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Originally published Sunday, July 5, 2009 at 12:00 AM

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Toyota's Toyoda scolds execs for emulating U.S. car companies' mistakes

Toyota Motor's honorary chairman, Shoichiro Toyoda, scolded the company's president for being so anxious to boost sales and profits that he'd let Toyota emulate now bankrupt General Motors and Chrysler. Toyota, he said, had become addicted to big, expensive cars and trucks and had forgotten customers' need to save money.

Bloomberg News

On a mild day in February, Toyota Motor's honorary chairman, Shoichiro Toyoda, summoned 400 executives to the redbrick factory in Nagoya, Japan, where his grandfather had built weaving looms a century ago.

The managers filed in for one of the customary updates from Toyota's gray-haired, 84-year-old patriarch. What they got was anything but ordinary.

Two months earlier, Toyota had forecast its first operating loss since Shoichiro's father began making cars in the same factory, now turned museum, in 1937. Then in January, about three months earlier than planned, the company announced that Shoichiro's son, Akio, would replace Katsuaki Watanabe as president. Even with these signals, the managers were ill-prepared for the normally reserved Shoichiro's litany of the carmaker's missteps and his dressing-down of Watanabe.

"How many times have you made a mistake?" Shoichiro grilled Watanabe, who sat silently among stunned audience members.

Shoichiro scolded the president for being so anxious to boost sales and profits that he'd let Toyota emulate now-bankrupt General Motors and Chrysler. Toyota had become addicted to big, expensive cars and trucks and had forgotten the customers' need to save money, Shoichiro said.

Toyota's rise

Shoichiro wasn't just lashing out at Watanabe. He was railing against the threat to everything his family had struggled to create.

The Toyodas built their first car when Henry Ford was turning out almost 1 million a year in the U.S. During World War II, the family opened dry-cleaning stores to get by. They adopted kaizen, the making of small and continuous improvements, to fine-tune manufacturing. They enhanced quality and squeezed costs to become one of the world's most admired companies.

Across the Pacific, Ford Motor, Chrysler and GM were gorging on Americans' car lust. They failed to heed skyrocketing gasoline prices, declining workmanship and escalating pay. Last year, with help from its gas-electric Prius hybrid, Toyota pushed General Motors from its perch as the planet's biggest carmaker.

In its June 1 bankruptcy filing, GM reported $172.8 billion of debt, more proof of the U.S. industry's descent.

Toyota's work isn't done. To avoid the four-decade decline that humbled GM, the Japanese company must fend off rising competitors and adapt to the global reality of slowing sales growth and shrinking profits, says John Casesa, managing partner of auto-industry-consulting firm Casesa Shapiro Group in New York.

"If Toyota is unable to react to a changing world, it will risk its very existence over time," says Casesa, who's covered the industry for two decades.

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"Akio's challenge is to cut Toyota's dependence on luxury cars and branch out from U.S. markets destabilized by easy credit. In its race to top GM, Toyota splurged on enough new factories to make 2 million additional cars a year. South Korea's Hyundai Motor targeted small-car buyers in China, India and other emerging countries, where it sold 55 percent of its vehicles last year compared with 31 percent for Toyota.

"Toyota went from being a scrappy newcomer to becoming convinced the market was just there for them to take," says Maryann Keller, an auto analyst and president of Maryann Keller & Associates in Stamford, Conn. "Toyota wrote the playbook and Hyundai read it: Build great cars with great value, and people will come."

Toyota investors won't see a quick revival, says Christian Takushi, a portfolio manager in Zurich for Swisscanto Asset Management, which owns 1.7 million Toyota shares.

After reporting record net income of $17.7 billion for the fiscal year ended on March 31, 2008, earnings took a $22.2 billion nose dive.

Toyota ended fiscal 2009 with a $4.5 billion net loss and the company says it expects to lose $5.7 billion more in fiscal 2010.

Cash cushion

Not all investors are so pessimistic.

"Toyota is among the best," says Wendy Trevisani, fund manager for Santa Fe, N.M.-based Thornburg Investment Management, which held 17 million Toyota shares in March. "They make every effort to address problems as seen by current initiatives, including management shifts."

Toyota's $52 billion in cash and marketable securities give it a comfortable cushion, according to Moody's Investors Service.

And it will get some relief in the U.S. from the misfortunes of bankrupt rivals, says Kota Yuzawa, a Goldman Sachs analyst in Tokyo. The Japanese automaker may be able to boost American market share by a third to 21.3 percent by 2011 as GM and Chrysler shut plants and dealerships.

