Understanding Americans better than Detroit does.
(FORTUNE Magazine) -- Two Tinny sedans left the port of Yokohama in August
1957, bound for California - the first exports from Toyota. The four-door
clunkers flopped. The car, which looked like a brick with a roof on top, was
prone to overheating and vibrated at speeds of more than 60 miles per hour.
By late 1960, Toyota realized it had made a mistake and pulled the Toyopet
Crown off the market.
A less determined company might never have returned after this humiliation.
But Toyota (Charts) came back a few years later with a better car and has
gone from strength to strength ever since.
The world's most profitable automaker - and soon to be its biggest - now has
a 15% market share in the U.S., where it sold 2.5 million cars and trucks
last year. Because Toyota is already bigger than Chrysler in the U.S. and is
about to pass Ford, Automotive News, the industry bible, has retired the
"Big Three" moniker; GM (Charts), Ford (Charts), and Chrysler (Charts) will
henceforth be known as the Detroit Three.
Toyota's presence in the U.S. is now so routine that the 3,322 business
leaders Fortune surveyed named Toyota one of America's Most Admired
Companies for the second year in a row - boosting it to third place overall,
behind two American perennials, General Electric and Starbucks. Toyota has
returned the compliment, making an entrance into that most American of
sports - we're talking NASCAR - and introducing a full-sized, Texas-built
pickup truck, the Tundra.
As the story of the tarnished Crown hints, nothing was inevitable about
Toyota's success. It has managed to survive discriminatory taxes, import
restraints, and the occasional xenophobic hissy fit - U.S. workers taking
sledgehammers to imported cars - to become something of a model citizen.
There's no question that coming in fresh, Toyota had some advantages over
Detroit: It was unburdened by retiree obligations, union contracts that had
been bid up over decades, and brands like Oldsmobile that refused to make
money (or die). And yes, it was lucky to have small cars ready to sell when
the first oil shocks hit in the 1970s.
But the most important reason that Toyota became America's most prestigious
automaker is that this quintessentially Japanese company has been better
than Detroit at reading the American car psyche. Toyota has never been a
style leader. It has never created a car as iconic as, say, the Ford
Mustang. But it discerned correctly that many car buyers don't need the next
hot thing. They just want a trouble-free product that looks fine - and they
will pay a premium for it.
One way Toyota reads the public mind is the think tank at Toyota Motor Sales
in Torrance, Calif., where a research department staffed by 116 people
monitors the industry and keeps tabs on demographic and economic
developments. Its mission: to predict consumer trends and create a lineup of
cars and trucks to capitalize on them. Each professional is expected to
spend time out in the field talking to car buyers. The Japanese have a name
for it: genchi genbutsu - go to the scene and confirm the actual happenings.
Most big companies have something like it; what distinguishes Toyota is that
its executives actually listen and have turned those insights into profits.
When researchers found in the mid-1990s that Toyota was losing young buyers
to hipper brands like VW, its marketers dreamed up the hugely successful
Scion. Another case: GM was fooling around with electric cars as far back as
the 1980s, but it was Toyota that tapped into the appeal of the green
revolution with the hybrid-powered Prius. The Prius accounts for less than
5% of U.S. sales, but Toyota has won a fortune in good publicity.
The in-the-flesh manifestation of this obsession with research and planning
is Jim Lentz, 51, who succeeded Jim Press (see "Toyota's Secret Weapon")
last year as the top American executive at Toyota's U.S. sales arm. Preppy
and personable, Lentz peppers his conversation with trend-conscious facts
(did you know that Wal-Mart intends to sell 400 kinds of organic food?) and
watches the rest of the world nearly as closely as he does the U.S. (he
marvels at the explosion of premium-priced small cars in Europe, like the
Toyota is tilting toward American tastes today - that's what the Tundra and
the dip into NASCAR racing are about - but he expects to be taking a broader
perspective over the next ten years. "The landscape of the market is going
to change dramatically," he said during an interview at Toyota's campus
south of Los Angeles. "Urbanization, interest in healthy lifestyles, safety,
and security--we need to open our eyes to more global products and
platforms." That's positive for a small car like Toyota's Yaris, which can
be sold around the world, but less so for the U.S.-only Tundra, a V-8 that
gets about 16 miles per gallon.
The new Tundra is an inflection point for Toyota in the U.S. On the one
hand, Lentz has to figure out how to make it succeed in the auto market of
the future; on the other, it's a big investment that needs to succeed right
away. Inside the company it's common to hear the Tundra described as the
riskiest launch in its history, because it is highly visible - and frankly,
a test of the company's machismo.
Toyota has high expectations: more than 200,000 truck sales this year
(nearly twice that of the previous smaller model), 300,000 eventually. It's
a direct challenge to Motown. Full-sized pickups are the highest-volume
vehicles sold by the Detroit Three and make a tidy profit. Buyers are loyal,
and imports have had a tough time breaking in.
Toyota approached the new Tundra cautiously - and characteristically.
Planning started seven years ago, when engineers gathered in 2000 to drive
different trucks and experiment with hauling trailers - a weakness in the
old version. They even stopped at national parks to talk to recreational
users. Such nitty-gritty consumer study, bolstered by other research, told
Toyota it should stay away from cowboy imagery and country music; the
competition had covered that territory. "Buyers said, 'Don't waste our time.
