Toyota

Yoi kangae, yoi shina! that's Toyota-speak for "Good thinking means good products." The slogan is emblazoned on a giant banner hanging across the company's Takaoka assembly plant, an hour outside the city of Nagoya. Plenty of good thinking has gone into the high-tech ballet that's performed here 17 hours a day. Six separate car models -- from the Corolla compact to the new youth-oriented Scion xB -- glide along on a single production line in any of a half-dozen colors. Overhead, car doors flow by on a conveyor belt that descends to floor level and drops off the right door in the correct color for each vehicle. This efficiency means Takaoka workers can build a car in just 20 hours.

The combination of speed and flexibility is world class. More important, a similar dance is happening at 30 Toyota plants worldwide, with some able to make as many as eight different models on the same line. That is leading to a monster increase in productivity and market responsiveness -- all part of the company's obsession with what President Fujio Cho calls "the criticality of speed."

Remember when Japan was going to take over the world? Corporate America was apoplectic at the idea that every Japanese company might be as obsessive, productive, and well-managed as Toyota Motor Corp. (TM). We know what happened next: One of the longest crashes in business history revealed most of Japan Inc. to be debt-addicted, inefficient, and clueless. Today, 13 years after the Nikkei peaked, Japan is still struggling to avoid permanent decline. World domination? Hardly.

Except in one corner. In autos, the Japanese rule. And in Japan, one company -- Toyota -- combines the size, financial clout, and manufacturing excellence needed to dominate the global car industry in a way no company ever has. Sure, Toyota, with $146 billion in sales, may not be tops in every category. GM is bigger -- for now. Nissan Motor Co. (NSANY) makes slightly more profit per vehicle in North America, and its U.S. plants are more efficient. Both Nissan and Honda have flexible assembly lines, too. But no car company is as strong as Toyota in so many areas.

Of course, the carmaker has always moved steadily forward: Its executives created the doctrine of kaizen, or continuous improvement. "They find a hole, and they plug it," says auto-industry consultant Maryann Keller. "They methodically study problems, and they solve them." But in the past few years, Toyota has accelerated these gains, raising the bar for the entire industry. Consider:

-- Toyota is closing in on Chrysler to become the third-biggest carmaker in the U.S. Its U.S. share, rising steadily, is now above 11%.

-- At its current rate of expansion, Toyota could pass Ford Motor Co. (F) in mid-decade as the world's No. 2 auto maker. The No. 1 spot -- still occupied by General Motors Corp. (GM), with 15% of the global market -- would be the next target. President Cho's goal is 15% of global sales by 2010, up from 10% today. "They dominate wherever they go," says Nobuhiko Kawamoto, former president of Honda Motor Co. (HMC). "They try to take over everything."

-- Toyota has broken the Japanese curse of running companies simply for sales gains, not profit. Its operating margin of 8%-plus (vs. 2% in 1993) now dwarfs those of Detroit's Big Three. Even with the impact of the strong yen, estimated 2003 profits of $7.2 billion will be double 1999's level. On Nov. 5, the company reported profits of $4.8 billion on sales of $75 billion for the six months ended Sept. 30. Results like that have given Toyota a market capitalization of $110 billion -- more than that of GM, Ford, and DaimlerChrysler (DCX) combined.

-- The company has not only rounded out its product line in the U.S., with sport-utility vehicles, trucks, and a hit minivan, but it also has seized the psychological advantage in the market with the Prius, an eco-friendly gasoline-electric car. "This is going to be a real paradigm shift for the industry," says board member and top engineer Hiroyuki Watanabe. In October, when the second-generation Prius reached U.S. showrooms, dealers got 10,000 orders before the car was even available.

-- Toyota has launched a joint program with its suppliers to radically cut the number of steps needed to make cars and car parts. In the past year alone, the company chopped $2.6 billion out of its $113 billion in manufacturing costs without any plant closures or layoffs. Toyota expects to cut an additional $2 billion out of its cost base this year.

