Toyota wins the sales crown - and a new list of worries

Now that it's on top, the new king fears the catbird seat could become the hot seat

In July, when Ford Motor Co. and General Motors reported surprisingly strong profits for the second quarter — Ford after seven straight quarterly losses and GM after eking out small profits in the previous two quarters — the news gave a badly needed shot of feel-good to the ailing domestic automakers and their troubled hometown.

"Turnaround" quickly became the favorite word of Detroit headline writers and talk-show hosts. Hope, buoyant as the Goodyear blimp, hung in the air.

Bet that Detroit wasn't alone in relishing the news, though. Bet that it brought smiles, maybe even a touch of relief, to senior executives at the headquarters of Toyota Motor Corp. in Japan, and in Torrance, Calif., home of the U.S. sales arm.

Why would competitor Toyota root for GM or Ford?

Because now that Toyota has passed GM as the top-selling automaker worldwide and is on track to pass Ford as the No. 2 seller in the United Sates this year, the Japanese automaker will walk through fire to avoid any impression that it's pushing the U.S. companies over a cliff.

Compete? Absolutely. Win? You bet. But don't run up the score on their home court, or we might get our butts kicked in the parking lot.

"The fear of backlash is always there for us — always," Yoshimi Inaba, 61, a retired Toyota vice chairman who headed Toyota's U.S. sales arm from 1999 to 2003, acknowledged in a July interview.

"We see the problems of the Detroit 3 automakers, having hard times, and that is a concern to us. We know their problems could fuel a change in public sentiment, protectionism. We are always conscious of that possibility, and whenever we make a decision, we have that in mind."

RISING U.S. SHARE

Toyota is still a long way from grabbing the No. 1 spot in the United States, a shift that could trigger the seismic response feared by Inaba. For the first nine months of this year, Toyota Motor Sales held 16.2 percent of the U.S. market, compared with 23.8 percent for GM. But Toyota's share is up nearly a point from 15.4 percent at the end of last year, while GM has slipped nearly a point from 24.5 percent.

And the two are on radically different trajectories. Toyota's U.S. sales have been increasing at an average annual rate of 8 percent over the past five years, while GM sales have declined steadily year to year in that time.

Worldwide, Toyota said it sold 4.71 million cars and trucks in the first half, while GM reported sales of 4.67 million. The Japanese automaker now says it expects its global sales to hit 10.4 million in 2009, helped by increasing demand in North America as well as China.

If it hits the target, Toyota will become the first automaker to sell more than 10 million vehicles in a single year.

For many observers, Toyota's vulnerability to protectionist backlash comes not so much from passing GM as it does from the relentlessness of its expansion — the power and seeming inevitability of it. In this view, Toyota somehow has become bigger than No. 1; it has become dominant, as overpowering and immune to challenge as a Nimitz-class aircraft carrier.

"Getting to No. 1 for Toyota was always a question of when, not if," said Doug McIntyre, who follows the industry for 247wallst.com, a market-analysis Web site. "Toyota now gets to define how big big can be in the global automotive market."

AVOID BEING A SCAPEGOAT

Seiichi Sudo, 56, president of Toyota Engineering and Manufacturing in North America, cautioned his colleagues this year about the dangers of just that. The pace and scale of Toyota's success was breeding jealousy in the industry, he warned, and the company could become a scapegoat for the problems of others.

"With recent market share gains and sales continuing to increase, we are becoming the de facto leader of the industry. That brings risks and responsibilities," he said in a transcript of a confidential briefing obtained by the Detroit Free Press. "A Democratic Congress, particularly those members with districts hit by Big 3 and supplier plant closings, may call for further oversight of the industry and Japanese companies in particular."

Toyota is more than willing to assume the mantle of industry leadership that has come with its ascendance in America, said Yuki Funo,Toyota Motor Sales CEO.

"Success and growth always bring increased responsibility. We recognize that our role has changed, and accept the responsibilities that come with it," Funo said in a recent statement.

"Going forward, it will be even more important for us to be at the table, part of the dialogue when public policy is debated to help assure our industry's direction and the future of society," he added.

KEEPING THE YEN LOW

Lawmakers from both political parties this year began attacking what they say is Japanese-government action to keep the yen artificially low, which inflates profits earned on U.S. and European sales. Indeed, in reporting a record $4.1 billion net profit for the first fiscal quarter ended June 30, up 32 percent over a year earlier, Toyota said currency gains accounted for a stunning $840 million of the total.

