toyota's comeback kid - fortune management

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Toyota president Akio Toyoda is also a certified tes

driver.

Akio Toyoda: Toyota's comeback kid

February 9, 2012: 5:00 AM ET

The grandson of the founder has the carmaker back on track after a spell of bad luc

and breakdowns.

ByAlex Taylor III, senior editor-at-large

FORTUNE -- When the final tally was made for

2011, Toyota Motor (TM), formerly the world's

largest automaker, slipped to third place in pro-

duction behind General Motors (GM) and Volk-

swagen. It's not surprising: Toyota has endured astring of calamities over the past three years --

natural and man-made -- that would make even

the company's famous paranoia seem like sunny

optimism. The latest is endaka, the strong yen that

causes everything that Toyota manufactures in

Japan to be more expensive and undermines its

profitability. A November issue of Automotive

News predicted "more misery" for Toyota as"sales slip, floods delay, shoppers stray."

At the head of the company all this time has been

a young president who was effectively born into

the job and has little experience in crisis manage-

ment: Akio Toyoda, the grandson of the compa-

ny's founder. For a decade, while the automaker

was being run by professional managers, Akiorose up the corporate ladder without making

much of a mark. (For the sake of clarity, we'll use his first name, pronounced a-KEY-

in this story.) Thrust into the presidency in 2009 , he immediately had to cope with

global recession, massive recalls, and a deadly tsunami. Auto production plummete

and at the same time Toyota lost its most important competitive advantage: its reput


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tion for exceptional quality. Americans saw Akio apologizing before Congress and lat

tearing up in a YouTube video. U.S. market share tumbled. After reaching 18.3% at th

end in 2009, it fell all the way to 12.9% for 2011. Emboldened by the recall crisis, com

petitors spread word that Toyota, once considered the unstoppable force of the autom

tive world, had been reduced to the status of also-ran.

But I had been hearing different things -- that Toyota had coped remarkably well wi

the tsunami , and that the recall crisis had served as a wake-up call for a compa

grown complacent. With a big boost from its new president, who took an intensely pe

sonal interest in its products, it was connecting with customers again.

The University of Michigan's Jeffrey Liker, a leading Toyota scholar, told me, "Akio h

reenergized the company. He's promised to be the closest president ever to the gem

[where the real work is happening]."

Toyota's big product offensive

The Toyoda scion was traveling to the U.S. more frequently to fire up dealers and ha

taken charge personally of the sagging Lexus brand. Independent studies were begi

ning to show that Toyota cars were regaining their reputation for quality and valu

With 19 new or redesigned models coming in calendar 2012 -- an exceptionally lar

number -- including a big expansion of the Prius hybrid line, the Toyota steamroll

seemed ready to regain its old momentum.

One of Toyota's guiding principles in times of crisis is genchi genbutsu , or "go and see

So to find out for myself what the changes meant for a company I had been covering fo

more than 20 years, I interviewed Toyota executives in California and New York, an

then flew to Japan.

Of all the woes Toyota has suffered, none has stung like the recall crisis of 2009-10. I

nited by reports of horrific accidents, some fatal, caused by cars that ran out of contr

and couldn't be braked to a stop, it eventually involved the recall more than 8 millio

Toyotas and Lexuses -- equivalent to a year's production. Independent investigation

turned up no mechanical or electronic defects -- only some misplaced floor mats an

sticky accelerator pedals to go along with driver error -- but exposed major flaws in th

corporate culture. Toyota, it turned out, was still being managed the way it had been


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2012 Lexus LFA: An ultra-exotic two-seater,

the $375,000 sports car embodies Toyota's new,

more aggressive attitude.

the 1950s: Every decision was tightly controlled in Japan; the U.S. was treated like a va

sal state. When American managers found defects in vehicles, they had to follow a tort

ous bureaucratic process to register their complaints in Japan, where they were ofte

met with skepticism and defensiveness. As it had long feared, Toyota had succumbed

"big-company disease."

Consumer confidence in its cars plummeted, and Toyota's higher-ups were shaken. "W

learned we are not so ahead of competitors as we might have thought," Yoshimi Inab

who heads sales and administration in the U.S., told me. "We were a little complacen

Toyota began to develop quicker reflexes. When a defect was identified in a Lexu

SUV, Toyota organized a recall in just eight days. But it balked at delegating more exe

utive authority to America. Rather than designate one person to head all of its Nor

American operations, it maintained its traditional silo structure. Its giant sales operatio

in Southern California, and its equally large manufacturing complex headquartered Kentucky, continued reporting to different executives in Japan.

Just as it was trying to put the recall crisis behind

the new management was tested again in Marc

when an earthquake and massive tidal wave disrup

ed production. The tsunami damaged plants in th

north of Japan, disrupting the supply of over 5

parts, and Toyota couldn't find replacements. Its firstier, just-in-time suppliers near Toyota City were n

directly affected, but up north were second- and thir

tier suppliers that Toyota did not know much about.

