Back in 2010 Akio Toyoda looked set to be ousted as president of Toyota, Japan’s biggest car group and the company his grandfather had founded. Only eight months into the job, Toyoda doubted that he would survive a mauling at the hands of a US Congressional committee after a massive recall of spontaneously accelerating Toyota vehicles.
At the time, the company was struggling to plug annual losses of Y437 billion ($3.5 billion), while sales had fallen 28 per cent since the financial crisis to Y19 trillion.
Fast forward five years and Toyoda’s position now seems unassailable. The automaker is once again sitting at the top of the global industry, churning out record net profits of $17 billion on the back of annual sales of more than 10 million vehicles worldwide. While its main rival, Volkswagen, appears distracted by a leadership spat.
Yet there is little sense of euphoria at the company’s headquarters. “With currency moves uncertain, we’re not in a position to celebrate record profits,” says one Toyota worker. His boss echoes the caution: “There is still much left to be done,” says Toyoda.
The automaker has been one of the biggest beneficiaries of Prime Minister Shinzo Abe’s policy of aggressive monetary easing, which has weakened the yen. Currency moves accounted for 23 per cent of the $41 billion in its total operating profits over the past two fiscal years.
But the currency benefits are starting to fade as dollar costs rise from a decline in the euro and other emerging market currencies. Abenomics also comes with strings attached as Toyota faces pressure to reward its employees with higher wages. It even dropped demands for lower prices from its network of suppliers to encourage pay rises to trickle down to the auto sector as a whole.
Under Toyoda, the automaker has undergone a radical makeover. Breakneck expansion is now considered dangerous and employees no longer dare use the phrases “all-time high” or “No 1” in front of the boss. He blocked the construction of new plants for three years as Toyota explored ways to make its business more efficient.
A race car driver himself, Toyoda pushed his engineers to build better cars, denting their pride along the way.
But as Toyota “paused” VW aggressively expanded, setting a target to overtake its Japanese rival by 2018. Analysts widely expect VW to take the top slot in vehicle sales as early as this year.
Toyota’s vulnerability is most obvious in China, the world’s biggest car market, where it lags behind European and US rivals with just a 5 per cent share of the market. Sales in China by Japanese automakers are complicated by a flare-up in a territorial dispute in 2012 that led to a consumer backlash against Japanese goods.
“Toyota is fully rehabilitated and it has a profitable business combined with a cash-rich balance sheet,” says Howard Smith, managing director at Indus Capital Advisors. “Now it’s time to start taking more risk and spending money again.”
Executives confirm the period of soul-searching is over. This year Toyoda chose February 24, the date of his US congressional grilling in 2010, to mark the beginning of production for its new fuel-cell sedan Mirai.
In April, the carmaker announced plans to spend more than $1.4 billion to build new plants in Mexico and China, lifting its three-year moratorium on plant construction.
Analysts say the strength of its turnaround will be tested as the company rolls out a series of models using revamped vehicle platforms and components. The project, called Toyota New Global Architecture, is expected to be launched with the new Prius hybrid later this year, and cover half of its vehicles by 2020.
The target, executives say, is to make appealing and affordable cars using common parts across continents and vehicles in a shift from its traditional practice of sourcing components mostly from a close-knit group of Japanese suppliers. Long term it wants to be nimble enough to respond to market changes, from a fall in demand to fluctuations in the yen.
“Whether Toyota can take another leap forward depends on the TNGA. Everyone is both excited and nervous since the Prius will be the litmus test,” says Keita Kubota, a Tokyo-based investment manager at Aberdeen Investment Management.
Toyoda was blunt in his criticism when he took over the company in 2009. A frantic pursuit of sales volume, he argued, had caused the automaker to lose touch with its customers, resulting in dull cars that sold in masses but failed to spark excitement. It was a concern he had harboured since he was overseeing Asian operations in the mid-2000s.
His proposals were met with opposition from former executives and panic among suppliers. “Everyone knew Toyota was growing too fast. But it was only Toyoda, because of his family background, who could make hard decisions and steer the company back to a normal condition,” says a former executive.
