HANDLING A DOWNTURN THE TOYOTA WAY

By Ian Rowley

The Slowdown Strategy

It’s a measure of how tough these times are for automakers that even the strongest are suffering. Through September, U.S. sales for Toyota, the world’s most profitable carmaker, are down 10%. In Japan (where Toyota’s market share is over 40%) and Europe, sales are also sluggish. Even fast-growing China, where the Japanese automaker aims to increase sales 40% this year, is expanding less quickly than previously hoped. Meanwhile, analysts reckon Toyota operating earnings could slump 40% during the current financial year—worse than the 30% fall Toyota projects.

Yet while the Big Three flirt with bankruptcy (BusinessWeek, 10/7/2008), Toyota’s solid balance, ample cash, and continued profitability—even if its earnings slump as projected, it will still make over $10 billion—are enabling the company to fund measures that many industry watchers reckon will help it emerge stronger from the current mayhem. In the short term that means steps such as offering 0% financing on certain vehicles in the U.S. That should help boost showroom traffic and tell customers Toyota has cash to finance vehicle purchases. Longer term, Toyota plans to introduce more hybrids and more attractive smaller cars. Here’s a look at some of the measure’s Toyota is taking during the current downturn.

More Hybrids Toyota plans to sell 1 million hybrids a year by the early 2010s and with gas prices high and the economy slowing, the launch of the new Prius next year and several other gas-sipping hybrids in the next couple of years couldn’t be more timely. By 2010, Toyota is also believed to be planning two more dedicated hybrid models, including a new minivan.

Premium Small Cars On Nov. 20, Toyota will begin selling the iQ ultra-compact car in Japan, with prices starting at around $14,000. Slightly longer than the Smart Fortwo but seating three adults, Toyota hopes the iQ will create a new demand for attractive, small cars and change the view that smaller cars are low on quality. The iQ will also go on sale in Europe in early 2009.

Working with Component Suppliers Toyota, perhaps better than any automaker, appreciates the importance of cutting costs. This year, it launched the new Toyota Crown in Japan, the first car to take advantage of a cost-cutting scheme called Value Innovation Activity, a program that reckons Toyota will save over $10 billion by working more closely with suppliers earlier in the design of new models.

Working with Steel Companies According to reports in Japan, Toyota has also instigated a new wave of cost-cutting plans aimed at offsetting rising raw material costs. One example: Toyota has begun working with steelmakers to find ways to reduce the cost of the 4 million tons of steel it uses each year. Japan’s Nihon Keizai newspaper reports that Toyota has made over 100 recommendations to five Japanese steelmakers on how they can find savings.

0% finance in the U.S. After a dreadful September in the U.S., Toyota on Oct. 3 began offering interest financing on 11 models, including the Corolla, Camry, and Tundra full-size pickup. Critics point out that 0% financing risks undermining resale values and, longer term, could hurt the company’s brand. On the other hand, the current deal only lasts one month and lets customers know that, despite the credit crunch, Toyota’s financing arm (which had nearly $3 billion in cash at the end of June) has money to lend.

Retooling U.S. Plants Toyota opened a large Tundra pickup factory in San Antonio in 2006, just before the market for large trucks lost steam. Now the company is busy reorganizing production. For the first time, its Prius hybrid will be built in the U.S., at a plant in Mississippi, while it consolidates large-truck production at the Texas plant. As part of the shakeup, Toyota is suspending production at three U.S. plants for three months

A More Fuel-Efficient Lexus Toyota’s Lexus brand might be the best-selling luxury lineup in North America, but that doesn’t make it recession-proof. Toyota’s response is to add more hybrid Lexus models. At next year’s North American International Auto Show in Detroit, Toyota is expected to show the first hybrid-only Lexus. Meanwhile, the company is considering including hybrid options for all future Lexus models.

Keeping Full-Time Workers Sure, times are tough, but Toyota doesn’t want to lay off employees. In the U.S., for example, its production shakeup means some 4,500 employees aren’t building cars while factories are retooled. Instead, Toyota is asking them to keep busy by doing everything from training programs to filling in at assembly lines elsewhere or helping out in local communities.

Fun-to-Drive Cars, Developed with Subaru While sports-car sales are unlikely to surge during a downturn, critics of Toyota complain of a dearth of sporty models. That's something that has been lacking since Toyota ended production of the Celica, Supra, and MR-2 sports models. But with Toyota having acquired a stake in Subaru owner Fuji Heavy Industries, the company plans to roll out a new, rear-wheel-drive sports car in Powered by Subaru's horizontally opposed, or boxer, engines, production of the new car will take place at a new factory in Gunma, Japan, with Toyota consigning production to Fuji Heavy.