Toyota as No. 1 Again Means Style Overhaul to Help Shares


Toyota Motor Corp. (7203)’s small sedan revealed today in Detroit is the most important model the company will never sell. Called Furia, it gives a hint of what Akio Toyoda wants from a company not known for its style.

Toyota, poised to take back the title of world’s biggest automaker, teased out a video and rear quarter-panel shot of Furia showing little more than a stylized knife-shaped LED taillight it never has used before. While Furia itself isn’t headed to dealerships, elements of the car may show up on a revamped Corolla, the company’s best-selling model globally, which is due for a new look this year.

Toyoda, 56, became chief executive officer in June 2009 after the company reported its first fiscal-year loss in 59 years. Soon, he faced charges of unintended acceleration that led to recalls of millions of vehicles around the world. To steer the company out of the quality crises and through the March 2011 tsunami, he pushed a return to the manufacturing basics that established Toyota’s reputation. Now, he wants to go beyond that to secure profitable sales gains into the future.

“What’s not to like about the job Akio Toyoda has done?” said Jim Womack, author of “The Machine That Changed The World,” an influential study of Toyota’s production techniques. “The real test for Akio is the future: Can he take them up another peg?”

Toyoda’s Challenges

Seeking an unprecedented 10 million annual sales, Toyoda faces a world of challenges, from those he can’t do much about, such as the strong yen and tensions between China and Japan, to those he can, such as competition from South Korea’s Hyundai Motor Co. and changing Toyota’s reputation for boring cars. Making better-looking cars can protect profit margins now and win new customers into the future.

While Toyota’s shares have risen 62 percent in the past year, they remain 49 percent below their peak in February 2007. Investors are less enthusiastic about owning Toyota, relative to its size and peers, than they were from 2003 to 2007. The price- to-sales ratio, which shows the value investors place on each dollar of revenue, reflect concerns about the stronger yen and about Toyota’s ability to increase profit now that its quality lead is less pronounced against U.S. and Korean peers.

Lead Changes

A reenergized General Motors Co. (GM) took the global sales lead from Toyota in 2011; Volkswagen AG (VOW) has pledged to become the world’s biggest carmaker by 2015; and Ford Motor Co. (F) doubled its dividend last week. GM reached a 17-month high on Jan. 10 and Ford closed on Jan. 11 at an 18-month high. On Jan. 2, VW was its highest in more than three years.

Toyota rose 1.3 percent to 4,260 yen on Jan. 11, matching the top closing price since October 2008. Its market capitalization remains the highest in the world — $165 billion compared with VW’s $105 billion and GM’s $48 billion. Of 25 analysts following Toyota, 19 have buy ratings, six say it’s a hold and none recommend investors sell, according to data compiled by Bloomberg.

“In terms of stock price, they are nowhere near where they were at the peak, around 8,000 yen, but they are off the bottom,” said William Fries, the Santa Fe, New Mexico-based manager of the $28 billion Thornburg International Value Fund. “This is a company that still has a lot of headroom.”

Net Income

Toyota’s net income soared from $4.93 billion in fiscal 2002 to $15.1 billion in 2008 before the loss that rushed Toyoda into leadership. The company may earn $10.1 billion in the fiscal year that ends March 31 and $12.8 billion the next year, the averages of 24 estimates compiled by Bloomberg.

“If you get them back to even approaching the kind profitability we saw in that earlier period, around 2006 and ’07, it’s going to look pretty good,” said Fries. Thornburg owns 14.7 million Toyota shares and 1.5 million of its American depositary receipts, according to data compiled by Bloomberg.

The Toyoda family scion is a car enthusiast who “wants the design to match the driving dynamics of the car,” said Mark Templin, who oversees global marketing for the company’s luxury Lexus brand and runs that unit in the U.S. “He’s also not changing the culture of what we stand for.”

Automatic Loom

Toyoda knows quality is the cornerstone of the company. He’s a CEO so steeped in company lore he can operate the automatic loom his great grandfather developed that began a family fixation with defect-free output. At the same time, he knows quality is no longer enough. He insists on testing each new model to make sure it’s fun to drive and looks just as good.

