TOYOTA CITY — The untold story of how — and why — Toyota Motor Corp. created the all-new Corolla is an eye-opener.

By 1997, when initial work on the 2000 model began, the company faced what then-President Hiroshi Okuda described starkly as a “crisis,” which left Toyota executives with no choice but gut-wrenching change.

An aging customer base for the company's perennial best-seller plus an imprecise and bloated development cost structure forced them to rethink their basic approach to creating a new model. And compounding the sense of crisis in Toyota City headquarters was a related problem: finding another place in the lineup for the Corolla as the new Vitz/Yaris family of cars was being readied to take over the entry segment in major world markets.

“We had to break away from the existing brand and introduce a totally new concept,” explains Project Manager Takeshi Yoshida. “Except for the model name, everything else was changed.” And improved.

By offering what he calls “new century value,” Mr. Yoshida hopes the 2000 Corolla sedan and all-new Fielder wagon will define Toyota as effectively in the 21st century as the marque did during the final three decades of the 20th century.

Analysts claim the company hit the mark. “It's hard to imagine Toyota can sell that model at such a low price,” says Koji Endo, director of equity research for Credit Suisse First Boston Securities in Tokyo. Kunihiko Shiohara, vice president for Goldman Sachs (Japan), adds: “The new Corolla is superior to anything built in the U.S. and compares favorably with the Volkswagen Golf in Europe.”

A complete Corolla overhaul was overdue. Critics complained that the previous model was lackluster and cheap, born during a cost-cutting frenzy in the mid-1990s when the dollar tumbled to historic lows, putting pressure on profit margins for exports. Toyota cut costs by “decontenting” the car and downgrading equipment, a recipe for trouble in trend-conscious Japan.

Moreover, the average Corolla buyer, 25 years old when the first model was introduced in 1966, had aged to 45. And young Japanese tended to dismiss the car — and the company — as old and stodgy.

“We've been weak in this segment,” says Toyota Senior Managing Director Akihiko Saito, Mr. Yoshida's boss and project manager for the Corolla in 1988 and again in 1992 (see sidebar). Mr. Saito, now head of product planning, adds that “this weakness was behind our decision to launch such new, “youth”-oriented models as the Vitz, Will Vi, Funcargo and Bb and set up the “Netz” sales channel.” And phase out the Tercel, Sprinter, Corolla II and Corsa.

In its first 23 months, Vitz sales topped 300,000 units. In fact, in the first half of Japan's current fiscal year (ending Sept. 30), the Vitz dethroned the Corolla, the only setback for the market leader in more than 30 years. Since September, however, the redesigned Corolla has blown by the competition, Vitz included, to reclaim first place. In calendar 2000, the Corolla edged ahead of the Vitz in the final month of the year to claim the top model position for the 32nd consecutive year: Corolla sales: 162,870 units; Vitz sales 160,731 units.

Mr. Yoshida's team was challenged to design a new car with enough pizzazz to attract men and women in their early 20s as well as provide the space and comfort expected by young parents and loyal customers in the 45- to 50-year-old range who take reliability and ease-of-use for granted — all within strict cost restraints permitting attractive prices.

“The most difficult part of the process was to find a balance between cost and performance and come up with a car priced at ¥1.5 million ($13,600) that looked like a ¥1.7 million ($15,500) model,” says Mr. Yoshida. Prices for the new series range from ¥1.1 million ($10,100) for the 1.3L base sedan to ¥2.1 million ($19,100) for the upscale “Luxel.” And for that ¥2.1 million ($19,100) comes a car with 4-wheel-drive, aluminum wheels, a reconfigured and highly responsive 1.8L low-emission engine, tilt-and-slide sunroof, remote door lock system, CD/casette player with six speakers, a split-screen navigation system and more interior space than any other car in its class.

Even the 1.3L base model represents a major step up from its predecessor with dual front air bags, antilock brakes, electronically controlled side mirrors, UV cut glass, a remote door lock system and an improved HVAC system all standard.

Adding value while improving the bottom line posed the greatest challenge to the development team, and industry analysts say they succeeded, doubling profit margins on an ex-factory basis to around ¥225,000 ($2,000).

To meet objectives, Mr. Yoshida's team benchmarked BMW and Audi while borrowing heavily from Toyota's sporty Celica coupe platform to enhance performance. Five existing engines were modified, all with continuously variable valve timing mechanisms, electronic controls and new intake tracks, and electronically controlled transmissions were added to automatic models. The result: improved fuel economy and lower emissions.