-- Toyota is putting the finishing touches on a plan to create an integrated, flexible, global manufacturing system. In this new network, plants from Indonesia to Argentina will be designed both to customize cars for local markets and to shift production to quickly satisfy any surges in demand from markets worldwide. By tapping, say, its South African plant to meet a need in Europe, Toyota can save itself the $1 billion normally needed to build a new factory.

If Cho gets this transformation right, he'll end up with an automotive machine that makes the Americans and Germans quake. Cost-cutting and process redesign will chop out billions in expenses. That will keep margins strong and free up cash to develop new models and technologies such as the Prius, to invest in global manufacturing, and to invade markets such as Europe and China. New models and new plants will build share, which will build more clout. And if there's a hiccup -- well, there's a cash-and-securities hoard of $30 billion. "This is a company that does not fear failure," says Cho.

Roadblocks?

Can anything stop Toyota? There are some potential roadblocks. Toyota doesn't always get it right: Its early attempts at the youth market, minivans, and big pickup trucks all disappointed. It remains dependent on the U.S. business for some 70% of earnings. Its Lexus luxury sedans are losing ground to BMW, though Lexus' strong SUV sales are keeping the division in the game. The average Toyota owner is about 46, a number the company must lower or risk going the way of Buick. And most of Toyota's big sellers aren't exactly head-turners.

Meanwhile, Toyota's rivals are hardly sitting still. GM is finishing up a $4.3 billion revamp of Cadillac, and a revival is in the works: Overall GM quality is on an upswing too. "Toyota is a good competitor, but they're not unbeatable," says GM Chairman G. Richard Wagoner Jr. Over at Nissan, CEO Carlos Ghosn doubts Toyota's big bet on hybrids will pay off. "There will be no revolution," he predicts. And Detroit's Big Three are praying that a strong yen will batter Toyota. If the yen sticks at 110 to the dollar over the next 12 months, Toyota could see its pretax profits shrink by $900 million.

A strengthening yen might have hammered Toyota in the 1980s, and it will certainly have an impact next year. But today, three decades after starting its global push, Toyota can't be accused of needing a cheap yen to subsidize exports. Since starting U.S. production in 1986, Toyota has invested nearly $14 billion there. What's more, many of its costs are now set in dollars: Last year, Toyota's purchases of parts and materials from 500 North American suppliers came to $19 billion -- more than the annual sales of Cisco Systems Inc. (CSCO) or Oracle Corp. (ORCL). The U.S. investment is an enormous natural hedge against the yen. "About 60% of what we sold here, we built here," Toyota Chairman Hiroshi Okuda said in a Sept. 10 speech in Washington.

Better for Toyota, those cars are also among the industry's biggest money-makers. Take SUVs: Ten years ago, Toyota had a puny 4% share. Today, it owns nearly 12% of that high-margin segment with eight models ranging from the $19,000 RAV4 to the $65,000 Lexus LX 470 -- and makes as much as $10,000 on each high-end model it sells. The company is steadily robbing Ford, Chrysler, and GM of their primacy in the cutthroat U.S. SUV market and has largely sat out the latest round of rebates: Toyota's average incentive per car this fall is just $647, compared with $3,812 at GM and $3,665 at Ford, according to market watcher Edmunds.com. This is one war of attrition where Detroit is clearly outgunned.

Toyota's charge into SUVs indicates a new willingness to play tough in the U.S., which it considers vital to its drive for a global 15% share. "The next era is full-size trucks and luxury, environmental, and youth cars," predicts James E. Press, chief operating officer at Toyota Motor Sales USA Inc. Toyota is already intent on boosting its 4.5% market share in pickups, the last profit refuge of the Big Three. Toyota is building an $800 million plant in San Antonio, Tex., that will allow it to more than double its Tundra output, to some 250,000 trucks a year by 2006, with rigs powerful and roomy enough to go head to head with Detroit's biggest models.