Tell me why I should buy the truck,'" Lentz says. The upshot: Emphasize
brute strength and performance.
During the Super Bowl, Toyota did just that. One ad for the Tundra showed it
hauling a 10,000-pound load; another depicted it braking inches before it
hurtled off a precipice (the truck was restrained by a tether). To show that
it was serious, Toyota decided to build a brand-new plant dedicated to this
model in San Antonio. Far from normal transportation routes, the location is
difficult logistically, but it did plop Toyota in the heart of truck
country - and in a big, powerful state.
The latter is emphatically no coincidence. Beginning in 1988, when it
started production in its first assembly plant in Georgetown, Ky., Toyota
has been careful to locate each new assembly plant in a different state,
partly to maximize congressional clout. "It is better to be spread as
broadly as we can be spread," says Josephine Cooper, who runs Toyota's
Washington, D.C., office. Toyota has no political action committee, but it
has built an effective lobbying operation.
Toyota's all-American ads
"Toyota is a public relations case study - a masterpiece of managing the
message," says marketing consultant George Peterson of AutoPacific. "People
refer to it as the Teflon car company." In 1989, for example, when the new
Lexus had to be recalled to fix the high-mounted brake light, Toyota still
emerged with its new-car smell unsullied when it returned the cars fixed,
washed, and with a full tank of gas.
Toyota has sunk deep roots in the U.S., especially in the middle of the
country, where it has built parts and assembly plants and technical centers
in a north-south corridor stretching along I-75. The latest, a $1.3 billion
assembly plant in Mississippi to make the Highlander SUV, is due to open in
2010. Toyota employs 34,600 Americans directly and 400,000 more indirectly
at suppliers and dealers. Every year, Toyota buys $28.5 billion in parts and
materials from U.S. suppliers, most of which goes into the 1.2 million cars
and trucks that it builds here - about half the total it sells domestically.
And when it is time to clear inventory, Toyota can be as brassy as any Yank.
In this sense Toyota can look as American as baseball, hot dogs, apple pie -
and yes, Chevrolet. But in terms of how it's managed, that is not quite the
case. Every U.S. function - sales and marketing, R&D, manufacturing -
reports to Japan. U.S. managers sometimes endure 20-hour roundtrip flights
to attend a single meeting. Japanese "coordinators" in the U.S. shadow each
operation and make their own reports to headquarters. Organizationally it
looks like a nightmare, but somehow the two-language, two-culture hybrid
The relaunch of the Tundra is about selling trucks; it is also about giving
Toyota a more national presence - in a way, to make it more American.
Toyotas sell well along both coasts, but it has been slower to penetrate the
upper Midwest from Pittsburgh to Minneapolis, where it has a 10.6% share,
and the Southwest (14.3%), according to J.D. Power estimates.
Those soft spots are part of the reason that Toyota became the first foreign
brand to compete in NASCAR since MG and Jaguar in the 1950s. Toyota figures
that NASCAR gives it access to a truck-loving heartland audience that
usually ignores it. "We race Camrys to sell Tundras," says marketing boss
Jim Farley. Toyota isn't taking any chances, providing technical support for
three teams, but there is a learning curve ahead. None of its cars finished
higher than 22nd (out of 43) in its first race, the Daytona 500, in
Being so much in the spotlight is leading to awkward moments. When Michael
Waltrip, one of its big-name NASCAR owner/drivers, was fined for using an
illegal substance to boost horsepower, the fallout was immediate. "Obviously
this wasn't the way we wanted to start," Jim Aust, head of Toyota racing,
told Sports Illustrated. And when a female employee complained last year
that a Japanese executive in Toyota's New York office had groped her, the
New York Post played it on page one: OH, WHAT A FEELING the tabloid blared.
Toyota quickly sent the executive into early retirement, but for a few days
it found itself in the unaccustomed role of tabloid fodder.
"We understand that as Toyota's presence increases, expectations and demands
will also rise," president Katsuaki Watanabe told Fortune. Nuances will
matter more than ever. When then-chairman Hiroshi Okuda in 2005 said Toyota
might raise prices to take pressure off GM, the perceived condescension
sparked outrage, followed by furious backpedaling. Okuda's remark betrayed
Toyota's biggest fear: the financial collapse of one of the Detroit Three.
Jim Lentz tries his best to deflect such talk. "We're all in this together,"
he says of his U.S. rivals. "We wish them the best."
If Toyota cares so much, why is it entering Detroit's last bastion of
comparative strength? But Lentz swears that he means it and that the Tundra
is simply a way to offer consumers a choice. The status quo, as he needn't
point out, has served Toyota well. Despite occasional Japan bashing, Toyota
has been able to grow. This process that has been gradual enough that the
company is now an accepted - in fact, admired - part of the U.S. landscape.
The dramatic failure of any of the Detroit Three would destabilize the
industry - and make Toyota the villain. "The most important management task
at Toyota these days," says auto consultant Jim Womack, "is to manage the
decline of the domestics."
Fifty years ago, when the Toyopet rolled into California, who could have
anticipated that this is where it would land?
"A Borg is never lonely"