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New World Order

Car making is pricey business, where it doesn't pay to take silly risks. With its extreme investment and its fill of super intelligent workforce, it is baffling how some carmakers get it utterly wrong -- think Ford. But then, says Nargess Shahmanesh-Banks, there is the odd one who is so puzzlingly clever you can't help but hope it succeeds -- think Toyota.

Toyota will invest further in its core European products (from top to bottom): Yaris, Corolla and Avensis

Toyota is now number-two carmaker, though company policies modestly clear away from such grading. Ford was shoved aside from the position less than a year ago, and with the way General Motors is experimenting with badge engineering, Toyota's position as number-one may not be as fantastic as all that.

The first half of 2004 has proved to be a success for the Japanese giant. On a consolidated basis, net revenues for the first quarter of this year, ending June 30, came to around €33.8bn ($41bn), an substantial increase of 10.2 per cent compared to the same period last fiscal year. Operating income also increased by as much as 31.6 per cent to €3.4bn ($4bn), while income before income taxes, minority interest and equity earnings of affiliated companies were €3.5bn ($4.2). Net income climbed 28.8 per cent to €2.1bn ($2.6bn) compared to €1.7bn ($2bn) in the first quarter of last year.

Positive contributions to operating income of €1.6bn ($1.9bn), from operational efforts and cost reduction efforts, offset the negative effects of €766mn ($930mn) from, what the company claims "an unfavourable foreign exchanges rate and increased expenses".

In Japan, despite sluggish market conditions, the market share of Toyota brand vehicles (excluding mini vehicles) rose by 46.1 per cent, which is the highest ever for quarterly results. This was due largely to the introduction of new models such as the hybrid Prius and the Sienta, although models like the Crown, made for the Japanese market, also performed well. As for the Prius, due to its continuous popularity in Japan and overseas, TMC expects to increase production capacity from ten thousand vehicles per month to fifteen thousand vehicles per month starting in the first half of next year.

Sales in the US reached 572,000 vehicles, an increase of sixty three thousand vehicles due to a strong popularity of Sienna. In Europe, locally-built models such as the newly launched Corolla Verso contributed to a sales increase of thirteen thousand vehicles to 247,000 vehicles.

Sales in other regions including Asia, Africa, and Latin America reached 434,000 units, an increase of 126,000 vehicles. In Asia specifically, sales increased by eighty thousand vehicles, or 65.1 per cent, mainly due to favourable sales of models such as Vios. Toyota expects further increase in production with the upcoming launch of (Innovative Multi-purpose Vehicle (IMV) project, more of that later.

TMC estimates that consolidated vehicle sales for the fiscal year ending March 31, 2005 will be 7.2 million vehicles, an increase of 18,000 vehicles from the forecast announced back in May 2004. These are serious targets.

"We recognise the uncertainties we are facing in both the foreign exchange and interest rate environment. In responding to these challenges," admits TMC executive vice president Ryuji Araki. "Toyota will continue its efforts and work hard to maintain the profit levels of the fiscal year ended March 2004.

The Lexus RX400h SUV (right) and Prius GT (bellow) are examples of Toyota's venture in to 'performance hybrids

Boosting its image in Europe

Europe is fundamental to Toyota's global strategy. It has nearly half the market share in its home market, the US market is a solid one with both Toyota and Lexus, and worldwide sales are on the up. Europe, however, though a success still has potential.

Toyota has cleverly launched itself as a manufacturer of European cars for its European market, meaning that the cars sold in the continent are completely separate to those sold elsewhere. Most crucially they are not only designed with Europe in mind, but built locally, hence keeping manufacturing costs to the minimum.

The 'core' cars in Europe -- Yaris, Corolla, Avensis and Corolla Verso -- are designed for Europe and made in Europe for Europe. "Toyota's policy is to develop its vehicles individually according to the region they are sold," says Johannes Thammer, vice president of Toyota European product planning and research. In its domestic market, Toyota has a 42 per cent market share, with 93 different models on sale there. "This means that you have to differentiate the design, otherwise it will be like these Russian dolls."

