nikko Citigroup reckons Toyota will raise margins to 9.1% during the current financial year. Toyota hasn't said when it aims to hit 10%, but a double-digit margin would be icing on the cake for investors.

To get there, top-line growth will help, but key to sustained profitability is finding more savings. That's more important than ever with high oil prices making gas-sipping smaller cars, which are generally less profitable, increasingly popular. Before Watanabe became CEO, a cost-cutting plan called CCC21 helped shave $10 billion from costs in five years (see BusinessWeek.com, 7/22/05, "The Man Driving Toyota").

Now Toyota is pinning its hopes on a new cost-cutting program called value innovation (VI) activity, which it says will help reduce costs by working more closely with suppliers earlier in the component design process and increasing modularization. Details of how that will work in practice are hazy, but Watanabe says he expects the VI program to find more savings than CCC21.


  But could Toyota come unstuck? After all, this year hasn't all been smooth sailing, despite rising sales and profits. The company has already garnered plenty of negative publicity from a host of recalls and a (now settled) sexual harassment lawsuit filed against former North American chief Hideaki Otaka by a female employee (see BusinessWeek.com, 7/20/06, "Troubles Can't Stop Toyota's Growth").

Watanabe appears in no mood to be taking chances on quality. He says the company is raising standards within its research and development division—recall problems have generally stemmed from faulty design rather than production difficulties—working more closely with suppliers, and paying more attention to customer opinions on quality matters.

"It's important to relentlessly pursue zero defects in line with rising consumer expectations," says Watanabe. "We believe that we can build an even stronger foundation for growth in the future."

Nevertheless, analysts say quality issues will likely persist in the short term. One reason is Toyota's rapid growth is heaping pressure on its engineers and suppliers. Another is using the same parts and systems in multiple vehicles makes recalls more far-reaching. Then, of course, higher sales and more new models mean there are more Toyotas out there which could develop faults.

Will any of that stall Toyota's progress toward 10 million units? It looks unlikely. "We are very upbeat," Nikko Citigroup analyst Noriyuki Matsushima notes in a research report on Sept. 21. "[Toyota] aims to prepare the ground for long-term stable growth with improvements in product quality, costs of goods sold, and human resources, key components of its strategy." Short of a mega-merger between its Detroit rivals, it seems nothing will stop the Japanese carmaker from becoming the world's biggest.

Before it's here, it's on the Bloomberg Terminal.