The Toyota Way to No. 1

Toyota's top U.S. executive on how it managed to become the world's No. 1 carmaker and why the company can hang on to the top spot

It happened. Toyota passed General Motors in worldwide sales globally in the first quarter. We knew it was coming. It's likely that the trend will continue and hold up for the entire year, and for years to come.

As the baton gets passed this year, there's a mix of opinions and perspectives in the auto industry about whether Toyota (TM) is succeeding fairly. Does its lack of health-care and pension responsibilities, which hobble GM (GM), Ford (F), and DaimlerChrysler's (DCX) Chrysler division, allow Toyota an advantage on an unlevel playing field? Does Japan's insular economy, which has made it so difficult for U.S. auto makers to achieve sales in Japan, offer an unfair advantage? Do charges that the Japanese government weakens the yen against the dollar to keep prices down and profit up abroad hold water?

Toyota isn't accepting the No. 1 position comfortably. It makes some of its executives nervous to be the chased, rather than the chaser. Yuki Funo is the chairman and CEO of Toyota Motor Sales USA—the top Japanese executive for Toyota in North America. He recently sat down with BusinessWeek Senior Correspondent David Kiley to discuss some of the issues confronting Toyota as it achieves top-dog status. Edited excerpts from their conversation follow:

Have you been talking among yourselves about protecting your culture, which could be vulnerable to change as you become the world's largest auto maker?

As far as Toyota culture goes…we regard ourselves as Japanese, but more important than the Japanese nature of our company is the "Toyota Way," which is embodied in our concepts and systems.

Toyota Way is more than just a Japanese Way. It's about constant improvement. If it was a Japanese Way only, then we wouldn't have Japanese companies that perform poorly or go into bankruptcy. Toyota doesn't monopolize this idea. And it has to translate beyond Japanese culture to be successful. We employ close to 400,000 worldwide, excluding dealers. If we include dealers, it might be about 1 million.

Of that, a significant number are Japanese. But there are people from every culture working for Toyota that share the concept and this way of doing business. From that viewpoint, growing larger doesn't suggest that we're stepping out of anything that's part of our culture.

Someone I know says Toyota really believes and nurtures the idea that the company should be able to build a car with no problems or flaws. When this person does business with Ford and GM, it's different, they tell me. Those companies strive to be better, but you don't get the idea they think a perfect car is possible.

With the Toyota Way…one of the key elements is kaizen: continuous improvement. There's no end to it. It's a never-ending journey. Respect for people is another important element. Employees. Customers. Suppliers. When it comes to consumers, they demand changes from time to time. We have to always keep watching what the consumer wants. If we base our business on what the customer wants, there's no end to the improvement we can achieve.

I remember a story related to me by a supplier company: They entered into a contract to supply axles for pickup trucks. It was the first contract his company had with Toyota. He said he was awarded the contract with no discussion of price. It was all based on whether his company's processes and quality were acceptable to Toyota. He was flabbergasted. Is that a common way Toyota does business?

Toyota's thinking based on the Toyota Way is teamwork with suppliers. This teamwork is going to be a long-lasting relationship. Price is only one element. Trust is a more important element. The relationship is a sharing concept, and should always be win-win. Price is important, too. But trust is perhaps more so. This is an idea that American business schools have come to preach. IBM (IBM), General Electric (GE), and other companies talk about how important the mission of the company is. Toyota is only doing intelligently what the business schools are teaching.

In the church when you get married, the priest or minister doesn't ask each partner how much each will get from the other in terms of money. You're asked about how well you get along. What is your commitment to one another? Now, in real-life situations, some companies practice this, and some don't. Some practice this in the U.S. Some don't. It's the same in Japan. So there are fantastic achievements in both countries, and there are bankruptcies in both countries. So, it isn't a Japanese issue or an American issue. It's a company-culture issue.

Growth comes from both new products and boosting volume of existing products. Will your sales growth come more from new products or from existing products in new geographic markets?

I think 15% global market share isn't low, but it's not that high either. There are a lot of opportunities for our product lineup as it is. But now that we have gone into full-size pickups with the new product, we fill in a significant segment.