Toyota plans to extend its early lead in eco-cars by pushing the Prius and adding a hybrid Lexus RX 330 SUV next summer. The Lexus will get as much as 35 miles per gallon, compared with roughly 21 mpg for a conventional RX 330. And Toyota is vigorously attacking the youth market with the $14,500 Scion xB compact, which surprised Toyota-bashers with its angular, minimalist design. Since the Scion's U.S. launch in California in June, Toyota has sold nearly 7,700 of them, 30% better than forecast. Toyota Vice-President James Farley says three out of four buyers of the brand had no intention of buying a Toyota when they started looking. "That's exactly why we started the Scion," he says.

The Scion is evidence that Toyota's growing cash cushion gives it the means to revamp its lackluster designs. When Cho traveled through Germany in 1994, he recalls being asked: Why are Toyota cars so poorly styled? Part of the problem, says Cho, is that too many Toyotas were designed with Japanese consumers in mind and then exported. Some worked; some flopped.

These days, design teams on the West Coast of the U.S., in southern France, and back home compete for projects. That has paid off with models such as the Yaris, Toyota's best-seller in Europe, where the company now has a 4.4% share, compared with less than 3% a decade ago. The Yaris was designed by a Greek, Sotiris Kovos, then imported successfully to Japan because of its "European" look. "Toyota has finally recognized that buyers want to feel like they have some level of style," says Wesley Brown, a consultant with auto researcher Iceology. The redesigned Solara sports coupe is getting high grades, too: A V-shape line flowing up from the grille gives it a more muscular silhouette, and its interior is 20% roomier than before.

Toyota Man

Leading Toyota to this new level of global vigor is Cho. He's Toyota Man personified: Self-effacing, ever smiling, but an executive whose radar seems to pick up every problem and opportunity. "Cho understands as much as anyone I've ever seen what's actually happening on the factory floor," says manufacturing consultant Ronald E. Harbour, whose firm's annual report on productivity is the industry bible.

That feel for the factory didn't come naturally. The 66-year-old company lifer studied law, not business, at the prestigious University of Tokyo and could have easily ended up as a faceless bureaucrat at the Ministry of Finance. But Cho learned the car business -- and clearly learned it well -- at the knee of Taichi Ohno, the creator of the legendary Toyota Production System, a series of in-house precepts on efficient manufacturing that changed the industry. Ohno, a brilliant but notoriously hot-headed engineer, lectured Cho about the need to be flexible and to look forward.

That advice is something Cho found invaluable when he was tapped to oversee the 1988 launch of Toyota's key U.S. plant in Georgetown, Ky., now the company's biggest U.S. factory and the maker of the Camry sedan. The good-natured and unpretentious Cho regularly worked the plant floor, making sure to shake hands with each line worker at Christmas to show his appreciation. He spoke at Rotary Club meetings and stopped to make small talk with the folks in Georgetown.

Given Toyota's booming U.S. sales in the late 1990s, few inside the company were surprised when Cho won the top job. Yet equally few had any clue that the new president was about to unleash so many powerful changes. Like his predecessor Okuda, Cho had long been frustrated by Toyota's glacial decision-making process and cultural insularity. Those had led to missed opportunities, such as when product planners at headquarters in Japan resisted calls from their U.S. colleagues to build an eight-cylinder pickup truck. Cho is rectifying that deficiency with a vengeance with the San Antonio plant.

Then three years ago, as Ghosn -- "le cost killer" -- was slashing billions at rival Nissan and cutting its supplier ranks in half, Cho had a revelation: If Nissan could do it, Toyota could do it better. The resulting program, called Construction of Cost Competitiveness for the 21st Century, or CCC21, taps into the company's strengths across the board to build cars more efficiently. It's also turning many operations inside out.

No Detail Too Small

Toyota has always valued frugality. It still turns down the heat at company-owned employee dormitories during working hours and labels its photocopy machines with the cost per copy to discourage overuse. But cost-cutting was often a piecemeal affair. With CCC21, Cho set a bold target of slashing prices on all key components for new models by 30%, which meant working with suppliers and Toyota's own staff to ferret out excess. "Previously, we tried to find waste here and there," says Cho. "But now there is a new dimension of proposals coming in."

