Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

What Toyota learned from Detroit

By Chris Isidore, senior writer

NEW YORK (CNNMoney) -- Toyota is learning the painful lessons that its Detroit rivals learned the hard way -- success in the auto industry will mean cutting costs, not just selling cars.

For decades Toyota Motor (TM) reported steady gains in sales, eventually capturing the title of world's largest automaker in 2008. The Japanese carmaker went from holding 8.7% of the U.S. auto market in 1999 to nearly twice that ten years later.

But in 2010, Toyota was hit with global recall problems that badly dented its reputation and sales. The company was forced to find a new strategy, and started focusing on cost cutting in order to compete with its leaner U.S. competitors.

"The ghost of Detroit's recent past may be going to visit our friends in Tokyo," said Peter Bible, a partner at accounting and advisory firm EisnerAmper, formerly an officer at General Motors.

It's not as if Toyota finds itself in the kind of trouble that put two Detroit automakers in bankruptcy and plunged the third into billions of losses. Toyota's dip into the red during the worst of the economic crisis was relatively brief -- lasting only three quarters, rather than several years, as was the case at GM (GM), Ford Motor (F, Fortune 500) and Chrysler Group.

But Toyota is facing new headwinds.

Even though the results of a U.S. probe of the recalls released Tuesday cleared it of the most serious charges, Toyota's recall problems are still a drag on sales.

Toyota was the only major automaker to report lower U.S. sales in 2010, and while it projects an 18% rebound, that still won't be enough to bring it back to its 2009 market share.

Globally, the company is projecting even more modest sales -- a gain of only 2%, which could leave it losing share worldwide.

But the biggest problem facing Toyota today is much stronger competitors closing the quality and cost gaps that used to give the Japanese automaker a clear leg up.

Not only has there been a resurgence for Detroit's Big Three, with more attractive vehicle lineups and a return to profitability for two of them, but new low-cost rivals such as Korea's Hyundai Motor, are also picking up some of Toyota's lost share.

"It's a much more competitive environment, where they have to worry about manufacturers they didn't take seriously in the past," said Michael Robinet, automotive production analyst at IHS Automotive.

Toyota has responded with stepped up cost-cutting efforts, the kind central to the recent turnarounds at U.S. automakers.

In 2010 it closed a joint-venture plant in California that it had operated with GM and inherited during its partner's bankruptcy process, its first U.S. plant closing ever.

And Toyota is rearranging production at its Japanese plants to adjust for the reduced demand from a stronger yen, which makes Japanese cars less competitive with vehicles built in North America.

So far, those efforts are paying off. The carmaker has saved 120 billion yen, or about $1.4 billion, in the first three quarters of its fiscal year. And it said Tuesday that better-than-expected savings from the cost-cutting measures are a prime reason the company raised its earnings forecast.

"It's not as if Toyota hasn't been doing cost savings all along, but they're doubling down on that effort," said Ron Harbour, the head of the North American automotive practice at consultant Oliver Wyman.

And Toyota isn't finished slashing costs yet. The company just announced a buyout program for U.S. managers, an unusual step at a company that has rarely cut staff in the past.

"I think they'll take a more cautious approach to growth going forward," said Robinet, who points out that Toyota executives have acknowledged focusing too heavily on increased sales.

"They got ahead of themselves and the market corrected them," he said. "Toyota has learned its lessons. Volume for volume's sake does not work." To top of page

Index Last Change % Change
Dow 24,651.74 143.08 0.58%
Nasdaq 6,936.58 80.06 1.17%
S&P 500 2,675.81 23.80 0.90%
Treasuries 2.36 0.01 0.38%
Data as of 6:29am ET
Company Price Change % Change
Bank of America Corp... 29.04 0.31 1.08%
General Electric Co 17.82 0.18 1.02%
Oracle Corp 48.30 -1.89 -3.77%
Micron Technology In... 42.40 0.16 0.38%
Microsoft Corp 86.85 2.16 2.55%
Data as of Dec 15