JIN-296 -- G.M. in Toyota's Rear-View Mirror: Okuda's Grand Strategy

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Issue No. 296
Thursday November 4, 2004

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@@ VIEWPOINT: G.M. in Toyota's Rear-View Mirror: Okuda's Grand Strategy

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@@ VIEWPOINT: G.M. in Toyota's Rear-View Mirror: Okuda's Grand Strategy

Before the recent spike in exports to China pulled Japan out of recession,
analysts examined the Japanese economy like so many doctors hovering over
a patient looking for signs of life. Now the economy has not only revived,
but one of its captains of industry fears his company's success
could swell employee heads.

Toyota Motors, fueled by unprecedented positive earnings, is pressing
accelerator to floorboard in its drive to expand. It has set global sales
targets of 8.5 million units for 2006 and production on the scale of 10
million units in the following decade. Chairman Hiroshi Okuda has his sights
set on surpassing the Big Three.

“Few automakers will survive until 2010,” opined Okuda at a press
conference in Tokyo on November 1. He presumes, of course, Toyota will be
one of them. Okuda, also chairman of the influential Nippon Keidanren,
rarely explains group strategy. This fact, in combination with the
timing -- the eve of the US Presidential election and concurrent with
Toyota’s semiannual financial settlement of accounts -- gave his words
extra weight. People in the auto industry lent him their ears.

Today the world's automakers manufacture 59 million vehicles annually.
It is forecast that full-scale motorization in such countries as India,
China, and Russia will boost annual production to the 75 million unit
level in the middle of the second decade of the century. Toyota's strategy
is to expand sales in these newly motorized countries while increasing share
in mature markets.

A new North American production base, whose construction was announced
by Okuda, would support the Toyota strategy of grabbing more share in
mature markets. He didn't specify the time or scale of the construction,
but it will be the seventh vehicle plant in North America. Okuda further
stated Toyota would increase its overseas production in the century's second
decade to a level roughly double that of 2003 (2.59 million units). He had,
in reality, laid out a bullish blueprint for global production of 10 million

Toyota sales in the U.S. are forecast to reach the 2 million level in
2004. Toyota is boosting profits in the North American market by concentrating
on the up-scale Lexus, SUVs, and other models with high per-unit profit.
It plans to strengthen this strategy.

The Japanese automotive industry was a source of trade friction with the
U.S until the mid-‘90s. However, Okuda, when asked if the Toyota strategy
would stoke trade friction, replied, “There is no reason for conventional
trade friction to occur. The Big Three are investing in Japan, and
Japanese automakers have formed tie-ups with them...We have forgone
torrent-like exports in favor of production in centers of demand.” Okuda
is proud of Toyota's providing jobs for local people in addition to
its local sourcing of parts.

Toyota, however, is not a juggernaut without weak points. One is a supply
system that has not kept pace with globalization. And Chairman Okuda fears
the rapid improvement in business performance will lead to hubris among
Toyota employees.

If Toyota adheres to its blueprint and doubles overseas production of
vehicles by the second decade of this century, it will pass General Motors
to become the world's largest automaker.

Wall Street approves of Okuda's tenure at Toyota. Over the last 12 months,
according to the New York Times, Toyota's U.S. shares have risen 30 percent,
while G.M.'s have fallen 28 percent. Moreover, Ray Mills, manager of the T.
Rowe Price International Growth and Income fund, notes in the same article,
"Toyota is taking share around the world, so there's no reason to think it
can't continue to do well."

Toyota has reason to beware of hubris.

-- Burritt Sabin

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Written and edited by Burritt Sabin (editors2@japaninc.com)


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