While Thammer admits that he cannot reveal the concrete future product plans for Toyota Europe, he reveals that the carmaker is basing all its strategy here on what it terms as 'superior quality'. He explains: "Toyota is famous for the functional quality, which means our products are less likely to break down and are more reliable functionally." In other words you can 'trust' a Toyota, but what the company now wants is for us to 'desire' a Toyota. It wants us to see is not just a trustworthy vehicle, but one that is also seen with perceived quality and superior quality will be accessed through design.

"If you look at our current products like the Corolla and Avensis, they already express what we understand to be superior quality," says Thammer. "If you compare our core models today, you can already find a family identity on the vehicles," though he insists that this is not done to the extreme of BMW or Mercedes-Benz, which he sees as making the same car in different sizes. Instead the family unity will be expressed through certain similar design features, for instance the nose, which will identify the car as being a Toyota.

"The Corolla isn't a smaller version of the Avensis and the Yaris isn't a smaller Corolla," he reminds us. "We need individual design for individual size." Toyota plans to concentrate on these four core models in the future and most important to their success is that they are all produced in Europe.

In the last decade, specifically, the Japanese giant has investment impressively in its European operations in the UK, Spain, Turkey and Poland as well as its joint operation with PSA Peugeot Citroën in the Czech Republic.

The car company has invested an additional €17.8mn ($21.6mn) in its Yaris production plant in Valenciennes, France, in order to better respond to European parts demand. The investment will be used to expand Toyota Motor Manufacturing France's (TMMF) press shop facilities. In early May, TMMF increased its annual production capacity from 184,000 to 210,000 Yaris models. Depending on market demand, TMMF's output could increase to a possible 240,000 units annually. Toyota has already invested €710mn ($865mn) in the plant, which has been making the Yaris model since 2001. The plant also assembles 30,000 diesel engines annually, in addition to 150,000 petrol engines, for the Toyota Yaris.

The carmaker said earlier this year that annual production capacity at its vehicle plant in Burnaston, UK -- Toyota Motor Manufacturing UK (TMUK) -- will increase from the current 220,000 vehicles to 285,000 Toyota Corolla and Avensis models. This will result in an additional investment of around €74mn ($90mn).

It's expected that the increased production at TMMF and TMUK will lead to improvements in capacity utilisation, and is expected to benefit Toyota's profitability in Europe. With the current annual capacity of 150,000 vehicles at its Turkish Adapazari plant (TMMT) and the planned capacity increase at TMMF and TMUK, Toyota will have a total production capacity of 645,000 vehicles per year.

In addition, Toyota and PSA will start manufacturing 300,000 entry-level small passenger cars in the Czech Republic starting in 2005, of which 100,000 will be for the Toyota brand. In 2004, Toyota expects to build 565,000 vehicles, 466,000 engines and 198,000 transmissions.

Thammer explains that these cars are designed to be sold only in Europe. "We are widely equipped with our range of small cars sold in Japan, through Toyota and Daihatsu, therefore there is no urgent need to expand there." However, he also acknowledges that Toyota is not necessarily excluding Japan per se. "One of the sales cannels in Japan could have a lot of fun with this car." Production capacities will be very tight in the next few years, which simply means not enough cars to go around the world.

"We take advantage of the variety of development and design to satisfy a wider range of customers in the domestic market," he says. Toyota boasts sales of around 2 million alone in the US and in Europe sales were relatively high 830,000 units though Toyota is expecting higher sales this year. Incidentally, the carmaker's stronger market in Europe is the UK, followed closely by Italy, Germany, France and now Russia -- catching up quickly, says Thammer -- followed by Spain.

"We are extraordinarily strong in the UK and Italy," he insists. In markets with strong domestic brands like Germany and France, there is still some potential. Thammer points out that the European market is slightly different to others. He explains: "The strongest selling brand in Europe has just a market share of around 10 per cent. Therefore there is not really a dominant brand here. That is why the customer must be able to easily identify the different brands."

Toyota may be an up-and-coming winner in Europe, but the Lexus brand isn't performing half as good as the company would like it to. Thammer thinks that this is due to the missing diesel engine. "Our midterm target for Lexus is for it to become a respected competitor in Europe. To do this we need to renew all the line up by 2007 to give the brand a unique identity with the design making it newer, more up-to-date and modern in appearance as some of our Lexus models are quite conservative in design." The next generation of Lexus will therefore tackle these issues. "There are plans to introduce the diesel engine to the next generation IS in one and half years."

