Two lessons, if Toyota boss steps down

Two lessons stand out from reports that Toyota Motor Corp. President Katsuaki Watanabe may step down next year, in the wake of news that Toyota will swing sharply to an operating loss in the current fiscal year that ends March 31, 2009.

1. Toyota is still a terrific carmaker. The emperor has clothes, but those clothes are a lot thinner than most realized.

2. Corporate Japan believes in CEO accountability, in contrast with the United States, where General Motors Chairman Rick Wagoner still has his job.

Toyota denies that Watanabe is on the way out. The reports, carried by Japan's Asahi Shimbun newspaper and the Wall Street Journal, don't identify their sources.

The Journal's article says that Watanabe won't leave because of Toyota's losses. Rather, it says, he's moving up to replace Fujio Cho as chairman, whose back pain makes it difficult for him to serve at Keidanren, the Japanese business association that's the equivalent of the Conference Board, CEO Roundtable, and American Chamber of Commerce all rolled into one.

After careful consideration of this explanation, I've come to this conclusion: Baloney.

Yes, Cho has suffered from sciatica for several years. But Toyota would not shake up its top management ranks for the sake of Keidanren.

If Watanabe goes, blame the losses -- and his management decisions. He approved Toyota's horrendously timed push into full-size pickups. He let Lexus become a truck-dependent luxury brand, with the RX crossover alone accounting for almost one out of three Lexus sales in the United States.

As truck sales tanked, those chickens have come home to roost.

Toyota now expects to see an operating loss of 150 billion, or $1.66 billion at current exchange rates, this fiscal year. That's a stunning fall from a record operating profit of $25.06 billion last year.

But the collapse in sales tells only part of the story. At the operating-profit level, Toyota will take a $9.81 billion hit from the dollar's fall against the yen. Today, Toyota books about 90 in profit for every dollar it makes in the United States. Last fiscal year, it was booking about 114 for every dollar.

Look at that number again: a $9.81 billion loss on currency rates. In other words, if the dollar-yen rate had just stayed unchanged, Toyota would still be in the black. And Watanabe might keep his job.

When Watanabe told a press conference in Tokyo that, "The environment surrounding us is extremely harsh," he was talking as much about currency rates as about tumbling sales.

Toyota, and the other Japanese auto companies, have benefited enormously from a favorable currency rate. Take that arbitrary advantage away, and the Japanese automakers aren't as wonderful as they're often portrayed.

Blaming the currency doesn't entirely get Watanabe off the hook. The best hedge against a stronger yen against the dollar is building more cars in North America. The pace at which Toyota opened U.S. plants slowed during Watanabe's tenure, leaving the carmaker well behind Honda Motor Co. in the percentage of U.S. sales that are built in North America.

In other words, Watanabe got lulled into relying on a favorable exchange rate for profits, every bit as much as the Detroit 3 got lulled into relying on trucks for their profits.

Failing to recognize your risks is a management failure.

Toyota is still an excellent automaker. After all, the last time it posted a pretax operating loss was in 1950. That was three years before GM Chairman Wagoner was born. You don't put together a string like that without doing a lot of things right.

On the other hand, you don't break a string like that without suffering some consequences. So Watanabe will go.

In contrast, consider Wagoner's results.

GM's net loss of $2.5 billion in the third quarter marked the fifth straight quarter in the red. Since 2004, Wagoner has led what used to be the world's largest automaker to cumulative losses of $72.3 billion.

But of course, Wagoner has one huge advantage in his favor.

GM doesn't believe in accountability.

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