DALLAS — The auto business used to be pretty straightforward, says Jim Lentz, CEO of Toyota Motor North America. Now, it's tough to know where to invest your dollars given the myriad ways the industry could go with alternative powertrains, autonomous cars and ride-sharing.
Lentz, 61, has invested a lot of his own time and energy over the past four years getting ready for this moment. He has reorganized the North American group and overseen the move to a new headquarters campus in Plano, Texas, to establish what's known internally as One Toyota.
As workers move into the new offices with marching orders to focus on collaboration and quick decision-making, Lentz says his organization is ready for the uncertain times ahead as it cements a business model designed to be sustainable 50 years into the future.
Lentz spoke with Staff Reporter Laurence Iliff on Wednesday, May 31:
Q: Toyota President Akio Toyoda said he felt a strong sense of crisis after a disappointing earnings report for the most recent fiscal year. How do you take action to address that in North America?
A: Obviously we have long-term plans. We have business plans going out into 2022 or so. Anytime you start to fall below that line, there's concern. And I think what Akio is voicing is that we are falling below that trend line that we have set for ourselves.
When I was made regional CEO, I sat down with Akio to kind of get his marching orders, and he said you need to develop a plan: What would you change in North America to make sure that you can be sustainable into the future?
And I'm thinking about this seven-year plan that we've put together, so I start talking about it, and he kind of smiles and looks at me and goes, "You don't understand. What can you do today to make your business sustainable for the next 50 years?"
That was where the idea of One Toyota started. We started back four years ago bringing all our affiliated companies together under one roof.
When Toyota started here — we'll celebrate our 60th anniversary this year — we started off as a distributor. And then we added manufacturing and then manufacturing oversight and a finance company and a holding company. So we kind of grew organically and parts of the company were on the West Coast and parts were on the East Coast, some were in the Midwest. That's not a sustainable way to do business when we have to move faster to serve customers.
We started this process of One Toyota just for times like this when we have to have one voice from North America [and] have consensus much faster to be able to respond much more quickly to an ever-changing marketplace.
On May 15 we started moving into this new [headquarters] campus. We are in the process right now of getting this entire team together so we can tackle challenges like we have today much, much quicker.
What's an example of how One Toyota improves decision making?
Working on a minor change of products where you have chief engineers and the technical side in Michigan, and in the past while there would be conversations with the sales group, it would be [just] that. Now, we work together jointly on presentations. So when we sit down and work on our product plan going into 2020, 2022, it is one team working together that represents the voice of the customer.
It's [also] expansions of plants, how we decided to expand the plant in Mexico to build 60,000 more Tacomas, to sit down and decide to add expansion to Indiana, which we've done three times now. So, it's truly the voice of the customer through the sales group, and the engineering and design and manufacturing team being directly connected now.
Is the reorganization complete?
Yes. The reorganization probably took place a year and a half ago, maybe two years ago. We basically looked at all the functions we perform — and there are about 29 different functions — and we decided which would remain in a pillar, for lack of a better term. So sales functions, r&d functions, manufacturing functions. But then the functions that cut across all that — finance and accounting, legal, corporate communications — we created a new organization with all of those teams .
Today, here in Texas, we have about 2,200 people on the ground. That's about all the space we have in temporary facilities. But now, as we start moving about 250 people a week into the new campus, by the end of the year the entire team will in fact have relocated.
What is the vehicle electrification strategy for North America, given that Toyota has focused mostly on hydrogen fuel cells so far?
Our belief is still that the long-term future is hydrogen. We believe that there is a place for EVs in today's market, but it's probably more in the short-range commuter area. If you look at the business today — and I'm not exactly sure of the percentage — about half a percent is EV and nobody is making money. Especially on the mainstream side, they sell at a discount to gasoline-powered cars. And part of that is being driven by the low price of gasoline. And there's really nothing on the horizon that indicates that there's going to be a drastic change in that price. So to me that shows that over the midterm, EVs are going to be a tough sell.