According to the Washington-based Auto Trade Policy Council, which is funded by GM, Ford and Chrysler, the yen at current levels yields a subsidy for Japanese automakers of $4,000 per car on average for volume vehicles and up to $14,000 on luxury cars and trucks. The weak yen also translates into additional profits on Japanese vehicles produced in the United States because at least 50 percent of their content still is imported from Japan, the group contends.

"Toyota doesn't walk on water. ... There are reasons, unfair reasons, why Toyota is doing as well as it is in the U.S. market and in Europe," complained Trent Wisecup, legislative aide to Rep. Joe Knollenberg, R-Mich., whose suburban Detroit district is home to many auto-related companies. "We need to level the playing field."

Knollenberg, in concert with Sen. Debbie Stabenow, D-Mich., introduced legislation this year that would require the Treasury Department to begin talks with Japan and the International Monetary Fund on ways to strengthen the yen. The bill, the Japan Currency Manipulation Act, likely will be reintroduced this fall along with legislation aimed at China's yuan, Wisecup said.

"To understand what's going on, ask yourself why Toyota, as an example, doesn't build the Prius in the U.S.," Wisecup said. "And the answer is, because they've been pricing it well below the cost of production since they introduced it. If they built it here, the car would be unprofitable. By building it in Japan, the yen subsidy covers the gap — and, presto, the Prius becomes a viable program for worldwide sale."

With Congress stirring, observed James Womack, chairman of the Lean Enterprise Institute in Cambridge, Mass., and co-author of the landmark study on manufacturing, The Machine That Changed the World, Toyota is wise to be wary of its own success.

"The last thing Toyota wants is for any of those guys to collapse," Womack said in a telephone interview.

"That would do them no good at all. It would hurt them politically — they're absolutely right about that — and they couldn't begin to fill the vacuum anyway. They're selling all the vehicles they can make already. Toyota's challenge is to manage the pace of decline of the domestics in a way that will allow it to continue growing organically while avoiding the potential for public backlash."

MANAGING THE RISKS

Toyota's strategy rests largely on an advertising and PR campaign touting its ever-increasing investment in North America, which it puts at about $16.6 billion, from 13 plants with more than 37,000 employees. The company will build 1.6 million vehicles in North America this year, and is raising its capacity here to 2.2 million by 2010.

Beyond the sheer power of those numbers, Toyota and other import-brand automakers have built political immunity to "anti-foreign" backlash by scattering their plants and other facilities across the country — often in states with little other manufacturing.

As a result, a sizable number of federal lawmakers consider the import-brand automakers — not to mention thousands of dealers — to be their constituents, as well as employers of their voters.

Also, some Washington insiders have noted privately, any attempt to punish Toyota would be offensive to millions of satisfied Toyota customers.

Another important element in Toyota's defensive strategy appears to be to pooh-pooh the importance of being No. 1. Oh, we're now the biggest automaker in the world? We hadn't noticed. We've been too busy serving our customers.

SPREADING THE GOSPEL

Senior executives spread the message at every opportunity.

"I don't think any of us have a desire to be No. 1," Jim Lentz, executive vice president of Toyota Motor Sales U.S.A., said in an interview this year.

"Our desire is to be No. 1 with our customers. The customer is going to decide who is No. 1.

"It's a math exercise, not a meaningful thing. If it becomes meaningful to the customer, then it becomes meaningful for us. Today, it's not."

Jim Press, 61, until recently the president of Toyota Motor North America and the first American to be named a director of the Japanese parent company, read from the same playbook in a July interview. He had just returned from a board meeting in Japan, he said, where the topic of being No. 1 "hadn't even been raised."

"Being No 1 isn't at all a benchmark or a goal," he said. "We don't want to be the biggest; we want to be the best."

But Hirofumi Yokoi, who follows the industry for CSM Asia, says the orchestrated denials miss an important point. Being No. 1 in the world may not matter to Toyota, but it may matter to the people who got kicked off the perch, or who were run over along the way.

"Being No. 1 matters for GM, and for America," he cautions. "It becomes a political issue when America gets passed in a core industry. Toyota will have to be even more sensitive and cautious in the U.S. market."

Contact Automotive News