To offset more expensive materials used in luxury cars, Toyota developers improved fit and finish tolerances by an average 50%. Inside the car, gaps between the instrument panel and center cluster, audio system and air-conditioner vents were narrowed to a super-tight 0.04 ins. (1 mm). Headroom was raised 2.6 ins. (65 mm) while rear leg space was extended by 2.8 ins. (70 mm).

Outside tolerances are equally stringent. Examples: Gaps between hood and grille and hood and headlights were narrowed from 0.3 ins (8 mm) to 0.22 ins (5.5 mm). The distance between the front bumper and fenders was cut to a negligible 0.04 ins. (1 mm). Meanwhile, windows were fitted with water-repellant glass, and electronically controlled side mirrors were installed on front doors.

But the real key to the program's success — or failure — was changes made in the vehicle's cost structure. Building on lessons learned from the launch of the compact Vitz, Mr. Yoshida's team focused initially on cutting “variable costs” — materials, labor and other expenditures that tend to go up or down in proportion to output.

Next the team then addressed the more complex issue of “horizontal costs.” Mr. Yoshida explains that “if we hoped to eliminate ALL waste — in materials, manufacturing and distribution — it was absolutely essential to break down walls and improve communications between (corporate) divisions. For Toyota, this was a totally new approach amounting to structural reform.”

Merrill Lynch Japan analyst Takaki Nakanishi adds, “The basic concept was to concentrate on ‘absolute value,’ which includes everything from R&D costs and capital expenditure to depreciation and sales.” To establish this new structure, Mr. Yoshida's development team created an EQ Committee — “E” for Corolla and “Q” for Quality. Joining the team were key staff from design, engineering, purchasing, production and sales, together with representatives from Tier 1 suppliers. Thousands were involved at some point throughout the development process, and in addition, to keep the sales force informed, 2,800 dealership heads from around Japan were invited to seven Toyota test tracks to see and hear all about the new Corolla.

The result was significant savings in development costs for both Toyota and component manufacturers like Denso Corp., Aisin Seiki Corp. and Yazaki Corp. And by uniting suppliers with product and plant engineering groups inside Toyota, the automaker held down investment in new tooling and facilities at the domestic production sites for the car — the Takaoka plant and the Higashi Fuji plant of Kanto Auto Works. Suppliers in turn reported smaller capital expenditure bills.

Facing a similar challenge in the mid-1990s when planning the current-generation Accord, Honda Motor Co. Ltd. showed the way by matching “hard points” on the body of the outgoing model — including A, B and C pillars, side members and suspension pickup points — with those of the new. These moves yielded a dramatic savings in plant and equipment investment for a three-continent model launch from autumn 1997 to summer 1998.

With suppliers, Toyota realized savings of 30% and more for critical components such as engines, transmissions, wire harnesses and steering wheels. Part of these gains were achieved through greater use of modules for front and rear lighting; cockpit, door and ceiling assemblies; and the compact heating, ventilating and air-conditioning (HVAC) system.

Denso, which supplies the instrument cluster, HVAC system and more than 50 smaller assemblies and parts, implemented significant cost-reduction measures of its own. For instance, the top-ranked Japanese supplier has cut air-conditioner variations for more than 40 Toyota models produced in Japan to six. And the Corolla unit was made lighter and smaller — thus cheaper — than its predecessor.

By reducing the thickness and number of wires, Yazaki, the main wire harness supplier, cut prices by an estimated 25%.

Analysts estimate that improved design and expanded use of modules permitted a 15% reduction in total parts for the new Corolla.

“We looked for value enhancement, not just how much costs were cut, and always keep in mind that the Corolla is a ‘1 million per year’ model,” says Mr. Yoshida, adding proudly that some 300 engineers were involved at the peak stage and, despite all the changes, the team succeeded in improving handling and stability while lowering overall weight.

Toyota plans as many as 10 derivatives from the Corolla platform, including a new passenger van and sport/utility vehicle, both 3- and 5-door versions, and a surprise or two still in the early planning stages. When these join the Fielder wagon and sedan, analysts concur with Mr. Yoshida that global output for the new Corolla family will reach 1 million units per year.

In fact, that level is already in sight. Since the launch in late August, Toyota has begun exporting the new Corolla to Hong Kong, Singapore and the Middle East and eventually plans exports to more than 100 countries on six continents, all of the markets in which the previous model is sold. In addition, says Mr. Yoshida, the new car will be built in 14 different countries, including the United States — where production is most likely to start at New United Motor Mfg. Inc. (NUMMI) some time in the next 12 to 14 months.

And if all goes well, the best-selling car of the 20th century — with cumulative sales of 25 million units and counting — is likely to remain in the forefront in the 21st century.