Good, Steady Growth in 2006

Soaring fuel prices, destructive hurricanes and massive flooding have not dampened the enthusiasm of Jim Press, president and chief operating officer of Toyota Motor Sales U.S.A. Inc. “Our sales have set a record pace this year,” he says, anticipating about a 10% increase in calendar 2005 to about 2.24 million Toyota and Lexus models.

Although the forecast for the auto industry in North America as a whole may be gloomy, the outlook he sees for Toyota is “good, steady growth.”

What surprised Press this year was the dramatic shift in U.S. Big Three sales, pulled ahead steeply by special “employee pricing” incentives, then plummeting without them. Another surprise: soaring interest in models offering good mileage.

“The U.S. market is responding to new products as never before,” says Press. “A good product yesterday may not have that much appeal today, so we have four new models coming out between now and next April.”

Toyota's growth strategy in North America is 3-pronged, based on hybrids, fullsize pickup trucks and the youth market.

“There will be 64 million new drivers in the U.S. this decade,” he says. “That's a sizable opportunity, and Scion is our brand to catch these trendsetters,” ranging from new drivers to 35-year-olds.

Factories in Japan are working overtime to satisfy demand. Scion sales this year may reach 140,000, up from 98,541 a year ago. Yet the three youth-oriented models — plus a possible fourth concept still in the works — are not expected to become high-volume sellers.

To retain exclusivity, Press expects annual Scion sales to peak at about 150,000.

Backing up Scion in the youth segment will be two new models: the 3-door Yaris already popular in Europe (replacing the slow-selling Echo) and the retro FJ Cruiser. The Tacoma pickup also is attracting youthful buyers. It has 20% of the compact pickup truck market. Sales so far this year are running 6% ahead of last year and headed for 157,000 units.

Toyota is aiming to become a major pickup maker. Sales of the Tundra, its largest pickup, this year are expected to rise 8% to 9% above the 111,354 sold in 2004 and are expected to continue their surge.

To those who carp the company does not have a truly fullsize pickup and is not a serious player, Press says, “Wait until next year.”

Capacity already has been increased by 50,000 to 200,000 units even before the new truck plant in San Antonio is completed. Press promises “the new Tundra will have a very big engine that is very fuel efficient.” He declines to provide details about the size and efficiency of that engine but foresees Tundra sales doubling in the first full year after ramp-up in late 2006.

The biggest engine available in the current Tundra is a 4.7L V-8.

Toyota, so far, is the runaway world leader in hybrid-electric vehicles (HEVs) and determined to maintain its dominance.

The Highlander HEV and Lexus RX 400h cross/utility vehicles have joined the HEV lineup alongside the Prius. Toyota expects total HEV sales to hit 140,000 in the U.S. this year, almost triple the 50,000 sold in 2004, all imported from Japan.

Adding to the HEV offerings will be the introduction of a Lexus GS 450h next spring and a U.S.-built Camry HEV will follow later. Toyota predicts its HEV sales could more than double to 300,000 in 2006. Eight more HEVs are under development.

The parent company's new president, Katsuaki Watanabe, aims to have hybrid powertrains in all Toyota models, including SUVs and pickups. Within the next decade, Watanabe sees the auto maker's global HEV sales rising to 1 million units annually, with the U.S. accounting for 60%.

Another significant trend, says Press, is the booming demand for luxury vehicles priced between $30,000 and $55,000. Sales have doubled in the last 10 years and are expected to jump another 39% by 2009, spurred by baby boomers enjoying their peak earning years, he says.

Press is impressed as well by the sales potential of CUVs, what he calls “station wagons with steroids.” Opinions about definitions as well as the breadth and width of this market segment vary, but Toyota offers a growing array of CUVs, from the RAV4 and the Highlander to the RX 330 and RX 400h.

On the horizon, Press perceives a new category of vehicle.

“If you merge a Camry (sedan), Sienna (minivan) and 4Runner (SUV), you have a new vehicle like a large sedan, with all-wheel-drive capability, a high step-in point like an SUV and maybe the utility of a vehicle that has three rows of seats, some of which fold down for storage.”

Press dismisses rumors Toyota will import a small car from China, explaining, “We plan to build more cars here, and we're increasing our capacity.”

By 2008, when the newest plant comes on line in Woodstock, Ont., Canada, Toyota says its production capacity in North America will expand to 1.81 million units and its investment in North America will exceed $17 billion.

Included will be seven assembly plants — one in Mexico, two in Canada and four in the U.S. There is speculation that an eighth will be necessary, and it might be built in Michigan, home of the United Auto Workers union. The company also reportedly is narrowing down a list of possible sites for a new engine and transmission plant it wants to build in the next several years.

Choosing the location of a greenfield plant is a time-consuming, delicate dance among many suitors. “I'm not sure where an eighth North American plant will be built, if we need one, but there's no reason not to consider Michigan as a site,” Press says.

In the unofficial competition with General Motors Corp. to be the world's largest vehicle producer, Toyota executives are running scared over the dangers of complacency.

“Our biggest problem is to make sure that, from the inside out, we stay hungry,” Press says.

With the growth Toyota is experiencing, he identifies another problem: maintaining dealer service capability.

“In the next three years, our dealers are spending $1.8 billion dollars of their own money to get the kind of capacity necessary to sustain customer satisfaction,” he says. “Everyone can copy our products, but they can't replicate the partnership we have with our dealers. They are the No.1 reason for our success.”

But not even Toyota's well-oiled machine is running perfectly. In October, it announced the recall of 1.4 million cars globally — its biggest recall ever — because of problems with headlight switches. It also announced a voluntary recall of 75,000 '04 and '05 Prius HEVs because a software glitch caused some to stall or shut down while driving at highway speeds.

Toyota's HEVs also are coming under fire for not living up to fuel economy expectations in real-world driving. Nevertheless, these issues have not put a dent in sales.

Asked whether there is a politically correct ceiling on U.S. market share for Japanese brands, perhaps “under 40%” as recently suggested by Honda Motor Co. Ltd. President Takeo Fukui, Press replied: “I don't believe there's a magic number. The reality is right now, while some other companies may have excess capacity, Toyota, Nissan (Motor Co. Ltd.) and Honda have excess demand. I don't think you can put a limit on how many American jobs we should provide.”

Nor does he see China or India, the world's most populous countries, supplanting the U.S. any time soon as Toyota's biggest market and the major source of the auto maker's operating profits — 70% according to some estimates.

“The golden age of the automobile business in the U.S. is just around the corner,” Press says. The growth rate of the U.S. population, both from immigration and a high birth rate, is five times that of China. Incomes are growing, too, Press adds.

“In the next 10 years, the purchasing power of the youth market will be bigger than that of the baby boomers,” he says. “And in the not-too-distant future, we will see industry sales here of 20 million vehicles per year.”