Akio assembled general managers of departmen

such as body engineering and powertrain in Japa

and took the unusual step of instructing them to r

store production and not waste time reporting uward. They sent two-man teams of engineers to vis

each supplier plant and to identify and locate backu

parts until the suppliers were running again. By Apr

unavailable parts were down to 150, and by May, according to Liker's count, all but

of the 500 parts were available. Toyota solved the problems in half the time expecte


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but Liker figures the company still lost 800,000 production units -- 10% of its annual ou

put. Plans to make up most of the shortfall through overtime work were pushed back b

October floods in Thailand that affected about 100 suppliers. As a result, inventories

North America won't be completely replenished until March.

As I fidgeted through a 14-hour flight to Japan in a well-worn Boeing 777, I wonderewhat I would find. I figured Toyota had gotten some bad breaks, but I wondered abou

how committed this ponderous and bureaucratic company was to change.

After overnighting in Tokyo, I moved on to Nagoya, Japan's third-largest city -- on

hour and 40 minutes away by Shinkansen bullet train -- where Toyota occupies sever

office buildings. I met with executive vice president Yukitoshi Funo, one of Akio's ke

advisers. Funo, who holds an MBA from Columbia and formerly oversaw U.S. sale

told me there had been an upheaval at Toyota. "[Akio] has dramatically changed thway the company is managed," he said through an interpreter. "There are two major p

lars to how he manages: First, be fast; and second, be flexible. Usually Japanese comp

nies are based on a 'bottom up' management style, which slows down the pace of de

sion-making. In looking at other companies, we realized the need for a certain level

'top down' to move quickly."

Akio shrank the board of directors by half and took out layers of management. Funo r

vealed a more significant development: Akio has begun meeting informally with hfive top advisers every Tuesday morning to review the company's operations. The

work so closely together that Funo called it "pit work" management. No agendas

written reports are allowed, and decisions are made on the spot. "Basically, the six pe

ple have a very strong personal bond. So it's not a very emotional or heated debate

we have a very good understanding among each other." They can move quickly. Aft

Akio visited Tesla Motors (TSLA) in California in 2010, the Tuesday morning meetin

signed off on a $50 million investment in the electric-car maker. Subsequently Toyo

agreed to buy $60 million worth of Tesla batteries to power its all-electric RAV crossover.

Funo said Akio has made another fundamental change in the way Toyota is manage

Traditionally, Toyota has rotated its top executives, so a sales specialist could be a

signed to purchasing, or a product engineer to manufacturing. Now they stay with


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their specialties so that they can leverage their experience. "It's very American," sa

Funo. "I'm not really sure how what he learned at Babson [the Boston college whe

Akio studied business] has affected how he is running the company. But he is not typ

cal Japanese management." That turned out to be an understatement.

The next day I made the 40-minute car ride to Toyota City to meet with Takeshi Uchiymada, Toyota's top engineer and another participant in the Tuesday morning meeting

In 1993, Uchiyamada accepted the challenge of Toyota's elders to develop a car wit

50%-better fuel economy; today he's known as the father of the Prius. More than 3 m

lion of the hybrids have been sold since 1997, and it has been expanded into a sub-bran

with additional models.

Akio is pushing Toyota to make "always better cars," and Uchiyamada is the point ma

For years enthusiasts have complained that Toyota treats cars like transportation appances and allows companies such as Hyundai to seize design leadership. Uchiyamad

says the critics were right. He told me: "Basically, Toyota's growth had been unde

pinned by QDR [quality, dependability, reliability] that was very high compared wi

competitors'. However, since the Lehman shock [in 2008], large-scale sales of Toyota v

hicles have decelerated. Compared with past practices, we need to make products th

are even more attractive. We have stepped up our efforts emphasizing design, hig

quality of the interiors."

Appearances count, but Uchiyamada has no intention of allowing Toyota to lose i

green credentials either. This spring Toyota will launch the plug-in Prius, a $32,000 c

that he believes is the best short-term solution to freeing the automobile from gasolin

Unlike conventional hybrids, the plug-in has a large battery that can power the car f

up to 15 miles on electricity alone and be recharged at home. "I think the plug-in is th

most practical technology of the future that will see great potential for mass dissemin

tion. It can be recognized as an electric vehicle without having to worry about runnin

out of battery. If the battery runs out, the car can be driven as a normal hybrid, so thamount of battery mounted in the vehicle can be minimized." I asked him how he com

pared the Prius to the much-publicized Chevrolet Volt, and he gave me a surprising

candid answer. "The Volt has a longer driving range in EV mode, but for that they hav

greater battery volume. After the battery runs out, the Volt's power performance dete

orates when driven by a gasoline engine. So I believe the cost of the Volt will be high


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Akio Toyoda at the Toyota Gazoo Racing Festival at the Fuji

Speedway in Japan

than the Prius plug-in."

