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Business

Company in focus: For Toyota's president, it's a never-ending quest to find the future

Akio Toyoda is forging unexpected alliances as the world's top carmaker refuses to relax

Akio Toyoda in Tokyo on Sept. 19. (Photo by Wataru Ito)

NAGOYA, Japan On a warm Saturday afternoon in early September, Toyota Motor President Akio Toyoda made a surprise visit at a Corolla auto dealership in Fukushima. Customers quickly pulled out their smartphones and began snapping pictures of the widely recognizable executive.

"He came here right after the earthquake, too," said Yoshiya Sato, president of the dealership, referring to the 2011 earthquake, tsunami and nuclear disaster. "He showed concern about the situation in the region, what with the nuclear accident and all, and not just about our sales."

Toyoda also dropped in on the company's Toyota, Toyopet and Netz dealerships around Fukushima that day, as well as a Mazda Motor dealership and a Gulliver shop, which sells used cars.

The Mazda dealership's interior was black and white, which helped make the bright red new car on display stand out. Gulliver, meanwhile, had a car-sharing service with more than 300 vehicles, including sports cars and imports.

The Toyota chief has made it clear that he has had enough of the pre-packaged world that company officials present to him and is hungry to see the shape of things up close and unfiltered. By leaving the walls of the company's headquarters near Nagoya and making unannounced visits to various parts of the company's kingdom, the 61-year-old executive hopes to get a better look at the shape of the auto giant.

That same thinking underscores Toyota's rush to forge partnerships with automakers such as Mazda and Suzuki Motor, and with companies in other industries, such as Uber Technologies.

MATCHES IN THE MAKING As changes grip the global auto industry in the form of electric vehicles, self-driving cars and car-sharing services, even Toyota is vulnerable.

Toyoda is sounding out other companies as he steers Toyota, which has a workforce of over 364,000 and has sold more than 10 million vehicles a year for the past three years. Even though it has slipped from the top spot, and lagged behind Volkswagen and General Motors in terms of sales volume last year, the Japanese automaker retained its position as the world's top assembler, producing 10.2 million cars in 2016, according to the Paris-based global auto-industry organization OICA.

Toyota's financial condition is robust. The automaker's 7 trillion yen ($62.3 billion) in net cash is comparable to the total public works spending by Japan for its last full fiscal year. Its solid financial foundation has been rewarded by the major credit agencies, with Standard & Poor's and Moody's giving Toyota AA- and Aa3 ratings, respectively, both one notch above the Japanese government.

Cars are inspected at a Toyota factory in Iwate Prefecture, Japan, in December 2016.

The company's consolidated net profit for the year to March 2017 was 1.831 trillion yen, and while that was 20% lower than the previous year, it still exceeds the combined total for Honda Motor, Nissan Motor and Subaru. On Nov. 7, for the current year ending March 2018, Toyota upgraded its net profit forecast to 1.95 trillion yen from 1.75 trillion yen. Thanks mainly to a weaker-than-anticipated yen, the company reversed the originally expected decrease to a gain compared with last year.

Toyota, however, was not immune from the global financial crisis. It suffered a net loss of 436 billion yen during the fiscal year ending in March 2009, and over the following three years the average annual net profit remained at 500 billion yen, hurt by a brand-damaging recall in the U.S. and the Fukushima tragedy. But net profits have been rising since then and reached a record 2.31 trillion yen in the year ended March 2016, helped by a favorable exchange rate.

Toyota has begun to forge deals with other automakers at a faster pace in recent years, even as its own business has leveled off. In 2015, it formed a partnership with Mazda and a year later it made Daihatsu Motor a wholly owned subsidiary.

In February, Toyota and Suzuki agreed to begin "concrete examinations" for cooperation in technology development and the mutual supply of products and components. And just this summer, Toyota and Mazda announced plans for both to acquire 50-billion-yen stakes in each other and use the funds to build a new U.S. plant.

Toyota has established other partnerships, too, with car-sharing startups Uber and Getaround of the U.S. and Grab of Singapore, as well as with companies developing artificial intelligence.

WHAT MAZDA WANTS Toyota's traditional strategy when it comes to alliances had been to wait until the time is ripe. But that was then. Part of the reason for the shift is a new sense of competitive threats.

Toyota executives, including Toyoda, gather with the heads of the company's labor union three times a year to socialize. However, at the last meeting, in August, the executives' discussions took on an urgent tone. They spoke of how rapid changes were shaking the foundations of their business, of how rivals were developing products faster, and how Toyota had become so big that it was becoming harder to reach consensus and act quickly.

