WSJ - Toyota Maps Plan To Displace GM As Top Car Maker

[Klaus]

Toyota Maps Plan
To Displace GM
As Top Car Maker

Challenger Revamps Models,
Boosts U.S. Manufacturing
As Detroit Faces Struggles
By JATHON SAPSFORD in Tokyo and NORIHIKO SHIROUZU and JOSEPH B. WHITE in Detroit
Staff Reporters of THE WALL STREET JOURNAL
November 19, 2005; Page A1

Toyota Motor Corp. is making a big bet that it can ride a host of new models past struggling General Motors Corp. next year to become the world's biggest maker of cars.

Late next month, when the Japanese auto maker unveils its 2006 targets, it could set the ambitious goal of producing as many as 9.2 million cars, say people familiar with the plan. That would be an 11% leap from the 8.28 million cars Toyota expects to make in its current fiscal year, which ends in March.

GM -- which has been the world's No. 1 auto maker for more than 70 years -- has not outlined its production plans for 2006. It has projected it will build 9.1 million cars this year. GM sold 8.99 million vehicles in 2004, a 14% share of the world-wide auto market. Ford Motor Co., the world's No. 3 auto maker, sold 6.98 million vehicles world-wide.

With the final release date for their forecast still a month away, Toyota officials warn the company has yet to decide on a final production target. Its plans include a redesigned version of the Camry, America's best-selling car; a spruced-up version of its RAV4 SUV; a new mid-size sport-utility vehicle called the FJ Cruiser; and a small car, the Yaris, aimed at energy-conscious drivers. Toyota also will launch more models under its Lexus premium nameplate.

Still, the prospect of a photo finish in the race for No. 1 auto maker underscores the profound shift of power occurring in a business increasingly marked by global competition. With the Big Three U.S. auto makers struggling under the burden of heavy labor and health-care costs, the industry is migrating away from the unionized U.S. operations that served as a model for decades and toward lower-cost, mostly nonunion factories -- many in North America -- run by Asian and European manufacturers.

Just yesterday, Ford's new head of North America, Mark Fields, warned staffers that the company plans to cut 4,000 salaried jobs in North America next year, or 10% of the total. (See related article.)

GM has long made being No. 1 central to its culture and its business strategy, counting on its massive size to help it recoup the billions spent on development and to help it open new markets. Last January, GM Chairman and Chief Executive Officer Rick Wagoner dismissed speculation that GM could fall behind Toyota, saying, "We've been ahead 73 years in a row, and I think the betting odds are we'll be ahead for the next 73 years."

But since then, his plans for GM have been derailed by falling sales of high-profit SUVs in the U.S. market and rising costs for U.S. health care. While GM is growing in some markets, notably China and Latin America, and has stabilized its European sales, its gains have been more than offset this year by declines in North America.

GM's debt is rated at junk status and its stock is trading near its lowest levels in more than a decade -- its shares were up $1.42 at $24.05 in 4 p.m. New York Stock Exchange composite trading yesterday. Mr. Wagoner is gearing up for a round of potentially deep cuts in North American production capacity and manpower in an effort to reduce costs and restore investor confidence. GM has said it plans to cut 25,000 of its 181,000 U.S. workers by 2008, and has signaled it will announce a broader restructuring plan soon.

To be sure, GM isn't giving in without a fight. While cutting in North America, the company plans to expand production in China, where it significantly outsells Toyota now, South Korea, through a joint venture, as well as in Latin America and Africa.

"We believe we have strong growth opportunities around the world," says Tom Kowaleski, GM vice president for communications.

But Toyota also has been ramping up production all over the world, in factories from Eastern Europe to Africa, from Southeast Asia to South America. Its forecast global production of roughly 8.28 million cars this year would be nearly a 10% increase from 2004.

Sales are surging for the Japanese auto maker, especially in the U.S., which helped it post group net profit of about $2.6 billion in the quarter ended Sept. 30. GM posted a third-quarter loss of $1.63 billion in the quarter.

Though Toyota's profit margin fell to 8.1% in the first half of the year from 9.6% a year ago, that is still considered healthy, and reflects increased spending on marketing and production efforts. Its U.S. pension and health-care costs are a fraction of GM's because it has a much younger work force and comparatively few retirees.

