ASIA 200--Toyota Is First Across the Finish Line in Japan

• ASIA 200
• JULY 31, 2009

Reader Survey

Toyota Is First Across the Finish Line in Japan

But Victory for the Auto Maker Is Bittersweet, as It Overtakes GM to Become the World's No. 1 Auto Maker in a Time of Turbulence

By JOHN MURPHY

TOKYO -- Toyota Motor Corp. last year achieved its long term goal of becoming the world's largest auto maker by sales volume, beating out long time rival General Motors Corp.

But it was a bittersweet victory, a distinction earned during one of the worst years for auto makers, as car sales crumbled world-wide amid the global recession and GM and Chrysler Group LLC filed for bankruptcy.

The Japanese auto giant posted a record loss for the fiscal year ended March 2008, and is braced for an even deeper loss this year.

Associated Press

The Toyota logo is seen on the hood of a Prius Hybrid.

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• Methodology: How did we go about identifying Asia's top 200 companies?

And yet, few auto makers are as well-positioned to make a comeback in this tumultuous market as Toyota, which helps explain why the auto maker finished atop voting of the overall most-admired companies in Japan in a survey of subscribers of The Wall Street Journal Asia and other businesspeople.

Armed with huge financial reserves, an aggressive cost-cutting strategy and an expanding line of fuel-efficient cars, Toyota is plotting its recovery from its toughest period in its 71-year history.

The revival effort is being led by Akio Toyoda, grandson of the company's founder, who took over as president in June. The 53-year-old, U.S.-educated executive is promising to return the company to its core values of thrift and efficiency and to respond to consumers' needs.

"Toyota has overcome many challenges during its seven decades of business. What has made this possible is the way we make our cars under our "customer first" and genchi genbutsu principles," Mr. Toyoda said in his first press conference as president in June, referring to the leadership maxim that essentially encourages managers to get out of the office and go to the source of the problem.

The ability to anticipate drivers' needs and stay ahead of competitors help explain why Toyota, along with being the overall winner, led the Japanese field of companies in the featured category of "Management Has Long-Term Vision."

Toyota's Prius remains the best example of the kind cutting-edge technology that has allowed Toyota to stay a step ahead of its rivals.

More than decade ago, while Detroit was betting on the success of full-sized sedans, SUVs and trucks, Toyota introduced its first Prius hybrid to the market. It got 41 miles per gallon (17 kilometers per liter).

Many rivals dismissed the gas and battery-powered car as little more than a fad. But Toyota executives believed the fuel-sipping Prius was the future. Drivers agreed. Toyota has sold more than a million of the iconic cars since it was introduced in 1997 and has set a goal of selling one million hybrids per year by the early 2010s. The car maker has dominated the hybrid market with more than a 70% market share in the U.S. By 2020, the company plans to offer a hybrid version of all vehicles in its lineup.

Toyota's third-generation Prius, with an EPA-rated mileage of 50 mpg (21 kpl), hit showrooms this spring and has been a hit in Japan.

Toyota is betting that gas-sipping cars like the Prius will help drive sales as governments world-wide toughen fuel-economy standards and implement scrapping incentives for owners of older vehicles and tax breaks for efficient cars.

Toyota has also won accolades for its iQ, an ultra compact four-seat car meant to prove that small cars can offer style, safety and spaciousness. In designing the vehicles, Toyota had to rethink the way it makes cars, flattening the fuel tank, making seats thinner and reducing the size of the air-conditioning system. The engineering breakthroughs used to design the iQ will be used on the company's other small cars in the future, Toyota says.

Survey participants also voted Toyota No. 1 in the categories of financial reputation and good company reputation.

Japanese videogame maker Nintendo Co. topped the category of "innovative in responding to customers needs" and was ranked No. 2 most-admired company in the country. Panasonic Corp., which ranked No. 3 in the most-admired company list, won the "high quality services and products" category.

Toyota's consistent high ranking in the readership survey is a reflection of the company's impressive global expansion. For the past decade, the company grew at a breakneck pace, recording a net profit of 1.72 trillion yen ($18.11 billion) in the year ended March 2008.

But Toyota hit a speed bump during the global financial crisis and recession, tripping up its aggressive expansion plans as sales around the world plummeted.

Just over a year ago, Toyota had ambitious plans to sell a record 10.4 million cars in 2009. But with bloated inventories, a credit crunch and sagging demand world-wide, Toyota is now aiming to sell 6.5 million vehicles this year, one million less than last year.

Many of Toyota's woes are in North America, its largest market and home to seven of its 36 assembly plants. As demand fell, Toyota has scrambled to scale back production there, laying off or idling workers at some plants and suspending the opening of a new plant in Mississippi.

Toyota executives says the country perhaps grew too big too fast, making it difficult to throttle back its production levels as quickly as it should have during the sudden decline in demand last year.

Toyota made an ill-timed decision with a $1 billion new plant in San Antonio to produce the Tundra. Sales of the truck never reached expected volumes. Just one of the plant's two production lines is now in operation.

"I do not think we were wrong to expand our business to meet the needs of customers around the world but we may have stretched more than we should have," Mr. Toyoda said.

Adding to Toyota's woes, the strong yen, which diminishes the value of the company's overseas earnings, eroded profits. For the fiscal year ended March 2009, Toyota posted a 436.8 billion yen loss and is forecasting a net loss of 550 billion yen for the current fiscal year.

As Toyota maps out its recovery, Mr. Toyoda has taken a personal pay cut of 30%, vowed to cut 800 billion yen in fixed costs over the next year and called on the company to focus more on making quality products, not pursuing profits and rapid growth as it has during the last decade of global expansion.

To that end, the car maker has shaken up its management structure so its executive vice presidents will take responsibility for different regions of the world, allowing the company to respond quickly to opportunities to expand or take a step back.

"Rather than asking, 'How many cars will we sell?' or, 'How much money will we make by selling these cars?' we need to ask ourselves, 'What kind of cars will make people happy?' as well as, 'What pricing will attract them in each region?' Then we must make those cars," Mr. Toyoda said.

Write to John Murphy at john.murphy@wsj.com