Online Extra: Talking with Toyota's Top Man

Katsuaki Watanabe made his name at Toyota as a cost cutter. Now he's steering the world's most profitable automaker to No. 1

If it's tough at the top, Katsuaki Watanabe isn't showing it. Since taking over from Fujio Cho as chief executive of Toyota in June, 2005, the 65-year-old has won admiration for showing calm assurance, tenacity in battling complacency, and razor-sharp knowledge of all things Toyota.

That shouldn't come as a huge surprise. After all, Watanabe has been with Toyota (TM ) since he graduated from Keio University in 1964 with a degree in economics. Having risen through the ranks, Watanabe was appointed general manager of the corporate-planning department in 1999. He then participated in mapping out the company's current growth surge and oversaw a cost-cutting program called CCC21, which resulted in some $10 billion in savings. During his tenure as CEO, Toyota's market cap has more than doubled, to $245 billion.

Watanabe's 20 months at the helm have not been without challenges. A rising numbers of recalls have damaged Toyota's reputation for quality. The Big Three's woes, combined with Toyota's imminent ascension to the rank of the world's No. 1 auto maker, displacing General Motors (GM ), have execs in Toyota City concerned over a potential backlash in the U.S. And for all its strengths in the U.S. and Japan, Toyota lags behind rivals in some key emerging markets, such as China and India.

On Feb. 16, Watanabe addressed these and other issues in an interview at the company's headquarters with BusinessWeek Tokyo correspondent Ian Rowley. Edited excerpts of their conversation follow:

It's now 20 months since you took over as CEO. What have you learned about Toyota in that time?

There hasn't been a big difference between what I anticipated and what I've found out. The area that I thought we needed to focus most on relates to Toyota growing very rapidly. Because of that, I strongly felt we needed to consolidate the foundations of the business, focusing on three major headings.

The first relates to the firm assurance of product quality. The second is to accelerate research and development efforts. Third, to achieve these goals, around the world we need to develop human resources as much as possible. I've always been very conscious of the fact that we cannot hope for growth without the improvement of our quality.

When you took over, you talked a lot about what you call "big-company disease" and the risks of complacency. Have those fears receded?

I've made very strong appeals [to employees] to do a diligent job of strengthening the organization. As a result, there's much more awareness of the need to strengthen our foundations. To that extent, there has been an improvement, and the "disease" has been receding.

But there's still more work to be done?

The scariest symptom of "big-company disease" is that complacency will breed in the company. To be satisfied with becoming the top runner, and to become arrogant, is the path we must be most fearful of. There are so many challenges and issues that we need to address. Each individual [needs] to have the mentality to challenge those problems. Problems must be made visible. Not just in Japan but in all affiliated activities around the world.

Can you give me an example of where complacency has been identified and stamped out?

Quality, I think, can be taken as an example. When the quality issue occurred, we had to recall a number of vehicles, and we put in a lot of effort to determine the causes. If one drills into the true cause and tries to identify why those problems occur, the problem itself can be more clearly identified.

We scrutinized products and examined whether we had given enough lead time for development, for experimentation and testing, for procurement, and for quality assurance. We examined whether [we could fully] accomplish projects with high quality. We decided to give six months more lead time for some projects, three months for others, and so on. A steadfast improvement in quality is taking place.

So despite recent recalls, has quality now recovered?

Please understand that for new models good results are being attained, but unfortunately quality problems may remain for older models. This applies to the recalls of the Tundra and other models in the U.S. For this matter, we're strengthening activities to detect these problems early so they can be resolved.

Early detection and resolution is the key, and I'm telling [Toyota] people not to hesitate to recall. That's very important for customers. Rather than extending the period before a recall, or thinking the problem isn't serious enough, the most important thing is to try to service those cars and correct difficulties early on.

Toyota has been successful for a long period—long enough, in fact, for many managers to have never experienced tough times. How does senior management stop younger managers believing success is a given?

That's a very good point and a key element of my own management: how we make sure our own DNA is transferred to the younger generation at Toyota. So long as certain things are achieved, this will be ensured.

Going and seeing for oneself is the key. It's very easy to understand. When there's a problem, one should drill down and [see] what's taking place and why a certain problem has occurred. [The key thing is to] teach the method of identifying a problem and implementing the resolution.

Can Toyota continue to grow in North America?