When Toyoda took control of the carmaker his grandfather founded in 1937, the company was reeling from its biggest annual loss and downgrades from Moody’s and Standard Poor’s Ratings Services highest credit ratings. The global recession triggered a 35 percent contraction in U.S. auto demand, Toyota’s largest market.

Then came a deadly traffic accident in late 2009 that killed a California Highway Patrol officer and three family members after a loose floor mat in the Lexus loaned to him by a dealer jammed the gas pedal. The incident spurred 10 million recalls over the next year, rattling the company’s reputation.

’Personal Commitment’

Accusations arose almost daily and Toyoda flew to Washington to testify.

“My name is on the company,” he told the House Oversight and Government Reform Committee on Feb. 24, 2010. “You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers.”

While the recalls addressed floor mats and sticky accelerator pedals, plaintiffs’ lawyers argued faulty electronics were the culprit. Probes by the National Highway Traffic Safety Administration and NASA found no such flaw.

In his House testimony, Toyoda said Toyota’s growth, coinciding with record earnings under his predecessor, Katsuaki Watanabe, had come too fast.

“Priorities became confused,” Toyoda said. “We were not able to stop, think and make improvements as much as we were able to before.”

Empowered Executives

He vowed to empower company officials in the U.S. and elsewhere to make future recall and parts-fix decisions, traditionally the responsibility of Toyota City. He named chief quality officers for North America and other regions and outside advisory panels to assess company flaws.

Quality centers opened around the U.S. and Canada to dispatch technicians to quickly inspect vehicles and meet with customers who had technical complaints. New cars would spend four extra weeks in development for additional quality checks.

Toyoda pushed the U.S. unit to reach out to nervous customers to resolve questions and complaints.

To aid flagging U.S. sales in 2010, the company made two years of free maintenance standard on new Toyota models and offered low-interest loans and cheap leases for its top-selling vehicles.

Earthquake Strikes

Then in 2011, when it seemed Toyota was back on its feet and ready to run at full speed again, Japan was hit by a massive earthquake and tsunami that killed 16,000. The disaster also knocked out more than 650 suppliers, hobbling Toyota’s global production for months.

After grueling weeks of helping parts makers resume operation, Toyota began ramping up production throughout late 2011. Toyoda touted the on-time release of a revamped Camry on Aug. 23 that year as a victory.

“This vehicle has become a symbol of Toyota’s success over the years,” Toyoda said in a speech to workers at the Georgetown, Kentucky, plant that builds it, broadcast for the car’s unveiling. “This is an opportunity to show the world again what Toyota is all about.”

The company’s initial fears it would be further slowed in late 2011 by floods in Thailand that shut down auto plants and parts factories there for weeks weren’t borne out.

Disasters’ Toll

Still, the disasters took their toll, trimming the company’s production a further 7 percent in 2011 to 7.91 million cars and trucks, including those made by subsidiaries Daihatsu Motor Co. and Hino Motors Ltd. (7205) With that decline, Toyota was surpassed as the world’s largest automaker by GM, renewed with lower costs after its U.S.-backed bankruptcy restructuring.

With the recession receding, natural disasters sparing the automotive supply chain and the addition of new products, Toyota delivered a big rebound in 2012.

It sped back ahead of GM in first quarter sales and never let up, winning the first three quarters. Toyota now expects to report 9.7 million vehicle deliveries worldwide for the year, the most in company history. The company looks ahead to selling an unprecedented 10 million autos annually by mid-decade.

Demand for the revamped Camry, which remained the best- selling U.S. car for the 11th year in a row in 2012, and the expanded line of Prius hybrids in the U.S. pushed Toyota’s volume back above the 2 million-unit level last year for the first time since 2008.

‘Loyal Buyers’

“They’ve not only regained most of the market share lost, but at a much faster pace than we thought they would,” said Jesse Toprak, industry analyst for, an auto pricing and data service in Santa Monica, California. “Their loyal buyers turned out to be even more loyal than we expected.”

