Toyota Fights to Regain U.S. Traction

Toyota Motor's Lexus and Scion brands were textbook examples of how to launch new brands. But the automaker's new North American chief says the two need to be redefined and rethought for the future as Toyota (TM) reorganizes and assesses how it got caught so badly with excess manufacturing when the recession hit last year.

Yoshimi Inaba was dispatched to North America last month by new Toyota President Akio Toyoda, great-grandson of the company's founder, to fix what he has described as the automaker's most important market. Inaba is no stranger to the U.S., where he held senior posts between 1995 and 2003. He left Toyota headquarters in 2007 to run the airport near Toyota's headquarters, but says he found the job "not very challenging."

That won't be an issue in his new post. Toyota has long been considered a juggernaut in the U.S.—the company that's taken the most market share from Detroit. But Toyota finds itself with challenges all too familiar to General Motors and Ford (F); too much manufacturing capacity, multiple brands that it is finding difficult to manage, and products that aren't capturing the fancy of consumers as they once did.

Recession Isn't the Only Problem Toyota's overall U.S. sales are down 39% during the first six months of this year, a deeper drop than Ford's, which are down 33%. But what is especially worrisome to Inaba is what appears to be a lack of clarity around Lexus and the collapse of Scion, which he had a direct hand in launching.

Inaba says he isn't so sure that Toyota's problems are related only to the recession. "This is my intent—to solve this. It was so profitable when I was here last, it must be something [besides the economy]," says Inaba.

U.S. Lexus sales are down 34% in the first half of the year—more than BMW (BMWG.DE) and Mercedes-Benz (DAI), which are both down 29%. The trouble is worse at Scion. The brand, with three products priced under $20,000, should have held up well during the downturn as many car buyers traded down. Instead, sales are down 66% from a year ago.

When it comes to Lexus, the issue is pretty clear: The luxury brand is far too dependent on just two of its nine models. The ES330/350 sedan and RX350 line account for two-thirds of sales. The GS sedan lineup—rear-wheel-drive sedans meant to take on German brands—haven't caught on, selling just 3,500 cars this year. "Lexus needs to find a way to get more consideration and higher sales volume for some of these other models, which haven't seemed to hit the mark like the other two," says Jim Hall of 2953 Analytics, a Birmingham (Mich.) design and marketing consultancy.

Lexus GS: Stuck in the Middle Inaba sees two problems he needs to tackle: First, he says, Toyota has been making too many decisions about new models and designs in Japan. "We are becoming more regionally focused now and pushing decisions down to the places where the vehicles will be sold," he said. To that end, several "global" job titles have been eliminated. Second, he believes Toyota's vehicle designs must be jazzed up. "It's been a fair criticism that our designs do not have enough excitement," he said.

The GS, notes consultant Hall, has been a very good sedan, but it takes on neither the BMW 3 Series nor the Mercedes E Class in size, performance, or price. "It's in the middle and that can be a tough place to be," Hall says. "That car needs to take on one or the other in sales volume for Lexus to grow." Unit sales this year for five of Lexus' nine product lines will total less than 10,000 each.

Scion, when it launched in 2002, had a unique business model. The idea was to maintain three showroom spots for vehicles that would be plucked from Toyota's global product portfolio. That meant, for example, that the boxy xB car that was launched in 2002—after proving popular in Japan—would be sold in the U.S. for a few years and replaced with a completely different model, not a new version of the xB. Instead, Scion has largely kept the same trio of vehicles, with design updates. The current xB is merely bigger, less quirky, and more fuel-efficient than the original; it hasn't caught on as well.

Merrill: Toyota Market Share Has Stalled "The Scion brand started out very strong and then the air went out of it like a balloon…it was very surprising to watch," says independent marketing consultant Dennis Keene of Los Angeles. "At first, the product and marketing looked like nothing you would expect to see in a Toyota showroom, and then all of a sudden it looked just like the rest of the Toyota lineup."

Inaba says he is currently on a listening tour with dealers, journalists, and consultants as he looks for ideas on how to get the brands back on track for growth when the economy rebounds. He will have to move fast, though. It can take three to four years to bring a new product to market. Merrill Lynch recently issued a report that analyzes how fast auto companies replace old product with new, and the implications for U.S. market share over the next four years. Surprisingly, Toyota fell behind Hyundai, Honda (HMC), and Ford. Merrill projected that Toyota will gain only one market-share point in the next four years, compared with three points or more for the other three companies—despite its prediction that GM and Chrysler will jointly drop 11 points of market share in the next four years.

Toyota recently posted its first loss in 58 years and projects that it will record another for this fiscal year. Inaba expects that Toyota will return to profit in the fiscal year ending in 2011. But that's only if he can find some answers as to why more people aren't buying the Toyotas he has in showrooms today.

Of the 16% U.S. market share Toyota posted in the first six months, almost 14 points of that came from Toyota cars and trucks, so the core lineup will get the bulk of Inaba's focus. But Lexus and Scion both have been big profit contributors in the past, and must be again for Toyota to regain its momentum in its most important market.