I think we need to pursue more niches in future. We had a car at the Detroit Auto Show that could be a replacement for the former Supra sports car. But what's more important is to keep improving the products we have. Like Camry—what consumers want out of Camry is always changing. That's my understanding of how to keep a product strong for the future. We will look after Camry customers by looking after Camry as a product. Same goes with RAV4 and others.

From time to time, a GM or Ford exec will complain about an uneven playing field: a health-care advantage for Toyota, or monetary policy that favors Japanese products. Do you and your colleagues read that and pay attention?

We always read the stuff in the newspapers. We know health care is very difficult situation for the Big Three. It's a fact of life that they incur more costs. That's the political and economic history of the U.S. A decision was made some years back on what they would give to workers. To some degree, the problem is of their own creation.

Not all the workers in every industry receive as high a medical benefit as in the auto industry. Who decided that? It's their management. They complain sometimes about the currency valuation. It's very difficult. For example, the biggest economy in the world is the U.S. Bigger than Japan. It's the Big Three who have an advantage in operating in the biggest economy in the world. For myself, I invested in my English education. If you're born here, there's no need to invest in that. So, that's not a level playing field. It's very difficult to define what a level playing field is.

You would think that GM and Ford execs, given the fact they all grew up here, should have a better idea of how to design and package a family sedan and minivan, yet these are two product segments where you and Honda (HMC) have done especially well against the Big Three.

Increasingly, we're doing the development of our vehicles in the States. The Camry chief engineer is a Japanese man. Why the heck does he develop the most favorite car in the U.S.? That Camry car doesn't sell in the Japan. It's a failure. Why? He applies himself to understanding what the customer wants. He visits here and learns things.

If we talk about the level playing field, what is it? He had to overcome such a big handicap being Japanese to create a car that's the top seller in America. It's very difficult to talk about what the level playing field is.

U.S. companies are saying that while they're improving manufacturing processes, costs, etc, they will never out-Toyota Toyota. They have decided the best way to outdo you as they close the gap on those things is by out designing you. Do you feel a greater pressure to compete on expressive design than you once did?

Toyota, if you look at the history, our design hasn't been very expressive. If we aren't careful, design could fall into the dull category. Our designers have been seeing design as a critical challenge. If you look at the last five to 10 years, designers have done a great job of advancing here.

Look at the FJ Crusier. People look at that and say, "Who designed that? Toyota? I can't believe it." Every organization has strengths and weaknesses. Twenty years ago, Toyota had no confidence in how we would operate manufacturing in the U.S. That's why we regard the NUMMI joint-venture plant [where Toyota builds the Matrix and Corolla alongside the Pontiac Vibe] with GM as very beneficial. GM helped us a great deal.

The corporate advertising you have been running seems to be quite effective. Some of your Detroit rivals resent the fact that you're acting and talking like an American company.

We have a lot of dialogue about what should be the corporate message. That advertising is what we wanted to accomplish. We knew that many people didn't know what we have been doing in the U.S. for 50 years. In San Antonio, Tex., for example, we gave a lot of money to the local family-literacy program. We have been giving money to this organization nationally for 20 years. But we had never advertised it. People need to have a clearer and more correct image of Toyota.

Is your decision to advertise more aggressively a response to those kinds of remarks by people like Ford President of the Americas Mark Fields or GM Vice-Chairman Bob Lutz?

More important than the political consideration, Toyota is known as a product. No one knows what Toyota is. Toyota is a faceless organization. It doesn't have a human element in the eyes of the consumer. Toyota is just a car.

Toyota is bigger than that though. It's people. We have some 40,000 people working for us in the U.S. We need to have more of a face. That we are people. That's the most critical thing we have been trying to achieve.

Perhaps you would like to star in some ads yourself? DaimlerChrysler Chairman Dieter Zetsche did that last year as "Dr. Z." Do you want to be known as "Dr. T"?

No. We want to show everybody in the company. The heroes. Not one single person.

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