Lentz wields the ax as Toyota aims to cut costs
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November 12, 2018 12:00 AM

Lentz wields the ax as Toyota aims to cut costs

Hans Greimel
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    AUTOMOTIVE NEWS ILLUSTRATION
    Facing an uncertain future as Toyota buckles down on costs around the world are, clockwise from top, the Prius C hybrid, Lexus RC coupe and subcompact Yaris.

    TOKYO — Toyota's North America CEO, Jim Lentz, is looking to chop unpopular nameplates from the U.S. lineup as bosses in Japan order him to restore sagging profitability to record levels.

    Facing the knife now is any model falling out of favor as customers swarm to crossovers, SUVs and trucks.

    In a word: cars.

    That spells an uncertain future for such vehicles as the subcompact Yaris, Toyota 86, Lexus RC coupes and even the Prius C hybrid, the five-door Prius' smaller sibling.

    The scrutiny may have Toyota abandoning its once-ballyhooed idea of marketing a Prius-badged family of vehicles. It once had a stable of four, including the Prius PHV and now discontinued Prius V people mover.

    "We are taking a hard look at all of the segments that we compete in to make sure we are competing in profitable segments and that products we sell have strategic value," Lentz said here last week after Japan's biggest automaker reported an increase in quarterly profits.

    Lentz is racing to shore up profits as Toyota buckles down on cost control around the world. Toyota CEO Akio Toyoda wants fatter margins so the company can plow profits back into developing the costly technologies needed for next-generation electrification, connectivity and autonomous driving.

    Low-selling car models are an obvious place to cut costs. But no expense is too small for scrutiny, according to Toyota's cost-crunching chief financial officer, Koji Kobayashi.

    Kobayashi: Even office suppliers get budget ax

    To demonstrate Toyota's seriousness, Kobayashi said he expects "huge" savings in the company's office supply budget alone.

    "We might not need to buy new pencils or stationery for another five years," he said at Toyota's quarterly earnings announcement last week.

    Kobayashi has handed Lentz the lofty target of delivering a North American operating profit margin of 8 percent in the fiscal year ending March 31, 2021, up from just 2.5 percent in the fiscal second quarter ended Sept. 30.

    Under scrutiny

    But Toyota said the figure used in its balance sheet is calculated on a different basis than the internal 8 percent goal that Lentz is now chasing. That internal target equates more closely to achieving the level of profitability North America booked in the fiscal year ended March 31, 2016, a spokesman said. That year, Toyota achieved a record North American operating profit of $4.73 billion.

    Streamlining the lineup is one way to boost results, Lentz figures. In that respect, Toyota joins Ford Motor Co. and Fiat Chrysler Automobiles in rethinking product portfolios as the market becomes increasingly dominated by light trucks.

    Lentz said his company will not abandon cars. He said the compact Corolla and Camry midsize sedan remain core to the Toyota brand. But the company is scrutinizing such categories as coupes and subcompacts.

    Lentz: "Hard look at all of the segments"

    "Maybe you need one of those," Lentz said. "But you don't need two or three.

    "Yaris doesn't do much in the U.S.," he said. "I'm not sure, at least in the U.S., how important that segment is."

    The entire U.S. subcompact segment was down 21 percent through October. U.S. sales of the Yaris iA, a rebadged version of the Mazda2 sedan, were down 28 percent, while deliveries of the French-built Yaris Liftback were down 78 percent.

    Meanwhile, Toyota has only three coupes in its company lineup: the Toyota 86 sporty car, a rebadged version of the Subaru-produced BRZ; the Lexus RC; and the newly introduced Lexus LC. Sales for the 86 dropped 40 percent through October and RC sales fell by 52 percent.

    Rethinking hybrids

    Lentz also said Toyota's hybrids will need to be rebranded.

    Toyota wants hybrids to account for 15 percent of U.S. sales in 2020, from around 9 percent today. But it plans to offer some form of electrification in every nameplate by 2025.

    Given the influx of hybrids, Toyota needs to broaden the pitch beyond fuel economy, Lentz said.

    "As we expand those volumes, we're going to have to rebrand hybrid to make sure people understand it can be economical, but it can also be fun to drive," he said.

    "There may not be a need for [the] Prius family in the future."

    Since 2016, spiraling incentives have undercut Toyota's profitability in North America as the company was caught flat-footed with a car-heavy lineup as crossovers boomed.

    Lentz is out to fix that, too, with a more tailored approach to spiffs.

    The Toyota brand's average U.S. outlays are down $145 per vehicle this year and are about $1,200 below the industry average, he said. Lexus spiffs are flat, even as the luxury segment's average increases.

    "We're putting dollars where we're going to get the most bang for our buck," Lentz said. "Most importantly today is incentivizing vehicles that are much more profitable."

    While the Toyota brand's incentives on passenger cars fell 16 percent through September, spending on light trucks increased 8 percent, according to Autodata.

    All that is slowly putting North America back on track.

    Boosting profitability is key to greenlighting investment in the region, he said.

    "As it works in Toyota, this is a competition," Lentz said.

    "I have to demonstrate I am the most competitive when a need comes for either more [units] or more manufacturing."

    Naoto Okamura contributed to this report.

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