In implementing CCC21, no detail is too small. For instance, Toyota designers took a close look at the grip handles mounted above the door inside most cars. By working with suppliers, they managed to cut the number of parts in these handles to five from 34, which helped cut procurement costs by 40%. As a plus, the change slashed the time needed for installation by 75% -- to three seconds. "The pressure is on to cut costs at every stage," says Takashi Araki, a project manager at parts maker Aisin Seiki Co.

Just as Cho believes he can get far more out of suppliers, he thinks Toyota can make its workers vastly more productive. This is classic kaizen, but these days it has gone into overdrive. In the middle of the Kentucky plant, for instance, a Kaizen Team of particularly productive employees works in a barracks-like structure. The group's sole job is coming up with ways to save time and money. Georgetown employees, for instance, recommended removing the radiator support base -- the lower jaw of the car -- until the last stage of assembly. That way, workers can step into the engine compartment to install parts instead of having to lean over the front end and risk straining their backs. "We used to have to duck into the car to install something," explains Darryl Ashley, 41, a soft-spoken Kentucky native who joined Toyota nine years ago.

In Cambridge, Ont., Cho is going even further: He's determined to show the world that Toyota can meet its own highest standards of excellence anywhere in its system. It was once company doctrine that Lexus could only be made in Japan. No longer. Production of the RX 330 SUV started in Cambridge on Sept. 26. If the Canadian hands can deliver the same quality as their Japanese counterparts, Toyota will be able to chop shipping costs by shifting Lexus production to the market where the bulk of those cars are sold.

The Japanese bosses put the Canadians through their paces. The 700 workers on the RX 330 line trained for 12 weeks, including stints in Japan for 200 of them. There, the Canadians managed to beat Japanese teams in quality assessment on a mock Lexus line. Cambridge has taken Toyota's focus on poka-yoke, or foolproofing measures, to another level. The plant has introduced "Circle L" stations where workers must double- and triple-check parts that customers have complained about -- anything from glove boxes to suspension systems. "We know that if we can get this right, we may get to build other Lexus models," says Jason Birt, a 28-year-old Lexus line worker.

The Cambridge workers are aided by a radical piece of manufacturing technology being rolled out to Toyota plants worldwide. The system, called the Global Body Line, holds vehicle frames in place while they're being welded, using just one master brace instead of the dozens of separate braces required in a standard factory. No big deal? Perhaps, but the system is half as expensive to install. Analysts say it lets Toyota save 75% of the cost of refitting a production line to build a different car, and it's key to Toyota's ability to make multiple models on a single line. Better yet, the brace increases the rigidity of the car early in production, which boosts the accuracy of welds and makes for a more stable vehicle. "The end results are improved quality, shortened welding lines, reduced capital investment, and less time to launch new vehicles," says Atsushi Niimi, president of Toyota Motor Manufacturing North America.

Cho and his managers are not just reengineering how Toyota makes its cars -- they want to revolutionize how it creates products. With the rise of e-mail and teleconferencing, teams of designers, engineers, product planners, workers, and suppliers rarely all convened in the same place. Under Cho, they're again required to work face to face, in a process Toyota calls obeya -- literally, "big room." This cuts the time it takes to get a car from the drawing board to the showroom. It took only 19 months to develop the 2003 Solara. That's better than 22 months for the latest Sienna minivan, and 26 months for the latest Camry -- well below the industry average of about three years.

If all this sounds like Toyota is riding a powerful growth wave, well, it is. While Cho is as mild-mannered and modest as they come, the revolution he has kicked off is anything but. Toyota is in the midst of a transformative makeover -- and if Cho succeeds, the entire global auto industry is in for one, too. By Brian Bremner and Chester Dawson

With Kathleen Kerwin in Detroit, Christopher Palmeri in Los Angeles, and Paul Magnusson in Washington