Flexible car making

The Corolla Verso went through complete makeover only three-years after the old one was launched, which is a pretty short lifespan for any model. Thammer points out that Toyota in general has a policy of shorter life cycles than its European competitors. "They usually have a six-year life cycle, as opposed to our five," he notes. In the Verso's case, when Toyota came up with the old model it realised that it had registered a very strong trend with cars with seven seats.

The model sold extremely well both in Europe and in Japan -- though under a different name there -- so on the back of this success, the carmaker decided to make a new model, designed and manufactured in Europe, specifically for Europe. "We installed the factory in Turkey to produce the current generation Corolla Verso." Though this, he admits, was an exceptional case, Toyota's manufacturing flexibility could manage to cover a trend in the market. "I think it would have been a waste of opportunity to wait until this model was ready."

Global Planning

Toyota is planning to increase vehicle output in four countries around the world in an effort to achieve better economies of scale. The carmaker expects to builds more than half a million vehicles -- 510,000 to be exact -- in Thailand, Indonesia, South Africa and Argentina next year, almost one-third more than the 387,000 produced last year.

The increases are all part of Toyota's IMV program, explained before, which has just kicked off in Thailand with the launch of the seventh-generation Hilux pickup truck, the Hilux Vigo, which sits on the IMV platform. Production capacity at the Toyota Motor Thailand factory is being doubled to 280,000 units to cope with a global exporting role for Hilux Vigo.

The Hilux Vigo is a key element in the Toyota's global IMV project. Boasting almost 100 per cent local content, the vehicle is built at the Samrong assembly plant. Finished vehicles and components will be exported to more than 140 countries in Asia, Oceania, Europe, South America and Africa with a projected annual value of about $1.8bn with the first outbound shipment scheduled for next month.

Many pickups in Thailand and elsewhere in the region are leisure-use vehicles rather than workhorses, which means they need to be more than just a vehicle. Toyota says it has retained the tough build that has made Hilux such a foundation of its business in emerging markets, but at the same time has kitted it with a rather plush, car-like cabin. A new suspension system supports the chassis, the TOP platform that is the core architecture for the entire IMV programme. Power is provided by a second generation D-4D common-rail diesel that provides stronger performance and improved fuel-efficient.

Vehicles sharing the IMV platform and many components will be built in Indonesia, South Africa and Argentina. Additionally, the utility vehicle version of IMV -- a replacement for the Kijang -- is about to be introduced in Indonesia.

Production in Argentina and South Africa will begin in 2005, with India and Pakistan following on later in the year. As always with its fingers on the pulse, Toyota knows the future value of India. The country is already playing a key role in the IMV program as a factory there, the Toyota Kirloskar Auto Parts, has started exporting complete manual transmissions for IMV factories around the world.

Toyota isn't ignoring China either, though here it is shrewdly pushing forward its luxury Lexus brand, ideal for the new China moneyed folk. The company announced in June plans to set up exclusive dealerships in four cities there by the fourth quarter of 2004. This is the first time for TMC to introduce a Lexus-brand dealer network in China. "We believe China has the potential to be the top luxury car market in the world," says Akio Toyoda, a senior managing director at TMC. "We are committed to continuing our investments in China by bringing the best product, the best dealership and the best customer service."

By the end of this year, TMC will establish six exclusive Lexus dealerships in four cities in China: Beijing, Shanghai, Guangzhou and Shenzhen. TMC will invest heavily in these dealerships including construction, ensuring customer-oriented designs, as well as training of Lexus Associates. The dealer network is expected to increase to 14 by mid-2005 and through this Toyota will offer what it calls the Lexus Touch, a customer care strategy that it says made Lexus the number-one selling luxury brand in the US, a title it has retained every year since 2000.

"I know that China and the US are very different markets, but that intense focus on people is a universal principle of business success," says Jim Press, chief operating officer of Toyota Motor Sales in the US. TMC is currently in the process of doing focus group studies to better understand luxury car buyers in China. "It's very important that we listen closely to what our customers in China have to say. We are ready and willing to listen," add Toyoda.

