Top Spot in Sight, Toyota's Not Slacking

The Japanese automaker is set to overtake GM next year, but chief Katsuaki Watanabe is determined to steer clear of "big company disease"

Culturally speaking, it's not considered good form in Japan for executives to shout from the rooftops. So it's no surprise that top guys at Toyota (TM) are coy when asked about the company's imminent ascension to the rank of world's No. 1 automaker.

When faced with questions on the subject from reporters, Toyota Chief Executive Katsuaki Watanabe usually answers that it is not something he thinks about, even though analysts say that it's almost certain Toyota will pull ahead of General Motors (GM) sometime during 2007.

That might seem disingenuous coming from a company that has added about 650,000 units a year to production—more than compatriot Subaru makes in any given year—during the last three years and will likely pass the nine million mark in 2007.

Trying to Avoid Complacency

One reason Toyota is playing down the fact that it will soon be king among automakers, is that it doesn't want to be seen as kicking Detroit when it's down—a smart move given that around 60% of the company's profits are made in North America. However, a 1980s-style anti-Japanese backlash seems unlikely nowadays, with 40,000 U.S. employees spread across 20 states.

In truth, Toyota's show of modesty is arguably less about diplomacy and more about steering clear of corporate complacency. One big feature of Watanabe's 18-month reign as CEO has been a near obsession with avoiding what he calls "big company disease."

With Toyota on the up, Watanabe is worried workers will slack off, silos will form, and inefficiencies will set in, creating openings for nimbler rivals. "There's a risk that a belief that the current status is satisfactory creeps into the minds of employees," Watanabe told BusinessWeek after taking over as CEO last year. "We should never be satisfied with the current status."

Profits Up, Sales Up

In reality, of course, Toyota could be forgiven for gloating. Almost bankrupt in the 1950s, the company has spent the last decade doing the near impossible—driving sales growth in multiple markets without skimping on profits. During the current financial year, Toyota expects operating profits to reach $19.3 billion on sales of $203 billion, compared to operating profits of $16.2 billion from $188 in sales a year earlier.

Analysts are relieved to see that the company has no intention of resting on its laurels. "If you were looking for a place where complacency was about to set it in, Toyota would be it," says Christopher Richter, an analyst at securities house CLSA in Tokyo. "But it doesn't happen."

One recent example of that is Toyota's response to quality problems. In July, police in Japan filed a complaint against three Toyota leaders, accusing them of delaying the recall of faulty Hilux SUVs for eight years after discovering a problem with defective relay rods in 1996. On top of that, a string of recalls in the U.S. damaged Toyota's image and enabled critics to question the company's reputation for quality.

Focusing on Quality Control

"We take all these matters very seriously," a contrite Watanabe said before bowing at press conference in Tokyo in July. "I take this seriously and see it as a crisis (see, 7/20/06, "Troubles Can't Stop Toyota's Growth")."

He's since backed words with action. Toyota has held back new launches in the U.S., including the new Corolla, for a year to ensure quality was up to snuff. It has also appointed a quality czar in Shinichi Sasaki, senior managing director and former Europe chief. While the role existed before, an important change is that Sasaki's sole remit is quality control. Predecessors had additional responsibilities.

Analysts welcome those moves but point out that many of the recent quality problems are not a symptom of complacency.

On the contrary, the problems often date back to the mid-1990s when Toyota's margins were thin and the company was under pressure from a strong yen.

Promoting a Sense of Crisis

But by escalating the issue to "crisis" levels and implementing a host of reforms, Watanabe, Toyota's worrier-in-chief, ensures the company and its employees stay focused. "Toyota is always trying to promote a sense of crisis among their employees," says Mitsuyuki Ohdaira, a senior analyst at Tokai Tokyo Research Center in Nagoya.

If Toyota employees think they'll get a breather when the company moves ahead of GM they can think again. Obsessed with not repeating the mistakes of the Big Three, Watanabe has spent much of 2006 laying out hugely challenging goals.

In September, Toyota said it would boost sales to 9.8 million units by 2008, compared with 8.5 million this year. That's all the more impressive when the weak Japanese car market, where Toyota has a share of about 45%, is taken into account. In November, car sales in Japan fell for the 17th consecutive month (see, 8/31/06, "A Tough Ride for Japan's Carmakers").

Too Much Strain?

Then, last month, Toyota Senior Managing Executive Takeshi Suzuki announced that the company is also gunning for operating margins of 10%. Toyota declines to reveal its timeframe, but the target would be easily the best among major automakers. "They're setting wildly audacious goals," says Matthew May, author of The Elegant Solution, a recent book on Toyota and a lecturer at the company's school for employees, the University of Toyota in Torrance, Calif. "They take a look at GM, Ford, and Chrysler and they see that 30 years of success can mask problems."

Not that Toyota is worry-free. With production surging, Toyota could face increasing quality problems in the future. Overseas, Toyota has been opening roughly two plants a year, putting a huge strain on engineers and its ability to train up new employees.

Worker Casualties

To satisfy strong demand for its cars abroad, Toyota has been exporting more of its local production. In the process, since 2001 it has tripled its ranks of seasonal workers, to roughly 10,000. "An increase in the number of inexperienced workers has created some problems on the factory floor," quality control chief Sasaki told Japan's Nihon Keizai business newspaper in November.

There also are signs that Toyota's Japanese workers are struggling to keep pace with the company's breakneck expansion. In July, Toyo Keizai, a Japanese weekly, published a story with the headline Toyota is Weary. Two months earlier, a former Denso employee who had been seconded to Toyota filed a lawsuit claiming damages for depression caused by overwork.

"Many employees are forced to work long hours and burn out physically and mentally," the unnamed 42-year-old reportedly told the court. The worker discontent, if it is indeed spreading, is unlikely to amount to much. Toyota has not suffered a strike in Japan since the 1950s and, for all its profits, seldom has wage disputes. The company in August also launched a campaign to improve communications between its 80,000 domestic employees and management. What automaker would not trade places with Toyota right now?