Toyota's recipe for success
The automaker has a commanding lead on a breakthrough technology -- one that could enable it to dominate the industry for years to come.
By Alex Taylor III, FORTUNE senior editor

NEW YORK (FORTUNE) - In an industry where others are sputtering, Toyota is a juggernaut. It is producing nearly 50 percent more cars than in 2001 and this year it will almost certainly pass General Motors to become the world's largest auto company.

Toyota (Research) alone earned more than all the rest of the world's 12 largest auto manufacturers combined -- $11.4 billion. And it is pioneering a new technology for the 21st century that will shrink gasoline consumption and limit greenhouse gases.

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In its March 6th issue, FORTUNE tells the inside story of how Toyota -- the first non-U.S. company to break into the top ten on FORTUNE's Most Admired Companies list -- developed the hybrid Prius. It is a rare look under the hood of the usually secretive car company. Toyota overcame punishing deadlines, skeptical dealers, finicky batteries and its own risk-averse culture to bring the hybrid to market.

The story of the Prius is a tale of technological potholes, impossible demands and multiple miscalculations, and it reveals how a great company places big bets on the future. The total output of the gas-electric sedan represents only a tiny fraction of the nine million cars and trucks the Japanese auto company will produce this year.

But it has become an automotive landmark: a car for the future, designed for a world of scarce oil and surplus greenhouse gases. In developing the sophisticated new powertrain, Toyota has a commanding lead on a breakthrough technology -- one that could enable it to dominate the auto industry for years to come.

And Toyota's push into hybrids is only going to accelerate. Although the drive to bring the Prius to market was led by Hiroshi Okuda and Fujio Cho, Toyota's two previous presidents, new boss Katsuaki Watanabe is keen on seeing hybrids enter the automotive mainstream.

Watanabe, 64, who became the company's top executive last June, has the deferential air of longtime family retainer. But beneath that surface he is clearly intent on continuing Toyota's explosive growth of the past five years, in which worldwide production rose by more than half.

In an interview with FORTUNE earlier this year at company headquarters in Toyota City, he stressed the importance of making hybrids more affordable for consumers.

"We need to improve the production engineering and develop better technology in batteries, motors and inverters," he said. "My quest is to produce a third-generation Prius quickly and cheaply." To that end, he has added a third division to Toyota's hybrid R&D effort, dedicated to working on advanced technology.

Critics complain that hybrids are inherently uneconomical because the $3,000 or more the technology adds to the cost of the vehicle can't be recouped with greater gas mileage; that they didn't improve fuel efficiency that much; and that some American models were being built more for performance than to benefit the environment.

Carlos Ghosn, CEO of Japanese rival Nissan, likes to poke fun at Toyota's supposed social responsibility. "Some of our competitors say they are doing things for the benefit of humanity," he says. "Well, we are in a business, and the company has a mission of creating value."

The knocks against hybrids are all true. But what the critics didn't put a price on was the value of being seen as eco-sensitive without giving up performance.

"Does it save enough money to pay for itself?" asks Jim Press, president of Toyota Motor Sales in the U.S. "That's not the idea. What's the true cost of a gallon of gas, if you factor in foreign aid, Middle Eastern wars, and so on? The truth is on our side."

By early in the next decade, Toyota expects to be selling one million hybrids a year. Since no other automaker can even approach that quantity, Toyota is way out in front -- which would seem an unusual place to be for a company that lagged behind its Japanese competitors in opening assembly plants in the U.S. and moving into China.

"Is Toyota a conservative company?" asks Jeffrey Liker, an engineering professor at the University of Michigan and author of "The Toyota Way." "Yes. Is it innovative? Remarkably so. Go slow, build on the past, and thoroughly consider all implications of decisions, yet move aggressively to beat the competition to market with exceptional products."

If Liker's right, that formula -- a combination of production prowess and technical innovation -- is an unbeatable recipe for success.

See FORTUNE's full list of America's Most Admired CompaniesTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.