Quality scores for Toyota’s brands were slipping prior to the recall crisis that pushed them lower still. Consumer Reports magazine in 2007 said it would no longer assume Toyota vehicles had better than average quality because of flaws with some Camry and Tundra pickup models.

By 2012, the company had returned to pre-crisis levels of quality, according to assessments from J.D. Power Associates, Consumer Reports and ALG Inc., the Santa Barbara, California- based company that sets automotive residual values.

Quality ‘Basics’

“He had to get Toyota back to what it was, but that’s just rework; it’s not improvement,” Womack said. “Doing rework at Toyota is a bad, bad thing. It’s a form of waste.”

In Japan, Toyota estimates its sales jumped 35 percent last year to 2.4 million, the highest in 22 years.

Government incentives worth as much as 100,000 yen ($1,120) and tax breaks for highly fuel-efficient cars made Toyota’s Prius hybrid and the smaller Aqua, sold in the U.S. as the Prius c, Japan’s No. 1 and 2 sellers.

Toyoda’s advocacy of “back to basics” quality was necessary to retain its large and deeply loyal U.S. customers. When the restyled Camry arrived in August 2011, Toyota estimated more than 6.8 million Camrys were on U.S. roads.

“That high level of buyer loyalty cannot be underestimated,” said Larry Dominique, president of ALG. “It’s money in the bank.”

Classier Camry

Jim Press, Toyota’s former U.S. sales chief and first and only non-Japanese board member, said in a 2004 interview he didn’t see the Camry’s bland looks as a drawback.

“Do you know what the best-selling flavor of ice cream is?” he said. “Vanilla.”

While exterior styling changes on the 2012 Camry were modest, Toyota executives touted its higher quality interior materials, roomier layout, fuel-economy gains and livelier handling, particularly on sporty SE and V-6 engine versions.

Jim Lentz, Toyota’s U.S. sales chief, credits those changes for cutting the age of the average age of Camry buyers to 51 from 60 on the previous iteration. U.S. sales of the car topped 400,000 last year, the best since 2008.

“When I see a strong company recover from controversy, I see strong leaders behind that,” said Dominique, formerly Nissan’s product planning chief for North America. “Akio Toyoda has done a good job of leading.”

Recall Settlement

Another coda to Toyota’s recall-related turmoil sounded last month.

A U.S. judge in Orange County, California, on Dec. 29 gave preliminary approval to the company’s $1.1 billion settlement plan for claims arising from its recalls.

“This settlement is a way to deal with uncertainty from the recalls, and investors like to see uncertainty go away,” said Alan Baum, principal of auto-industry researcher Baum Associates in West Bloomfield, Michigan.

Toyoda ties his advocacy of strong design and performance for Toyota vehicles to his personal passion for driving.

“I love cars as much as anyone,” Toyoda told House members at the start of his 2010 testimony. He has blogged about his experiences driving in a 24-hour race on Germany’s famed Nuremberg track.

Threatening GS

His push for more desirable cars has included threats to kill products he deemed insufficiently exciting. That included the company’s Lexus GS sport sedan, said Templin.

While the midsize, rear-wheel-drive sport sedan is intended to be a muscular competitor to Bayerische Motoren Werke AG’s BMW 5 Series, it was falling short, Templin said last week in an interview in Las Vegas.

“Driving dynamics were initially not up to his expectations,” said Templin, who works directly with Toyoda on global product plans for Lexus. “When he drove one of the very first prototypes, which at that point was the new suspension under the old car basically, he said, ‘If you can’t make it fun to drive, we shouldn’t do this project.’”

The engineers responded.

“That’s when they really went to work making the body more rigid, lowering the seating position, lowering the angle of the steering wheel, really developing the suspension to make it fun to drive,” Templin said.

Long Hike

U.S. sales of the GS jumped more than 500 percent last year, the new car’s first full year of availability. Race-car like elements, such as car’s sporty suspension and low-center of gravity, are also being applied the revamped Lexus IS sedan to be unveiled in Detroit tomorrow.

While Toyota has thrived on a reputation for durability, fuel efficiency and value, Toyoda has said its hallmarks must include design and performance.