There are real risks for Toyota in such rapid growth. Company executives worry the expansion could overtax such core functions as engineering and quality control.

Moreover, the company has set ambitious targets before only to fall short, especially in North America. Late next year, for instance, it will launch its third attempt to make a significant dent in the U.S. market for large pickup trucks. Despite past efforts, trucks have remained a stronghold for Detroit brands such as GM's Chevrolet and DaimlerChrysler AG's Chrysler and Dodge brands.

And Toyota could be slowed if rising gasoline prices and other costs curb auto purchases next year. Some car makers are warning that 2006 could be a notably slow year for sales in big-volume markets like Japan, Europe and the U.S.

Toyota sees things differently -- at least where the U.S. is concerned. At a recent car launch in Tokyo, senior Managing Director Kazuo Okamoto said strong population growth in the U.S. continues to create plenty of growth opportunities for well-targeted products.

Indeed, Toyota is counting heavily on the U.S. -- where it sold two million vehicles last year -- to help fulfill its ambitions. It plans to spend more to promote new models in 2006 than ever before, though officials won't disclose figures.

Jim Lentz, vice president in charge of Toyota brand sales in the U.S., says the company aims to hold 15% of the U.S. market, up from about 13% now. Having built strong positions on the East and West coasts, Mr. Lentz says Toyota will focus on boosting sales in the U.S. heartland -- the bastion of Detroit's brands.

For instance, to build up sales of large pickups, Toyota has built a big new factory in Texas, the heartland for large pickups. Toyota's new Tundra is expected to be larger and more powerful than its current model, which generally is seen as too small and not rugged enough to compete head on with the class leading Ford F-150 or Chevy Silverado.

Part of Toyota's blitz is aimed at cashing in on its reputation as a producer of fuel-efficient vehicles at a time of high energy costs. Mr. Okamoto says the new Yaris is designed to meet what he calls "strong demand" in the U.S. for affordable, entry-level vehicles that don't guzzle too much gas.

More models will come with versions of "hybrid" engines, or gas-electric propulsion systems that are proving a hit with environmentalists as well as mainstream consumers. Among them is a hybrid version of the Camry. Toyota aims to sell as many as 30,000 a year.

Senior Toyota officials say they realize the public-relations risks of overtaking GM at a time when the onetime icon of American industry is staggering. To counter potential political friction, Toyota is keen to note that it is expanding local production and employment of U.S. workers. It has 11 production facilities in North America and three more planned and is currently scouting locations for a new engine and transmission plant.

The company boasts of making $22 billion in purchases of parts, materials and services from local producers each year. Senior officials have even suggested that Michigan, GM's home state, could be considered for a new factory, on top of the growing engineering center that Toyota runs in Ann Arbor.

Wall Street has expressed worry that Toyota is trying to do too much, too quickly. Brokerage analysts caution that Toyota's mad rush to unseat GM could cause it to sacrifice quality. Nissan Motor Co., for example, had trouble in some of its U.S. plants after a quick launch of new factories.

Real Tanguay, the French Canadian president of Toyota's expanding production facilities in Ontario, Canada, says the company maintains a strict hiring process that tests for qualities such as team spirit, patience and the ability to accept constructive criticism, a process that screens out vast numbers of applicants. "I don't think my son would make it," Mr. Tanguay said at a recent auto industry event in Tokyo.

Takeshi Suzuki, senior managing director in charge of finance, says that Toyota's annual investment in plant and equipment will peak at roughly 1.4 trillion yen, or about $12 billion. But he conceded recently that such spending will remain near those levels for the foreseeable future.

So far Toyota hasn't been able to keep up with demand for its products in North America or other key markets, and has been filling the shortfall by exporting all over the world from Japan. Those exports, another possible source of friction, are increasingly profitable thanks to the weak yen, which make dollar sales in U.S. and other overseas markets worth more when exchanged into yen.

Toyota says the rising level of exports to the U.S. won't be an issue as long as it keeps hiring locally and expanding production. It aims to produce locally as much as 70% of the cars it sells in North America. Last year, the figure was 63%.