Toyota could see bumpy road ahead
Experts say despite impressive sales and profit gains, cost advantage over Big Three could soon narrow.
By Chris Isidore, senior writer

NEW YORK ( -- While its competitors stumble and struggle to cut costs and capacity, Toyota Motor Corp. has seemingly had the smoothest ride possible to the top of the industry.

The company raised its sales and profit targets Wednesday, and is now poised to be the No. 1 automaker in terms of vehicles sold worldwide as soon as this year, and could be No. 2 in terms of U.S. sales starting in 2007. It raised its profit outlook for the current fiscal year by about a third Wednesday, and said it is now poised to see a 75 percent improvement in its bottom line in the fiscal year ending March 31.

The new Toyota Tundra, the company's first entry into the full-size pickup market, which will be built at its newest plant.
The new Toyota Tundra, the company's first entry into the full-size pickup market, which will be built at its newest plant.

But experts say that there are some bumps and potholes that could be ahead for Toyota (Charts) in the coming years, especially in the United States, which is now its largest market.

Those experts say its potential problems are nowhere near as severe as those dogging Detroit's Big Three, but they do pose a risk that the company's seemingly easy growth and bullet-proof reputation.

Toyota has seen better than 8 percent annual growth in U.S. sales the last 10 years, and is poised to complete it third straight year of double-digit growth. Meanwhile, industrywide sales have gained at only slightly better than a 1 percent annual growth rate.

The gains have nearly doubled its U.S. market share in that time, from 8.1 percent in 1997 to 15 percent for the first eight months of this year. But experts say there are a number of factors that might put the brakes on those rapid gains in the coming years.

The challenges are some of the same factors that have dogged General Motors Corp. (Charts), Ford Motor Co. (Charts) and the Chrysler Group of DaimlerChrysler (Charts) for years.

Lower price import brands, such as Korean automakers, are expected to pose an increasing competitive threat, as could its Japanese competitors Honda Motor (Charts) and Nissan (Charts).

Perhaps more surprisingly, some experts say Toyota also faces an increased level of competition from the the traditional Big Three, if and when they make improvements in their cost structure they are now striving to achieve.

"Toyota has a lot of new product in the pipeline that no one else can match, but it's going to start getting a little tougher," said Joe Langley, market analyst for auto consultant and research firm CSM. "GM is getting more on its game and Toyota has got to be looking over their shoulder at Hyundai. Further out, the Chinese could be a very difficult situation."

The higher labor costs for GM, Ford and Chrysler have done more than just hurt their bottom line, it hurt the product line those companies can put in dealer showrooms to attract buyers, said David Cole, chairman of the Center for Auto Research.

"If GM were to have Toyota's health care costs, that's roughly equal to it having enough to develop five new products a year," said Cole. "The changes to their cost structure that have been made and undoubtedly will be made in the 2007 contract will be a huge improvement in the Big Three's competitive position."

In addition, as the Big Three start to make improvements in their cost structure, Toyota's costs are likely to rise as its North American manufacturing operations, which now has 30,000 employees, matures.

Toyota is just about to open its 13th North American plant, in San Antonio. The oldest of its plants are approaching their 20th anniversary.

Right now Toyota only has 258 retirees from its North American manufacturing operations, but that is expected to increase rapidly in the coming five to 10 years, said company spokesman Victor Vanov. Even if Toyota is miles away from the hundreds of thousands of Big Three retirees, their cost advantage appears poised to narrow.

"If the Big Three succeed in their restructuring, it's really going to be tougher for Toyota," said Walter McManus, an auto industry expert at the University of Michigan.

Sales gains could be tougher

Toyota has seen some of its growth come from being able to expand into new segments of the U.S. market, picking up share where it had little if any presence before, such as SUV's and other light trucks.

But with Toyota's introduction of its full-size Tundra pickup early next year, it can be argued Toyota will now be in every U.S. segment, with no more virgin territory left to explore for further gains.

Toyota spokesman Xavier Dominicis said the company has always been conservative in its growth forecasts, and is not counting on continuing to post double-digit sales gains.

"It's important to remember we're not chasing market share. We never have. As to our relative ranking, it has more to do with what others do or don't do," he said.

Company officials concede the Tundra's introduction will be a tougher challenge for Toyota than any of its past products, as it is producing a new vehicle at a new plant, rather than having the first product off the line of a new plant be a vehicle Toyota has perfected at other facilities.

That challenge raises perhaps the most worrisome threat to its past success on the horizon -- increasing questions about quality.

Toyota has recalled about 3 million vehicles since the beginning of 2005, compared to 2.1 million vehicles in the five-year period before that. Recalls have also become a scandal for the company in Japan.

The recalls prompted executive shakeups and an apology by Toyota President Katsuaki Watanabe in a speech in Japan on Wednesday, along with reports that Toyota will delay the introduction of some new vehicles as it addresses quality issues.

"They recognize they've been stretched very thin with everywhere they've grown," said Cole. "They're extremely sensitive to things like this because they're concerned with how consumer base will react to anything that change their image of perfection."


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