Within a year of his appointment, Toyota pulled out of Formula One racing and shut down a plant in California that employed 4,600 workers. Instead of jobs, it cut spending in equipment and production lines at home. It now spends 40 per cent less to build new plants compared with 2008, and it can make 10 million vehicles using factory space for just 6 million.
“For us engineers, it was tough that the president constantly kept saying that we needed to build better cars since many of us thought we had been doing that all along,” says Mitsuhisa Kato, Toyota’s executive vice-president. “But the essence is in building even better cars.”
That meant Toyota’s powerful chief engineers had to adjust their way of designing vehicles. To build cars more efficiently, the engineers now coordinate with other divisions and involve parts suppliers early in the process. The days of having 800 custom-made engine types are gone.
“The TNGA won’t work unless you break down the walls inside the organisation,” says Yuzo Ushiyama, president of Tokai Rika, a Toyota supplier.
The 59-year-old Mr Toyoda, who doubles as chief executive, also broke with tradition recently by bringing in senior officials from its network of suppliers for the first time to redesign car-making from the bottom-up.
Having deliberately put a brake on its growth, analysts warn that Toyota must now shake off its past. “The question is how it will invest in growth,” says Goldman Sachs analyst Kota Yuzawa. “It needs to build more plants and a slew of new products will come out. Once it starts growing, Toyota [then] needs to make sure it doesn’t snowball out of control.”
All the main carmakers are wrestling with slower growth and ballooning costs to develop energy-saving technologies. Goldman Sachs estimates that there will be an extra $2,500 in costs per vehicle for every manufacturer to comply with regulations to curb carbon dioxide emissions.
Analysts say the TNGA project is Toyota’s answer to those competing problems: an attempt to redefine the spine of its production system to meet global trends for quality, cheaper cars. Toyota claims the system will cut development costs by 20 per cent, with Yuzawa estimating the company can reduce parts costs by $1,000 per vehicle, of which half would translate to profit.
The Japanese carmaker unveiled the concept three years ago after it studied a similar effort in platform sharing by VW. Renault and Nissan have adopted a similar approach.
That it has taken three years to turn the idea into reality — for instance, having production lines that can be shortened or extended according to demand — is not surprising. But what happens next will determine its success.
VW has struggled to raise its profit margin through platform sharing, with its operating return on sales standing at 6.3 per cent last year, compared with 10.1 per cent for Toyota.
“TNGA will be considered a success if Toyota can keep its profit margin,” says Takaki Nakanishi, a former Merrill Lynch analyst. “In reality it will be very difficult.”
Once the first vehicles produced using the new platforms begin to hit the streets later this year, analysts say the big measure for Toyota will be whether it can tackle its relatively weak positions in China and India. The Japanese automaker has traditionally been strong in other emerging markets such as Thailand.
Toyota has also benefited from a strong rebound in the North American market, which generated 27 per cent of its annual vehicle sales in the year to March.
“Toyota excels in selling quality cars at high prices in the US, but it’s not good at making low-cost cars,” Nakanishi says. Sales of its Etios compact sedan, developed for the Indian market and priced below $10,000, have slid since its 2010 launch.
The key challenge is China, where Toyota sales topped 1 million for the first time last year — still a long way short of VW and General Motors, which sold more than 3.5 million units each. It misjudged the market, says Satomi Harada, senior analyst at IHS Automotive, by pushing models that did not cater to local tastes.
Japanese brands have yet to recover from the dispute with China that has poisoned relations between the countries. Even Nissan, the strongest Japanese player in China, says it has lost two years in development due to the dispute over the Japanese-controlled Senkaku islands.
When asked last month about its weaker performance in regions outside the US, Toyoda insisted that its efforts will eventually pay off in terms of higher sales and profits. But five years on from the recall crisis — which ended with an apology and $1.2 billion fine — the presidential-like motorcade that follows Toyoda around underlines the power he now wields after delivering a strong turnaround.
Still, he believes, Toyota has a long way to go, warning that it tends to be too inward-looking. “Because we are stronger, we must do more now for our rebirth.”
Financial Times
