In new automotive era, even Toyota struggles

TOKYO -- Not long ago, Toyota engineers prepared a special treat for President Akio Toyoda, with an eye to the electrified future. It was an all-electric version of his beloved Toyota 86, the sporty coupe Toyoda had a personal hand in creating and still drives today in rally races.

Toyoda took the modified car for a spin. He wasn't impressed.

"The first question I got was: "What is your impression?'" Toyota's self-proclaimed "master driver" recounted last week to Automotive News. "And my answer was, "It's an electric car.'"

His disappointment spotlighted a key challenge confronting old-guard automakers in a rapidly changing industry. Like other traditional metal-benders from Detroit to Wolfsburg, Toyota Motor Corp. finds itself struggling to mold conventional ideas about what a car should be into the new reality of zero emissions, autonomous driving and on-the-go connectivity.

"What I meant was, for an OEM manufacturer, you're choking yourself. It is commoditizing your vehicle," Toyoda said of the proposition of next-generation battery-powered cars.

The conflict was on full display in the latest earnings report Toyota released last week. The company reported a 21 percent tumble in net income for the fiscal year that ended March 31 and warned that net income was poised to fall again, by 18 percent, in the current fiscal year.

That would be the first back-to-back net profit decline in more than 20 years for the company founded by Toyoda's grandfather. In announcing the gloomy results, Toyoda minced no words.

"I feel a strong sense of crisis," he said, "about whether or not we are actually executing carmaking from the perspective of the customer in all Toyota workplaces, from development, production, procurement and sales, all the way to administrative divisions."

Earnings were mostly hammered by hefty foreign exchange rate losses.

But also impacting profits are spiraling costs for projects such as retooling factories for next-generation cars and investing in technologies including artificial intelligence and electrification.

It all adds up. Toyota's annual r&d budget alone is soaring above ¥1.0 trillion ($9.0 billion) for a fourth year in a row in the current fiscal year, which began April 1.

Toyoda, 61, said that is the price to pay for remaining viable in a brave new world. 

"The present automobile industry is being asked to make a paradigm shift," he said at the earnings announcement. "I want to continue planting seeds with a look to 10 or even 20 years into the future." 

Toyota is spending more partly to retool factories for its new Toyota New Global Architecture vehicle platform. Toyota embarked on a new era of expansion two years ago after taking a three-year pause on new factories. The offensive began with the introduction of TNGA in the fourth-generation Prius hybrid. The campaign will continue through 2020 with a new factory in Mexico. 

But Toyota is also funneling cash into such projects as the new U.S.-based Toyota Research Institute, seeded with $1 billion to develop artificial intelligence. Toyota needs to make cars that are as much software as hardware products, Toyoda said. 

"Approaching both software and hardware from all directions is Toyota's way," he said. 

For hands-on Toyoda, who lives by the Toyota maxim of "go to the source and see for yourself," his turn behind the wheel of the all-electric 86 prototype was an eye opener. 

His company had long been skeptical of electric cars, in favor of the hybrid technology pioneered by its flagship Prius. But when the foot-dragging Toyota finally decided to join the EV race late last year, Toyoda insisted the company go about it in a fresh, unconventional manner. 

For starters, Toyoda put himself directly in charge of the project, as chief officer of a new EV Business Planning Department, effective Dec. 1. 

"When it comes to electric vehicles, every car, be it the Yaris or whatever, once it is electrified, the acceleration is all the same," Toyoda told Automotive News. "The reason I am responsible for EVs as well is that I don't want to make these cars a commodity. Even with the electrification of the vehicles, I want the prefix "I love' to be affixed to those cars."

Toyoda also wanted a flat, fast-moving organization to replicate the nimble corporate culture of the Silicon Valley startups, such as Tesla or Google, challenging the old guard. Toyota dubs it an "in-house venture company." And it is run by just four people, including Toyoda. The others come from Toyota Group suppliers Aisin Seiki Co., Denso Corp. and Toyota Industries Corp. 

"I want to change the way they work on EVs," Toyoda said. "Maybe we will call them electric vehicles, but introduce connectivity. Think about Tesla. Tesla is producing cars. And Toyota is producing cars. But what Tesla is producing is something close to an iPhone."

Rethinking everything in the carmaking process is a big theme as the company scrambles to redouble its cost-cutting measures amid plateauing sales and bigger investment demands.

In the just-ended fiscal year, Toyota's global retail sales inched ahead just 1.6 percent to 10.3 million vehicles. Revenue declined 2.8 percent to ¥18.40 trillion ($165.38 billion). Toyota predicted unit sales and worldwide revenue will dip slightly this fiscal year.

Toyoda said his company has made big advances in churning out better cars with its new modular platform. The latest Prius, Camry and Lexus LC are proof of the improved product.

But the company also needs to overhaul the way it makes vehicles, to be more competitive.

"When it comes to making ever-better cars in a smart way, it is becoming apparent that there is still room for improvement," Toyoda said. "We need to change the work style."

Last year, Toyoda reorganized the company to create internal subcompanies free to act more independently and nimbly. He urged patience for the changes to bear fruit.

"Sales revenue is very slow to increase," Toyoda said. "But in that environment ... as the paradigm shift continues, we must make investments in those areas that do not produce immediate profit. That's the difficult challenge we are confronting."