The New Dude on the Road

By Daren Fonda

Had you attended a Texas state fair last year, you might have noticed a group of Japanese men dressed in jeans and boots, gazing at the sea of pickup trucks in the parking area. The men were from Toyota, which has been trying with scant success for years to persuade Americans to dump their Ford and Chevy pickups--the cowboy Cadillacs of the heartland--for a Toyota. Spending hours observing folks as they tailgated, hitched up horse trailers and hauled everything from plywood to goat sheds, the Japanese took copious notes, even if they still couldn't quite understand the American lovefest with the pickup. "There was a level of amazement," says Jim Press, chief operating officer of Toyota Motor Sales U.S.A.

Picture a Toyota engineer in a Stetson, munching on a corn dog, and you'll get a sense of how the company sees its future. Toyota is constructing its sixth North American assembly plant, in the heart of truck country just outside San Antonio, Texas, aiming to build the next generation of its full-size Tundra pickup there and--if all goes as planned--finally conquer the U.S. truck market. Achieving that feat would mark a milestone for Toyota in its quest to become the great American car company and would follow its conquest of virtually every other market segment, from compact cars to luxury SUVs (by way of Lexus). Indeed, the Tundra was considered so important that Toyota's entire executive design-approval committee, more than 30 members, flew to the U.S. to sign off on the final design.

Yet Toyota's truck plan illustrates not only the company's relentless drive but also the risks that accompany it. The Tundra is part of a massive increase in Toyota's global production that will have far-reaching repercussions for the firm's future and that of the entire U.S. auto industry. The history of the car business shows that bigger isn't always better: Toyota's top two rivals, Ford and General Motors, have struggled to make money despite leading in market share. Toyota, in contrast, has reeled in cash by controlling costs and focusing on vehicle quality. So is the company, in piling on capacity, inadvertently embracing a strategy that has proved perilous for its competitors? And how will the rest of the industry be affected by its initiatives? For Detroit automakers--which rely on pickups as a critical source of profit--the flood of Toyota metal spells only trouble. As Toyota president Fujio Cho told TIME, "We're expanding very rapidly." That is a diplomatic way of saying: Get ready for a showdown.

No question, Toyota's rise is the envy of the auto business. Since 1999, Toyota's U.S. market share has grown from 10.6% to 14.7%. The company makes America's best-selling sedan, the Camry. Its fuel-sipping hybrids, like the Prius, are the hottest cars on the market, commanding premiums and long waiting lists. The folks who snickered when Toyota launched a youth brand, Scion, by importing funky compacts from Japan like the xB, are racing to develop their own hipster cars. Toyota is doing a bang-up job financially, forecast to post profits of $10.8 billion in its 2005 fiscal year, according to Prudential Equity Group. The company is gunning for 15% of the global market by 2010, which would most likely vault Toyota past GM as the world's largest automaker.

GM's story is laced with warnings for its fast-rising rival. While GM is still the world's biggest automaker, its North American market share has slid for years despite costly incentive programs. Saddled with excess capacity and sluggish sales of all-new cars like the Pontiac G6, the company recently forecast a first-quarter loss of nearly $850 million. Highly profitable, full-size SUVs like the Chevy Tahoe risked looking like beached whales as record gas prices crimp sales and consumers shift to smaller models and hybrids made by rivals. (Until recently, GM dismissed passenger-car hybrids as a lousy business, though light-truck hybrids are in the works for 2007.) GM's credit rating teeters a notch above junk, and rumors of a bankruptcy filing, which GM officials persistently deny, sent its stock sliding to a 12-year-low closing price last week.

Perhaps most frustrating, GM's American factories are now nearly as productive as Toyota's U.S. plants, yet Toyota has the advantage of not having to pay health-care bills for a small city of retirees, population 340,000. One GM worker supports 2.65 retirees, adding $1,100 in "legacy" costs to each American-made vehicle, says Sean McAlinden, an economist at the Center for Automotive Research. While the Japanese government pays for most Toyota retirees in Japan, GM shelled out $3.6 billion to pay for retiree health care just last year. GM's turnaround plan is a high-wire act: pushing up the launch of new pickups and SUVs, reducing profit-killing incentives, cutting costs and pressing its unionized work force to share more of GM's health-insurance bill

The peril for Toyota is that it repeats GM's mistakes by overexpanding. With new plants in far-flung places from China to the Czech Republic, Toyota has added capacity for an additional 1.5 million vehicles a year by 2006, bringing annual production to 8.5 million vehicles. That's a lot of metal to move at a profit, and it's only getting tougher. Rising commodity and energy prices are increasing manufacturing costs. And looming interest-rate hikes, the bane of new-car sales, may make even today's volume tough to sustain.

With more factories around the world, Toyota has had to abandon its distinctive one-on-one training methods, prompting questions about whether the company can maintain its vaunted production standards. In the old days, Japanese manufacturing gurus schooled in the legendary Toyota production system would move overseas and practically live in a new plant for a few years. Classroom training is now the rule. And for the first time, Toyota's U.S. plants--not factories in Japan--are acting as the "mother ships" for new factories. A Georgetown, Ky., plant shepherded a new truck plant in Mexico, and one in Indiana is taking charge of training for the San Antonio plant. Seizo Okamoto, president of the Indiana plant, candidly calls the added responsibility "a strain on resources."