The U.S. market is characterized by its depth. The population will continue to grow, and the economic fundamentals are very strong in the U.S. In that sense, the market this year will be 16.5 million or close to 17 million—more or less on par with the previous year. Barring any unforeseen developments, that market will be at a high level.

But do you see the product mix changing?

Considering environmental or energy-related issues, the market structure is likely to change. We need to further introduce some high-mileage or environmentally friendly vehicles.

Lately, there have been mutterings about the weak yen, while Toyota is closing in on GM as the world's biggest carmaker. Are you worried there could be a backlash against Toyota?

Our primary consideration and focus is on providing customers with the vehicles that they're happy to have. As a result of various activities that we pursue, we constantly need to think about the potential backlash against us.

It's very important for our company and products to earn citizenship in the U.S. We need to make sure we're accepted. In addition to enhancing the level of production and vehicle design, we will increase procurement in the U.S., and, of course, have American people in the management cadre as well. We should also be proactive in social-contribution activities.

Are you increasing your lobbying effort in the U.S.?

For years, we have been engaged in lobbying activities for the purpose of gathering information, as well as having our own thinking and approach better understood by the American people. But given the increase in size [of Toyota], it makes sense for us to enhance and strengthen our external-relations and public-relations efforts in the U.S.

In terms of new factories, how many will Toyota eventually have in North America?

Last year, we started operations at the Texas plant. This year, we will start production at SIA (Subaru Indiana Automotive) in Indiana. And production at the second plant in Canada will be inaugurated. Right now, we're considering what's next. To that extent, we have a plan, but beyond that, we're still thinking about it and don't have any concrete program.

What role do political concerns play in these decisions?

In selecting a site, our primary consideration is how we can establish an excellent plant. Our considerations [include] employee availability in the local area, logistics, and supplier relationships. All of these factors are considered before we reach any judgment, so politics isn't the focus of our considerations. But [that] doesn't mean we totally disregard political considerations.

Despite the success of the Prius, Toyota has also been criticized lately for introducing larger vehicles like the new Tundra. Will Toyota's next generation hybrids provide a response to critics?

I still have the idea of having [hybrid sales of] 1 million units [a year] in the early part of the next decade. For us to be able to do that, we will probably have to double the number of models with a hybrid system installed.

We always talk about the right vehicle at the right location and the right timing. An easy to understand example may relate to Brazil, a country with extensive bio-fuel availability. We have decided to [introduce a] Corolla that can accommodate 100% ethanol. We also think about diesel engines and compressed natural gas. Further into the future, the fuel cell is another area we're considering. But for all of those systems, a hybrid system can be applied.

Will Toyota's next generation of hybrids, which are expected in late 2008 or early 2009, focus on fuel economy or performance?

When we shifted from the first generation to the second generation hybrid we enhanced substantially performance in many different aspects. On top of that, we reduced both the cost and size by half. We are currently working on the third generation hybrid, which will also have a much higher performance and good mileage per gallon. On top of that we are now aiming at reducing, by half, both size and cost of the third generation hybrid system. We are not yet at the stage where we can disclose data relating to performance or fuel consumption.

Will Toyota use Lithium-Ion batteries in the next generation hybrids?

We will change the battery from nickel hydride to the lithium battery, and therefore we would like to reduce the size of the motors and inverters by half, so the overall size of the hybrid system can be reduced by half.

There's been a lot of discussion lately over how long it will take Li-Ions that are safe and durable for autos. Will the batteries be ready in time?

Yes, I believe we can develop this battery in time. Occasionally I visit the site where the development is going on to see the trial model.

But were you worried by Sony's problems last year when Li-Ions in laptops were reportedly catching fire?

Of course, we're experimenting on the problem that Sony encountered last year. We are making sure that the problem can be avoided. Automobiles are used in different conditions. For example, cars are used in temperatures from -20 degrees Celsius to 40 degrees Celsius and are constantly exposed to high vibrations. It's extremely difficult to build those systems for automobiles compared with cell phones which are used in relatively stable environments. These difficulties must be reflected in the design.

How well is Value Innovation (VI) activity, Toyota's latest cost cutting plan, progressing?

We don't yet have a vehicle that embodies these activities yet. [As VI involves] changing the design concept or design method, it will take a little while. There are cases where we have received many ideas from suppliers [and are] incorporating those ideas into a change in design. There are cases where not just one supplier but several suppliers are working together.

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By Ian Rowley

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