This prospect, which would make Toyota the top-selling carmaker in the U.S., helped send Toyota's shares up 29 percent this year. That's still 56 percent below their 2007 peak.

"Toyota should emerge from the downturn in an even stronger position relative to competitors," says James Hunt, who helps oversee $6 billion at Tocqueville Asset Management in New York, including 37,000 Toyota shares.

'Next great automaker'

Inside Toyota, some chalk up the recent stumble to the recession that's sent global car sales down 20 percent since 2007. Shoichiro wasn't buying that excuse. He told employees at the February meeting that Toyota fell victim to hubris.

Beginning in 2003, Toyota pushed to expand manufacturing capacity by 25 percent to build 10 million cars a year. When Watanabe became president in 2005, he backed the growth plans and championed a $1.3 billion truck plant in San Antonio, Texas, calling it "a dynamic symbol of our bright future."

Watanabe, 67, sealed his fate by failing to predict that sales would plunge last year and not acting fast enough to recover, people familiar with the situation say.

In October, 2 ½ weeks after Lehman Brothers Holdings's bankruptcy deepened the global credit freeze, a key Toyota lieutenant, Executive Vice President Mitsuo Kinoshita, said sales could rise to 9.7 million vehicles this year. In May, the company predicted it will sell just 6.5 million vehicles in the fiscal year ending in March 2010.

"If Toyota can't adjust to a market that will be smaller, with less-expensive cars, then somebody else will be heralded as the next great automaker," Keller says.

It's up to Akio Toyoda, 53, the first Toyoda in 14 years to run the company, to ensure that prediction doesn't come true. First, he'll have to guide Toyota through unfamiliar times.

"We're facing a once-in-a-century crisis," Akio said, referring to the recession, in a January news conference after his appointment as president.

In a nod to Toyota's new austerity, Akio, wearing a dark-gray suit with a pale-pink tie, spoke in the lobby of the company's Tokyo office instead of at the Palace Hotel or one of the other upscale venues of previous years.

"I'll try to make changes without being tied down by the past," he said, reading carefully from a script. "I will consider measures quickly."

Akio has been huddling in Japan with 11 department heads to discuss ways to slow Toyota's expansion without completely killing it, people familiar with the meetings say. He's planning to appoint five executive vice presidents in key regions such as North America. They'll handle product development, manufacturing and sales locally. The heads of these departments currently report to executives in Japan, which slows decision making.

Obama's school

Akio, who is fluent in English, learned Toyota's ways from the ground up. On Oct. 30 each year, he visits the Kosai, Japan, birthplace of his great-grandfather Sakichi, who received the family's first loom patent in 1891.

During his freshman year in 1973 at Tokyo's Keio University, Akio spent six weeks at the Punahou School in Honolulu, where President Obama was a seventh-grader.

Akio graduated from Keio with a law degree in 1979. Three years later, he got a MBA from Babson College in Babson Park, Mass.

Akio joined Toyota in 1984. After factory and finance jobs, Shoichiro, then Toyota's president, tapped Akio to make the Japanese sales office more efficient by cutting inventories of unsold vehicles. In 1996, Akio spearheaded a service called G- Book that uses mobile phones and Web browsers to provide traffic updates to drivers.

Two years later, he left Japan to become vice president of a Fremont, Calif., manufacturing operation. Toyota had begun the venture 14 years earlier to gain experience in the U.S. By 2002, he was running Toyota's China unit. He headed purchasing in 2005 and moved to global sales in 2008.

Some suppliers and dealers resisted Akio's ascension to president, saying he'll have a hard time breaking from Watanabe, people familiar with the situation say. For one thing, managers Akio is promoting supported Watanabe's expansion, including Yoshimi Inaba, 63, who'll head North American operations, and Yukitoshi Funo, 62, who'll run global sales.

During Watanabe's tenure as president, Akio and Shoichiro backed major decisions such as building new factories, the people say.

"I don't think anybody sees Akio as a highly original kind of guy, but he's really earnest," says James Womack, chairman of the Lean Enterprise Institute in Cambridge, Mass., which trains companies on the automaker's methods for cutting production costs.

Akio's quest to fix Toyota will take him to the scene of one of its biggest setbacks: a former cattle ranch in San Antonio where 600-pound wild pigs roam the underbrush.

In 2003, Toyota announced the factory in an effort to undermine Detroit's last great profit bastion: pickups. The Texas plant opened in November 2006, just months before cracks emerged in the U.S. subprime-mortgage market and gasoline prices began their rise. Timing was just one issue.