At the same time, Toyota is losing ground in the vehicle-reliability race. Hyundai last year nudged past Toyota (excluding Lexus) in J.D. Power & Associates' initial-quality survey. GM has narrowed the gap with models like the Buick Century. Even the indomitable Camry has slipped, dropping from first place in 2000 to eighth in 2004, as consumers report fewer problems with competing models. (Camry complaints aren't appreciably higher.)

Indeed, for all Toyota's strengths, the company needs a truck hit in the U.S. to offset weaker prospects in other areas. While Toyota is expanding rapidly in Europe and China, those sales tend to be concentrated in the compact-car segment, in which profit margins are low. In Japan, where Toyota intends to launch its Lexus brand in August, the company may have a hard time expanding market share, already at 44%. The dollar's slump against the yen, meanwhile, makes Japanese exports more expensive.

Piece it together, and you'll get an idea of why Toyota is moving to Texas. The state anted up $133 million to lure the new state-of-the-art plant, which when it lights up late next year will feature a highly flexible system for producing eight different models on a single line. Toyota aims to produce 150,000 Tundras annually there, and analysts expect a second line eventually for other models. Says Rob Hinchliffe of UBS: "They're very methodical."

Because Texans buy more pickups per capita than anyone else, Toyota is banking on a core group of buyers in its backyard. The company has started the courting, launching a limited-edition Tundra co-branded with cowboy-boot maker Lucchese and slapping the Toyota name on the Houston Rockets basketball arena. Traditionally, Toyota has done best in cities and on the coasts, selling Corollas and Camrys to baby boomers and Lexuses to well-off urbanites. On the West Coast, Toyota's share is 16%, double its share in the Midwest and the South. Yet Toyota can no longer count on that base since boomers are heading for retirement homes and Hyundai and Kia are coming on strong with compelling models at bargain prices.

Conquering the truck market won't be easy either, in part for cultural reasons. Pickup country is perhaps the last auto segment in which patriotic shopping habits prevail. Despite years of knocking at the market, Toyota sold just 107,000 Tundras in the U.S. last year, while Ford sold 916,000 F-Series trucks. Although Nissan and Honda have joined Toyota in the truck market, heavy investment has made Detroit's pickups more competitive than its cars. And Detroit can still count on the stubborn-guy factor. "I'd consider driving a Chevy, but that'd be about as far as I go," says Don Strumberger, 62, a lifelong Ford man from Dubuque, Iowa. A GM spokeswoman says 94% of folks who buy a GM-manufactured Silverado purchase another GM truck.

All the more reason Toyota is promoting itself as an all-American brand. The last thing Toyota needs is a revival of protectionist consumer sentiment. Recent ads tout the number of U.S. jobs Toyota has created. The company also became the first foreign automaker to crack NASCAR, entering the Tundra last year in the Craftsman Truck Series, and as a NASCAR sponsor Toyota is beginning to get notice from fans. "Being a Chevy man all my life, I'm starting to look at the Toyotas coming out," said Jared Branan, 24, of Kissimmee, Fla., attending a race in Daytona Beach last January. "They're starting to get with the program."

If Toyota is the great new American car company, can it stay nimble in the face of increased competition and quality-control challenges? Toyota executives acknowledge the need to build cars and trucks faster, cheaper and better than its rivals. That's no simple task, but Toyota has always been terrific at creating a sense of internal crisis even when times are good, persuading employees that the company will crash unless everyone, from the lowliest shopworker to the CEO, helps out to improve the bottom line. "There's a deep fear of complacency in Toyota," says Jeffrey Liker, an engineering professor at the University of Michigan.

The more rivals close in, the more disciplined Toyota seems to become. Since the Camry started slipping in the quality scores, managers have drilled into the consumer surveys, reading customer comments to fix peeves as minute as the sound of the trunk latch. As for eliminating waste, says Gary Convis, president of the Georgetown plant, "we're never satisfied." Convis says Toyota has cut the delivery time for custom models from 10 weeks to 10 days, and that his facility has reduced some manufacturing costs by as much as 70%. A group of assembly workers from the plant went to Wal-Mart last year hunting for cheaper bins to hold supplies along the line. Toyota now buys thousands of those bins for just $3.50 each, vs. $40 for the old ones. Convis could go on, but that would be bragging. And that wouldn't be the Toyota way. --With reporting by Jim Frederick/Tokyo, Avery Holton/Fort Worth, Hilary Hylton/Austin, Michael Peltier/Daytona Beach and Joseph R. Szczesny/Detroit

With reporting by Jim Frederick/Tokyo, Avery Holton/Fort Worth, Hilary Hylton/Austin, Michael Peltier/Daytona Beach, Joseph R. Szczesny/Detroit