Toyota's Paying the Price of Becoming King of the Hill

In April 2007, Toyota (TM) topped GM (GM) in global car and truck sales for the first time. GM had been on top ever since surpassing Ford in 1931. Toyota management has always been very leery of the attention drawn to its ascendency, but it looks like it too will have to pay the price for becoming king of the automotive world hill.

As early as 2005, the best and the brightest at Ford were reportedly comparing Toyota to Wal-Mart (WMT), i.e., they suggested that Toyota could end up like Wal-Mart in being reviled in small-town America because it had become too big and arrogant--i.e., America's penchant to root for the underdog could contribute to Toyota's downfall.

A recent article in the Economist highlights the strain that the push to the top has taken on the Company's fabled production system, which haver resulted in very un Toyota-like quality problems that have begun to nibble away at the company's heretofore sterling quality reputation. The recalls have continued and Toyota is still slipping in consumer-quality surveys.

The Economist also highlights the growing gap between the Company's nurtured "green" image as exemplified by the ground-breaking Prius hybrid, and the HD Tundra pickup, which has been plagued with problems at the onset. Consumer advocate Consumer Reports says that Toyota is "showing cracks in its armor" and would no longer give automatic recommendations when Toyota releases new or redesigned vehicles.

As the International Herald Tribune points out, testy relations with environmentalists and questions about quality were a headache for the Company at the Los Angeles Auto Show, where Toyota has historically been the star of the show. Other issues include a public relations gaff, where the Company was forced to withdraw a comment in a commercial that Fresno Californis was a "low budget tourist stop" after the Fresno mayor and California democratic senator Dianne Feinstein complained. The company has also been stung by departures of some critical US executives, including its North American chief, Jim Press (who went to Chrysler) and its US Lexus manager, Jim Farley, who went to Ford.

So far, dealers say the negative news has had little real negative effect on sales, as Toyota still boasts 17 of the 39 most reliable vehicles on Consumer Reports' influential list, which is much more than any other automaker. In addition, this hasn't hurt the Company's earnings performance, as Toyota recently reported a hefty $4 billion profit in its second quarter while GM was reporting a record $39 billion quarterly loss because of accounting changes.

Toyota's stock price, however is already in the doldrums, given that a slumping US housing market and soaring energy costs are likely to crimp U.S. car sales in 2008 (Toyota itself sees a weak US market in 1H 2008), expectations of a continued appreciation in the yen to JPY100/US$ within the next year, and weak car sales in Japan.

Disclosure: none