"There was a lot of non-Toyota thinking," says Shook, the former Toyota engineer. "San Antonio seemed kind of crazy."

Starting with its first U.S. factory in 1988, Toyota built the Camry midsize sedan and others that had first proved their popularity in Japan, Shook says. It designed each assembly line to accommodate many models.

In Texas, Toyota broke these rules by dedicating a whole plant to the largest pickup the company had ever conceived, the Tundra.

Watanabe authorized $3 billion for the effort, a person familiar with the situation says. He planned to turn out 250,000 Tundras a year in San Antonio and Princeton, Ind. Today, Toyota builds 100,000 annually, only in Texas.

Detroit's turf

Toyota was challenging Detroit where it was strongest, says Eric Noble, president of the research firm Car Lab in Orange, Calif.

As Toyota was learning the truck-building ropes, Ford redesigned its F-150 pickup. The new regular-cab F-150, with its 3,030-pound payload and 20 highway mpg for the midsize engine, was an exemplary achievement in the same way that the Prius is Toyota's best, Noble says.

By comparison, the Tundra had a 1,990-pound payload and got 17 mpg. Even better for Ford, the F-150 won a five-star safety rating from the National Highway Traffic Safety Administration compared with Tundra's four stars.

U.S. carmakers are catching up in quality, too. Chevrolet customers reported 113 quality complaints per 100 vehicles in 2008, compared with 104 for Toyota, according to J.D. Power & Associates, which tracks consumer satisfaction. In 1981, GM had seven times the complaints of Toyota.

On the luxury end, Hyundai is chasing Toyota's Lexus GS with its Genesis, a premium sedan that sells for $10,000 less. Hyundai also is preparing to bring its top-end Equus to the U.S.

For the Tundra pickup, the killer was price, dealer Cummings says. Toyota charged $29,568 for a typical Tundra in 2007. That was $4,000 too much based on what potential buyers told him, Cummings says. "By charging too much, we forced customers to look elsewhere," he says.

Kaizen-sparked improvements are taking root in San Antonio. Production manager Dan Antis says employees studied everything from workplace diversity to how to hold a screwdriver.

Saving 11 seconds

Standing near the assembly line's end, team leader William Steubing says he wanted a better way to handle a 20-pound plastic box that carries parts alongside unfinished trucks.

Initially, Steubing's team attached the box to metal frames holding the trucks. As the Tundras moved along the line, workers reached into the box for parts. When they emptied the box, they'd lift it off the carrier and carry it back for refilling.

During the shutdown, workers designed a conveyor to do that job. Now, as a truck moves forward, the conveyor tilts up a corner of the empty box and snaps it off the carrier. The box falls onto the conveyor and rolls back for refilling. The change saves 11 seconds of walking per truck.

Steubing and his co-workers also got training in welding and metal cutting. Then they recycled old conveyors, spending $2,000 compared with $90,000 that Toyota engineers had planned for a motorized conveyor.

These and more than 400 kaizen projects are making an impact. Defects that workers reported in an internal audit fell to 0.2 per truck from 1.2, comparable with Toyota's best worldwide. Productivity measured by trucks made per worker per day, not including temporary laborers, rose to 0.91 from 0.73.

Toyota's North American factories need to run at 70 to 75 percent of capacity to break even, Tanguay says. They were at 60 percent in March. In September, the North American factories will break even, he says.

Amid the upheaval, Toyota is making strategic shifts. It's building more compact cars and setting up factories in emerging markets and countries with large reserves of resources such as oil, Watanabe said in May.

It doesn't have much choice. Sales at the Lexus luxury unit had generated more than half of U.S. earnings, with 12 percent of sales, in the middle of the decade. Consumers' lust cooled when the average U.S. price for regular gasoline topped $4 a gallon in July 2008. During the first quarter of 2009, Toyota's U.S. pickup, minivan and SUV sales plunged 40 percent. Lexus sales dropped 37 percent.

The danger is that Toyota's moves toward smaller vehicles may cut earnings in half, even after the recession ends, says Koji Endo, an analyst at Credit Suisse in Tokyo. And nobody's sure how the price of gas, which has fluctuated by more than $2 a gallon in the past year, will affect consumer desires.

"Toyota faces an identity crisis," Casesa, the consultant, says. "Their spectacularly successful business model is not working, and they are undergoing profound internal change with the new president."

Shoichiro's retirement from Toyota's board means Akio may be the next Toyoda to speak to managers in the redbrick Nagoya factory.

Copyright © 2009 The Seattle Times Company

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