TOKYO - When Hiroshi Okuda took over as president of Toyota Motor Corp. in August 1995, a weak dollar and product miscues were eroding earnings. By bringing in Okuda, the first non-Toyoda family member to head the company in 28 years, Toyota seemed to be following an industry tradition: When times are tough, call on a finance man to cut costs.
It has not worked out that way. Okuda has turned into the most free-spending president in Toyota's history. Excluding Toyota's stepped-up outlays on product development and alternative energy powerplants, Okuda has spent an astounding $9.34 billion during the past three years.
He has picked up mapmakers and helicopter companies, home builders and Chinese engine factories, battery concerns and cellular phone companies, insurance and Australian forestry, other Japanese carmakers and French car plants.
There are no signs that he intends to slow down, and the shopping spree has raised eyebrows.
Many analysts and investors here question whether Okuda is straying too far afield from Toyota's core auto business or whether he is overpaying to acquire tangential businesses. But mostly, they wonder whether there is a grand strategy behind the patchwork quilt of purchases.
'There's a possibility that finance, if organized properly, could show a good profit, especially if the next battle for car sales in Japan is backed by financing,' said Peter Boardman, auto analyst at Warburg Dillon Reed in Tokyo.
'But there is no hope for returns on the other stuff, like biotech.'
Certainly, at first glance, Okuda's overflowing shopping cart looks like a jumble, the result of a shop-till-you-drop approach by the carmaker with the world's deepest pockets. But there is method to this buying binge.
Okuda's investments aim to reshape Toyota from the sleeping giant it was into a global powerhouse ready for the technological changes sweeping the industry.
Indeed, the entries in Okuda's checkbook are telling evidence of his vision of where Toyota and the auto industry are headed in the first half of the 21st century. He sees Toyota as a localized player in all key markets, not just a Toyota City-based export juggernaut.
Okuda's spending closely tracks his five-point strategic plan for Toyota. Those goals: improve product planning, refocus research and development on certain key technologies, expand globally, raise sales in Japan and expand in nonautomotive arenas.
And he sees an industry where telecommunications are as basic to a car as headlights.
ROAMING FAR AFIELD
As Okuda and Chairman Shoichiro Toyoda said in the letter to shareholders in Toyota's latest annual report: 'In diversified operations, we are developing products and services to enhance the value of the automobile, such as mobile communications and intelligent transport systems.'
To be sure, Okuda has roamed far afield in pursuit of expansion into nonauto fields. For example, he altered Toyota's articles of incorporation at the June annual meeting to allow the company to enter the biotech realm and then set up a $33 million biotechnology firm in September.
The broad thrusts of his policy, though, are easy to understand.
'What they're talking about is a three-legged stool - autos, nonautos and finance - which fits within the American model quite nicely,' said Stephen Usher, senior analyst at Jardine Fleming Securities (Asia) Ltd.
Put another way, said Takaki Nakanishi, auto analyst at Merrill Lynch Japan, it's a case of ichidai, ichigyo, or 'one generation, one business.' That is the way the Toyoda family built the company.
Founder Sakichi Toyoda established a loom maker. His son, Kiichiro, moved the family into autos. Shoichiro Toyoda later diversified into housing.
'Now, Okuda is laying the foundation for Akio Toyoda' - Shoichiro's eldest son and currently a top manager at New United Motor Manufacturing Inc., Toyota's joint venture in California with General Motors - to move into telecommunications, Nakanishi said.
For now, finance operations account for only 4.5 percent of Toyota's total revenue, while nonautomotive operations add another 6.6 percent. The latter includes housing companies Okuda has acquired to bulk up the housing unit enough to spin it off.
In the fiscal first half that ended Sept. 30, Toyota's operating income in the miscellaneous segment swung from a loss of $55.3 million a year earlier to a record profit of $149.3 million. The reason: For the first time, Toyota included the results of Nippon Ido Tsushin Corp., a mobile phone concern.
Early this year, Toyota raised its stake in the company to 63 percent from 27 percent.
Okuda has said that he wants to raise nonauto revenue, excluding finance, to 10 percent of the total.
Almost half of his $9.4 billion spending has gone into new carmaking ventures as he has opened factories from France to Vietnam. That continues a strategy, laid out before he took the helm, of raising Toyota's production capacity outside Japan to 2.5 million from just under 1 million.
In contrast, Toyota has opened only two factories in Japan during that time: an electronic parts plant and a recycling facility.