I would rather invest my dollars in the long run, which is hydrogen. Whether it is a passenger car for Toyota or maybe something for Lexus in the future, whether it is a Class 8 [cargo truck] that solves a societal problem, we think that's the better way to go.
Obviously, TMC [in Japan] is working on an EV program that reports directly to Akio, as does [the Toyota Research Institute] working on autonomous vehicles and Toyota Connected. So he has the future reporting directly to him. And as they develop products for other markets in the world, obviously we'd take a look at it.
With President Trump in office, how do you see things in terms of Toyota North America's agenda on NAFTA? On the border adjustment tax? On regulation?
Most of that comes through the [Washington-based] Alliance of Automobile Manufacturers and through Global Automakers, where it's really the industry sitting down to see what is best for consumers and, in turn, what would be good for the industry and jobs. I think the president kind of has a full plate right now between health care and tax reform and some type of infrastructure program down the road. So my sense is — not that he doesn't view regulation and the industry as important — but he probably has a few other priorities right now to tackle first.
If you look at the midterm review on CAFE, that doesn't happen until I think around '18. Bottom line is we still believe that there should be regulation. We believe in CAFE, as we've talked about in the past. We just have to make sure that everything that the industry agreed to, that the underlying assumptions are understood, and that the end result of the regulations still make sense to consumers.
How about the border adjustment tax? Does it look like that is going nowhere fast?
It's not dead until it's dead. It's still a concern because I think it's a concern for the overall economy, for customers and the overall auto industry. It would be a big negative anchor to the overall economy.
How do you survive the sales plateau? Do you do it through incentives? Cutting production?
Not too far back in our rear-view mirror, we were looking at a 12 million plateau. So that was surviving. This is adjusting production schedules to demand. We still believe that the market is going to be 17 to 17.1 million this year, and for the most part, the next couple years could be similar. So what I need to do is adjust to a 63 percent light-truck mix more than I need to adjust to a 17 million industry.
You mention incentives. I am not going to buy my way into market share. I'm investing $10 billion here in the next five years, mostly in plants, so I can build better cars. And a lot of that investment is in model changeover and this new TNGA global architecture that will allow us to build cars that I think our customers are going to fall in love with from a styling standpoint, a ride and handling standpoint, better fuel efficiency — all of that.
So the way that I deal with a plateauing market is to compete with better cars, not bigger incentives.
What is the brand strategy for Lexus, which is no longer in striking distance to be the luxury sales leader in the U.S.?
I think the brand strategy is, even more so than the Toyota side, to make sure that we produce vehicles that consumers love. I don't have the scale that the Germans do on a global basis to have as broad of a lineup. It's a very, very difficult thing to do. They probably sell globally twice what I do and it allows them to have a lot more derivatives. So, I have to make sure that I am extremely competitive in the right segments on the luxury side and that I can bring out new products with things like TNGA and new engines as rapidly as I can to make sure I satisfy customer needs. It's not about necessarily chasing volume, and it's not about driving your product downmarket, either.
What do you worry about in a market that is changing so rapidly? Do you think you're pretty much in the right place?
When I started in the business 40 years ago, it was pretty easy. You had cars and trucks, and you had to worry about body types, you had to worry about what you're going to do changing engines or transmissions.
Today, it's where are you going to put your dollars? There are internal combustion gas engines, there are hybrids, there are plug-in hybrids, there are fuel cells, there are EVs. Into the future, you've got to decide what you're going to do with autonomous cars and ride-sharing.
In our case, we're going to put small bets on a lot of different areas because my crystal ball's not clear enough to know definitively what direction customers are going to go.
Today we're looking at Gen-Y that's going to be probably 40 percent of the marketplace in the next few years. I've got to make sure that I'm ready when Gen-Z starts to come into the marketplace, because who knows? They may decide they want to go back to passenger cars again.