Auto-Rivals Toyota's Inbred Survival Instinct

Why top-selling carmaker Toyota will keep challenge Volkswagen at a distance, according to the Handelsblatt's Tokyo correspondent.

Volkswagen’s former patriarch Ferdinand Piëch had a dream, and chief executive Martin Winterkorn was its executor. The dream was that someday Volkswagen would overtake Toyota in profits and cars sold. But as of last week, the automaker based in Wolfsburg can finally shelve that wish.

Hardened by the worldwide financial crisis, a global recall debacle and the Fukushima nuclear disaster, archrival Toyota seems stronger than ever with a new and fabulous balance sheet for 2014. After a three-year, self-imposed pause in growth, the Japanese carmaker is beginning a new era of expansion.

At the end of March 2014, Toyota’s operating profit margin was 10.1 percent – almost four percentage points higher than Volkswagen’s. That should rise further in 2015, despite Toyota calculating for exchange rate losses and lower sales.

Toyota and Volkswagen produce just over 10 million cars annually. But Volkswagen needs almost 600,000 employees to do that, while Toyota employs fewer than 350,000.

By the end of 2015 it will step on the pedal again, with new and more exciting car models, said chief executive Akio Toyoda.

Even if Volkswagen sells a few more cars this year than Toyota, it will only be a brief interruption. Starting in 2016, analysts from Nomura anticipate 3 percent more sales annually for Toyota, not to mention record profits.

The reason is that Mr. Toyoda has been doing something for years that Volkswagen’s CEO, Mr. Winterkorn, has shied away from – mercilessly wringing savings from factories.

In 2012, Mr. Toyoda stopped building new plants until 2016 to radically overhaul production. The quantum leap will be a “simple and lean production line.”

The idea is to be able to plug a factory into the floor of any warehouse – because it won’t have conveyor belts that hang above or are dug into the ground. The new plants will not only cost 40 percent less, but also can be extended or shortened in hours, rather than days or weeks. Toyota would be able to raise or decrease production more quickly and at a lower price.

For Toyota’s rivals, the new concept is an occasion to ponder matters. Naturally, Volkswagen will not stand still. Its famous MQB car-building platform – or Modular Transverse Matrix – should make production more efficient by using a common core of components to produce different models.

But the power couched in Toyota’s collective savings zeal is already reflected in the numbers. Toyota and Volkswagen produce just over 10 million cars annually. But Volkswagen needs almost 600,000 employees to do that, while Toyota employs fewer than 350,000.

The longer Volkswagen doesn’t grab this hot political iron – and address the enormous staffing difference – the more difficult it will be to catch up.

With small improvements alone, Toyota will produce 1.1 million more cars in 2017 than it did in 2011, according to an estimate by Deutsche Bank. By then, with production capacity of 11.1 million cars, Toyota will have plenty of space in factories to counter attacks by Volkswagen. Also, because of its frugal expansion, it will have a lot of money to invest in new models.

German labor unions might grumble about so much passion for cost savings. But as paradoxical as it might seem, Toyota was not motivated first to satisfy shareholders or to be the world’s number-one carmaker. The company’s growth and record rise in profits came instead from a basic fear of bankruptcy.

The seemingly invulnerable industry leader was jarred by the world financial crisis seven years ago. In 12 months it went from record profits of €18 billion to €4 million. Mr. Toyoda, grandson of the company founder, came to power in 2009 to save Toyota’s legacy and, above all, jobs.

Mr. Toyoda wanted to build inexpensive, exciting cars that would stir up feelings in customers, in addition to higher sales and profits.

With his new simplified factories he hopes to make his group so strong and flexible that even in a new global crash Toyota would remain profitable and provide jobs.

A profit margin of under 3 percent, as the Volkswagen brand has had in relatively good times, is too small of a crisis buffer for him.

Mr. Toyoda expressly warned on Friday that Toyota should not allow itself to be blinded by record profits. How strong the company really is would be seen in the next crisis, he said.

This fear for its survival is the most important reason why Toyota will remain number one.

 

Martin Kölling is Handelsblatt's correspondent in Tokyo. To contact him: [email protected]