Akio Toyoda's Toyota timeline

When my interview with Uchimayada concluded, it was time for the meeting wi

Akio. It was to be held in a characteristically Japanese setting: a meeting hall in a priva

park near Toyota headquarters, where the company had reassembled the former re

dence of Kiichiro Toyoda, Akio's grandfather. Akio bounded into the interview roo

with the energy of a TV game show host, clearly more confident and relaxed than th

man I had met 2 years earlier, just after he had become president. Seated at a tab

across from me, he took questions in English and watched me intently while the inte

preter translated his answers from Japanese.

Unlike his gray-suited, office-bound pre-

decessors, Akio, 55, is more comfortable

in a fire-resistant Nomex suit and crash

helmet than he is in a coat and tie. A cer-

tified test driver, he evaluates as many as

200 Toyotas and competitive vehicles an-

nually, and appears happiest when he's

behind the wheel. After speaking at a

U.S. dealer meeting in Las Vegas lastApril, Akio unwound by driving an 850-

horsepower NASCAR stock car at a near-

by speedway. His passion, he says, has

made it easy for him to settle into his job

as president. He explained, "I was very glad to hear from my father [honorary chairma

Soichiro Toyoda], 'I leave everything in your hands.' Of course, over the past two yea

the environment has seen dramatic change, but one thing I maintained, which I thin

protected me from these hardships, is that I love cars, and I kept saying to people costantly that we need to come up with always better cars. Whenever a new car

launched I have to drive it myself. So by trying out as many vehicles as possible, I thin

I can compare Toyota cars with comparable vehicles, and by driving directly I can u

derstand the strategic direction of the company."


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Much of his wheel time recently has been in a Lexus. Although it is intended to be

global brand, the Lexus has never caught on in Europe, and its aging designs we

turning off U.S. buyers. Akio bypassed several layers of management to take direct r

sponsibility for the brand and invested hours fine-tuning the ride and handling of th

latest model, the 2013 GS. To give Lexus a sportier image, he also championed the deve

opment ofthe $375,000 LFA, a carbon fiber supercar, and personally tested the car oGermany's famed Nrburgring, where speeds top 180 mph.

"It has a limited production run of 500 units," he said of the LFA. "It seems to be a ve

secret sauce."

Does it make sense for the head of a company as large as Toyota to spend so much tim

evaluating its products and micromanaging small details? Well, it worked for Stev

Jobs , and Akio believes it is an essential component of his leadership. "As you knoour cars are evaluated as good, not emotional," he said. "I think it's possible for Toyo

to improve upon the emotion of cars. There are capable engineers who are about to d

that. So what I think is needed is to really have a champion to encourage people to tak

action on that, to serve as a leader to address any problems after a challenge."

The smooth functioning of his Tuesday morning group makes it possible for Akio

spend more time with product development. "Actually I was very uncomfortable since

was a little boy with so-called yes-men who were just obedient to what I said. These fivexecutive vice presidents who support me are experts in their respective areas, with e

perience of more than 40 years. I am the ultimate person in charge of this compan

[but] I found it is very important to ask them for their views."

One topic on which advice is plentiful is how to deal with the strong yen, which has a

preciated 35% since 2007 and is at a 65-year high. At 77 to the dollar, the currency co

Toyota $1 billion in profit during the quarter ended Sept. 30; Toyota needs an exchang

rate of 80 yen to the dollar to remain profitable. It is working with its suppliers to reducosts, but the currency imbalance threatens the future shape of the company. Alread

two-thirds of Toyota production comes from overseas, compared with half as recent

as 2006. Akio has pledged to maintain a manufacturing base in Japan with a capacity

3 million cars to protect parts makers and its skilled-labor supply, but Funo said th

number "is not carved in stone" and that Toyota may shift more production to the U.S.


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I had more questions to ask Akio, but my hourlong time slot had expired. He staye

around to shake hands and pose for pictures. Then he ducked into a black LFA an

drove off, the sound of the exhaust growling in his wake.

Most of my concerns about Toyota had been addressed. No company is better at th

nuts and bolts of the car business, but years of success had hardened some ill-advisepractices that are now being discarded. Akio had personally taken on its most persisten

shortcoming -- an inability to connect emotionally with customers through its product

- and he was making progress. Toyota does not make a practice of showing future mo

els to outsiders, but I learned from dealers that the 2013 Avalon sedan, due next sprin

will be something special in style and appeal. If subsequent models achieve a simil

high standard, then Akio's mantra of "always better cars" may join the Toyota lexico

alongsidegenchi genbutsu.

This article is from the February 27, 2012 issue ofFortune.

toyota's comeback kid - fortune management

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