“Those are the right directions for Toyota — and by the way, for every other carmaker,” said Eric Noble, president of the Car Lab, an industry researcher and consultant in Orange, California. “The challenge isn’t knowing where you want to go. The challenge is knowing how long the hike will be to get there.”

The new Avalon sedan Toyota added in late 2012 moved further in the design-oriented direction Toyoda desires.

Younger Buyer

The large sedan designed in California, engineered in Michigan and built in Kentucky, is a “bold departure from the current path,” both in terms of styling and U.S. development, said Kevin Hunter, president of the carmaker’s U.S. studio.

Its leaner chassis and new grille, similar to Ford’s new Fusion midsize sedan, shifts away from the previous Avalon’s more bulbous profile.

Toyota wants a 30 percent gain in Avalon sales this year from the new model and to cut the average buyer’s age to the mid-50s, from 65 for the previous version.

“Is Avalon a perfect product? No,” Noble said. “Is it a far more interesting product than previous Avalons, and was more of it done in the market it was planned for — North America? The answers are yes and yes.”

Other models embodying Toyoda’s styling and performance push include the Scion brand’s rear-wheel-drive FR-S sports coupe, which Lentz says remains in short supply, and the new Lexus ES sedan released in 2012.

Design Ethos

That new design ethos is starting to take hold throughout the company, said Dominique.

“You see with the newer products, the styling of the Lexus products is much more aggressive, the new Avalon is a significant departure and an improvement,” he said. “Camry was a little bit conservative when it came out. They’re making changes for 2013 that are a little more aggressive.”

Toyota’s global rebound last year was curbed by tension between Japan and China over a territorial dispute that has yet to be resolved. Problems between the countries triggered a sales slump in China, the world’s biggest auto market, for Japan’s carmakers and spurred protesters in September to set fire to Toyota vehicles and showrooms in China.

Watching scenes of the unrest was “unbearable,” Toyoda told reporters in Tokyo.

China Tension

Toyota pushed back plans to make China its third million- unit market until after 2013 as it waits for anti-Japan sentiment there to subside. Toyota’s China sales in December dropped 16 percent to 90,800, the sixth straight monthly decline.

China’s demand for Lexus luxury vehicles is moderating that slowdown a bit. “China is coming back faster for us than we expected,” Templin said last week, without elaborating.

A persistent crisis for Japan’s exporters in recent years has been the yen’s strength relative to the dollar and other global currencies.

In October 2011, Toyoda warned that the yen’s rate had risen so high Japan’s carmakers might collapse. The currency hit a postwar high of 75.82 to the dollar, further complicating the ability of Toyota, Honda Motor Co. and other carmakers to recover from natural disasters and compete against Hyundai.

Easing Yen

Since then, the yen has weakened against the dollar, trading at 89.18 against the U.S. currency on Jan. 11.

“We’re beginning to see the light,” Toyoda told reporters in Tokyo last week. An “appropriate” level is 90 to 100, Toyoda said.

With GM, Ford, Hyundai and Volkswagen all targeting bigger shares of global auto sales, Toyoda can’t rest on the 2012 rebound.

As a so-called concept car, the Furia is meant as a mind- expanding engineering exercise and won’t be produced commercially. Still, the reception of the Furia, the new IS and restyled Corolla due in 2013 are critical indicators for Toyoda’s strategy.

“Toyota seems to fully recognize that their products have to connect at more than just a rational level with consumers,” Noble said.

To contact the reporter on this story: Alan Ohnsman in Los Angeles at

To contact the editor responsible for this story: Jamie Butters at

Enlarge image
Toyota CEO Akio Toyoda

Toyota CEO Akio Toyoda

Toyota CEO Akio Toyoda

Haruyoshi Yamaguchi/Bloomberg

Akio Toyoda, 56, became chief executive officer in June 2009 after Toyota Motor Corp. reported its first fiscal-year loss in 59 years.

Akio Toyoda, 56, became chief executive officer in June 2009 after Toyota Motor Corp. reported its first fiscal-year loss in 59 years. Photographer: Haruyoshi Yamaguchi/Bloomberg

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