Toyoda also made clear that the capital tie-up with Mazda that had been announced just days earlier was not only about joint development of electric vehicles and the construction of a new U.S. factory, but also part of an effort to help shake off Toyota's complacent thinking.

The capital tie-up between Toyota and Mazda has its origins in July 2014, when the companies' leaders met for talks at Mazda's huge test track in western Japan.

Rather than showing off Mazda's high-speed course, President and CEO Masamichi Kogai took Toyoda to the company's standard course, where cars travel at speeds of a mere 30kph.

Two cars were demonstrated that day: the Toyota Prius hybrid and the Mazda 3, known as the Axela in Japan and which incorporates Toyota's hybrid system. The Axela handled acceleration around turns much better than the Prius, impressing Toyota officials and underscoring the high level of Mazda's technology as well as the challenges facing Toyota.

Akio Toyoda and Mazda President Masamichi Kogai bow to each other at a press conference in August. (Photo by Takaki Kashiwabara)

When the Toyota-Mazda capital tie-up was first announced, it was seen as a bailout of sorts for Mazda, which has little production in the U.S. and a dearth of advanced technologies.

But Mazda, "with its limited managerial resources, has the greater ability to develop a variety of models," says Toyota Executive Vice President Shigeki Terashi.

Toyota's primary strength lies in mass producing vehicles. In 2016, the automaker sold 1.26 million Corolla passenger cars and 750,000 of its RAV4 sport utility vehicles worldwide.

While the company is a leader in environmental technologies, such as hybrids and fuel cell cars, its high cost structure -- one of its weaknesses -- is masked by the economies of scale of its mass production.

In the electric-vehicle market, even Tesla of the U.S. sold only 76,000 cars last year. Because there is still little demand for electric vehicles, fuel-cell cars and other next-generation autos, the competition is played out between models that sell only in the tens of thousands of units a year -- a market that does not play to Toyota's strengths. With such small numbers, one Toyota executive admitted, "the only cars that Toyota makes bleed red."

Mazda, meanwhile, whose global sales total just 1.56 million units, has developed a range of nearly 10 models, from small cars to SUVs, and managed a net profit of 93.78 billion yen for the last fiscal year ended in March 2017. It is expected to have a net profit of 100 billion yen this fiscal year.

That Toyota made Daihatsu a wholly owned subsidiary and introduced a system of in-house companies only highlights the fact that Toyota's small-car business is struggling and competitively weak. The group's 2 trillion yen operating profit cloaks deficiencies. The question is whether Toyota can lift the veil and look squarely at its various business segments.

THIRD TIME AROUND Toyoda is keenly aware of his company's history and the foresight his grandfather, Kiichiro Toyoda, showed 80 years ago in founding what is now Toyota Motor.

At the time, Kiichiro Toyoda was running a successful automatic loom manufacturing business founded by his father. But he saw how the introduction of synthetic rayon fibers was gutting the European textile industry and decided to make a bold step into the newly developing automotive industry.

The huge and risky up-front investment in automotive manufacturing drove the company into a financial ditch. In 1953, the year after Kiichiro Toyoda's death, the automobile division accounted for only 10% of total group sales. But by 1960, that percentage had jumped to 50% and became Toyota's main business.

Akio Toyoda recognizes that his company needs to pull off a third business renewal.

With the advent of electric automobiles, the gasoline engine is on its way out, pushed along by government policies. The Netherlands and Norway will ban sales of gasoline-engine cars from 2025. India will do the same in 2030, and France and the U.K. will follow a decade later.

Meanwhile, China is giving preferential regulatory treatment to electric vehicles and boldly envisions a market supporting 15 million vehicles by 2030.

While electric vehicles still face problems -- including supplies of electric power and battery deterioration -- Toyota, with its emphasis on hybrids, is nevertheless being left out.

In the developing field of self-driving cars, Google is test-driving fully autonomous vehicles on public roads using a fleet of 600 cars supplied by Fiat Chrysler Automobiles.

Toyota's Concept-i, an electric vehicle with artificial intelligence, seen at the Tokyo Motor Show on Oct. 25 (Photo by Ken Kobayashi)

At the same time, consumer support has helped ride-sharing come of age, with Uber now operating in more than 60 countries and handling 100 million rides a month.

To remain competitive over the next 10 to 20 years, Toyota will need to invest more than 1 trillion yen each year on research and development.

In an industry faced with technical innovations like never before, Toyota has an opportunity through its alliances to assess its raw power. But it will have to be patient and not expect immediate results from its new partnerships.

Toyota will have to resist the urge to cut losses, like it did in 2016 when it sold off the investment it had made in Tesla in 2010, and it will have to stop resting on its laurels.

The challenge is whether it will be able to do both.

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