Planning on future hybrids

Toyota opened a peephole to the future at Paris last month with two key concepts: the Toyota D-4D 180 clean power concept car, revealed for the first time in preparation for a full production version of the engine next year (For more information see Tech Watch), and a GT sports version of the Prius hybrid. Also on view for the first time was the 2005 model year Toyota Land Cruiser with new transmissions and a revised 3 litre D-4D engine.

The Prius GT prototype model is part of Toyota's hybrid strategy of 'performance hybrids' that also includes the coming Lexus RX400h. It is based on the production Prius model, retaining the combination of 1.5 litre petrol engine and electric motor in the Hybrid Synergy Drive system, tuned to deliver 147bhp.

Toyota claims that power output is higher than any other 1.5 litre diesel or petrol engine on the market, while specific power output rises to almost 100bhp per litre. In regular production specification, the Prius delivers 110bhp.

Today Toyota sells five hybrid cars worldwide, though Europe has so far only been exposed to the Prius. The Lexus RX400 hybrid will be launched at the beginning of next year, another of the 'performance hybrids'. "With the Prius, the hybrid technology was seen as working well on 'eco cars'," notes Thammer, whereas the GT and RX400h will demonstrate how hybrid can incorporate great driving pleasure and speed.

The RX400h 4-wheel drive SUV is the world's first performance hybrid SUV, petrol/electric powered car in the premium automotive segment. A full hybrid capable of operating in petrol or electric modes alone as well as a combination of both, the car's Hybrid Synergy Drive promises a combination of high performance, quiet, seamless progress, frugal fuel consumption and ultra-low CO2 emissions for a premium SUV. The RX400h will accelerate from 0-100kph in just 7.6 seconds, yet boasts the fuel consumption figures of a 4-cylinder family saloon.

"For us, hybrid has very good potential. We are planning to extend our hybrid offer further and to do this it is extremely important to have advanced premium engines -- in the RX400h for example -- that can combine absolute performance," says Thammer.

Hybrid technology will be extended to other model on the Toyota brand, though the exact models have not been decided yet. Thammer explains: "Due to the innovative, but complex technology, it has to be a top down introduction." As a result it will not be introduced on smaller models to start with, as it will reduce the marketability by having too high cost in a small car. "I personally think that the hybrid is a good opportunity to realise a popular four-by-four," he says.

Back at home

In Japan the Corolla and the Avensis are advertised and sold under the label 'designed in Europe', which Thammer thinks has been a successful pitch for the models there.

There are an enormous number of different Toyota models sold in Japan mainly because the customer there desires a high turnover of models. "In Japan a new car is only new if everything is new," says Thammer. Cars are relatively cheap in Japan and they don't drive that much as the majority of the population are urban dwellers, living in packed cities and relying predominantly on public transport. The car there has a completely different function and as Thammer points out Toyota should not and cannot follow the same pattern in Europe.

The Lexus brand will finally be introduced to the Japanese market next year. It is an interesting move as the cars are already sold there already under the Toyota badge, with success, but since the Lexus badge has been such an overwhelming success in the US, company decision makers thought it lucrative business to introduce the badge there. The outcome will be interesting to see.

Thammer sees the Lexus move as having a positive effect on the brand. Lexus was created 1989 to be a competitor to the top premium brands, he explains. "From being a best selling brand in the US, it has become a real global brand." The Lexus brand had a slow entry in Japan mainly because the Toyota brand itself had a strong presence there.

Happy being number two

Though Toyota has elevated itself to an unofficial number-two position in the world, the company is modest when it comes to discussing this. "We don't count ourselves as number two, our counting is very different from the Ford counting," says Thammer. "We are oriented to make good business, to make profit, secure good products all around the world, so we don't attach too much meaning in being number one or two. Good sales are necessary to making good profit and we are eager to make good profit," he says.

Toyota, Thammer continues, was built on the Toyota way. To explain, the first three pillars are built on firstly challenge, secondly on going to the source and not relying on second hand messages and finally the famous Japanese manufacturing way, Kai Zen, or continuous improvement. The second pillar refers to respecting people and the environment. "The difference between Toyota and other companies," he clarifies, "is that Toyota is bottom-up oriented and developed. Other car companies are top down in creativity and leadership." Thammer should know as he worked ten years at Volkswagen and BMW. "With Toyota the strength lies in its bottoms-up approach that leads to more enthusiasm with the workforce, as well as its strength in continuous improvement."