To be sure, the actual return from many of Okuda's investments won't be known for years. But he has hedged his bets, often taking relatively small stakes in startups with a long-term horizon so as to limit his risk.
Moreover, he has not ignored shareholders during his spending spree. Okuda has raised the dividend twice and instituted large stock buybacks. In all, he has spent nearly 30 percent of the
$9.4 billion on those forms of direct rewards for shareholders.
So far, the buybacks have mostly offset convertible bond redemptions. 'But from here on, there will be a real reduction of outstanding shares,' Nakanishi said.
Okuda also has bought at a time when assets in Japan are cheap because of the recession, snapping up larger stakes in Daihatsu Motor Co., Hino Motors Ltd. and other Toyota Group members.
'I have to admit, the timing of all these investments hasn't looked all that terrible,' Usher said. 'On a long-term view, they're certainly not paying over the top on any of these.'
Did Okuda need to buy these stakes at all, however? Toyota already had considerable influence over Daihatsu when it owned 16 percent and effective control after Okuda raised the stake to 33.4 percent.
Did he really need to spend $632.5 million to raise his stake to a majority 51 percent?
Toyota says yes and reaches for its wallet.
'We don't see any major merit' in raising Toyota's stake in its affiliates this way, said Kosuke Yamamoto, Toyota executive vice president for business development and corporate relations. 'But they were Toyota Group companies, so we wanted to take care of them.'
This approach, more than any other, reveals the difference between Toyota's view of its future and that of Western carmakers.
Consider the marriage of telecommunications and cars. The idea is widespread in the industry: Intelligent transport systems and the Internet will bring about a major increase in automotive electronics.
GM's Delphi unit, along with partners IBM, Sun Microsystems and Netscape, has built a so-called Network Vehicle that uses an antenna built into the roof of a Chevrolet Blazer to offer unlimited Internet access.
For GM, though, the Network Vehicle is still a concept, and the carmaker did not buy equity stakes in IBM and Sun in case it becomes reality. In marked contrast, Toyota has bought into the concept, both figuratively and literally.
Consider the following (with Toyota's equity stakes in parentheses): Toyota car dealers now are selling cell phones made by Denso Corp. (25 percent), so that a driver headed to a concert can hook up through the IDO cellular service (63 percent) to real-time traffic and entertainment information service from Toyota Media Station (53 percent) to find the best route to the concert hall and determine which parking lot nearby still has spots available.
Toyota Media Station will draw on Zenrin (5 percent), Aero Asahi (76 percent), Satellite Positioning Information Service (21 percent) and Toyota Mapmaster (51 percent) to offer timely data.
Toyota is clear about its ambitions in intelligent transport systems, which it sees as growing to a $500 billion business by 2015.
'Intelligent transport systems are the ultimate aim of our work in mobile telecommunications,' Yamamoto said.
'In terms of navigation and map products, Toyota is the most advanced automaker in the world. We'd like to maintain our leadership, since we believe America and Europe will have to follow suit.'
But that doesn't explain why, faced with a choice, Toyota chose to buy a stake in the maker.
The reason lies in Toyota's historic business practices, Yamamoto said.
'Our philosophy is not to outsource. You cannot be an industry leader if you depend on outsourcing,' he said, citing the example of Panasonic EV Energy.
Like most of the world's carmakers pursuing development of an electric car, Toyota is researching advanced battery technologies. Unlike the others, Toyota has spent $6.7 million to take a 40 percent stake in the new battery maker.
Yamamoto said the hybrid system in the new Toyota Prius would not have been possible without the batteries from the new venture, which were developed with input from engineers from both companies.
More broadly, he said, Toyota's equity stake changed the relationship from supplier-customer to partner-partner.
'Without our participation as a partner, we would end up with only an assembly role of someone else's technology,' Yamamoto said.
Put another way, said Chikao Masuzawa, auto analyst at ING Barings Securities Japan in Tokyo, 'They really don't want to buy anything on a black-box basis. They insist on knowing what's inside and what the costs are. That's why they have to invest in their suppliers.'
Chris Richter, auto analyst at HSBC Securities in Tokyo, points out that the real danger Toyota faces from diversification is loss of management focus.
'The risk is that managers stop acting in the best interests of the company and start focusing on empire building,' he said.
'It's a danger of losing sight of what your core business is. But I don't see that happening yet.'