Cho driving Toyota into Europe - Close-Up

Business Asia, Sept, 2002

Fujio Cho, the president of Toyota Motor Corp, is a member of the US Automotive Hall of Fame in recognition of his success. In Europe, the only title to his name so far is Commandeur du Tastevin as a wine connoisseur.

Investors say he's doing the right things to change that. The world's third-biggest automaker is starting to expand in Europe, cutting its dependence on US sales for profit and making up for falling Japanese demand. Sales of Toyota and Lexus cars in Western Europe rose 20 per cent in the second quarter of 2002 as the market shrank five per cent.

"Europe is a difficult market, and we are totally aware of that," Cho said, after returning from a June trip to Burgundy to replenish his wine collection. "We are learning and trying all kinds of things to understand the market."

Cho is increasingly leaving it up to Europeans to cater for European tastes. The success of the Yaris compact car, designed in Brussels, prompted Toyota to open a design center in the French Riviera. Toyota's also building a car plant with PSA Peugeot Citroen and is competing with Europe's luxury carmakers in sponsoring Formula One racing.

"The Yaris has been a success for Toyota to break through in Europe," said Norihiko Kamada, of Chuo Mitsui Asset Management Co. "Toyota needs to follow the same path and apply the strategy to other models."

Toyota last month reported first-quarter net income more than doubled to 352.3 billion yen ($5.5 billion).

Outpacing rivals

Toyota's performance in Europe is outpacing rivals including Honda Motor. "Some of the Japanese automakers in Europe look like losers," said Peter Schmidt, an auto industry consultant with Automotive Industry Data Ltd in Warwick, England. "Toyota is an exception."

Cho halved Toyota's loss in Europe to 12.4 billion yen last business year, while Honda's European loss narrowed to 35.3 billion yen.

Honda wants to generate a profit in Europe next year. Toyota said it made money in Europe in the first quarter and may report a full-year profit there, a year earlier than expected.

Still, Toyota's 4.4 per cent of the West European market in the first half of 2002 lags its 10 per cent of US sales and 40 per cent stranglehold on the Japanese market.

Raise share

Cho wants to raise Toyota's share of worldwide unit sales to 15 per cent from about 10 per cent now by early next decade.

"It's essential for us to improve performance in Europe to truly become global," said Cho. He now expects Toyota to meet its target of a five per cent market share by 2004, or about 800,000 units a year, one year earlier than initially planned.

The Yaris is one example of Toyota's advance. Sales of the compact, now built at a French plant in Valenciennes, topped 118,000 in the first half of 2002. To align cars more closely to European tastes, Toyota hired local designers for its new Lexus SC430 Soarer sportscar and opened the French Riviera design center in May 2000. Toyota also started sponsorship of Formula One racing to tap Europe's interest in motor sports and add glamour to its image.

"When I joined our European dealers' yearend gathering in December, all of them told me how happy they were and how it may become easier for them to do business in the future," Cho said.

Steamroller

Critics, though, point to mistakes Toyota and other Japanese automakers made in Europe, including failing to adjust to rising demand for diesel engines.

"Toyota's a bit like a steamroller which tends to achieve what it wants--just over a long time," said Graeme Maxton, managing director for Asia at Autopolis, an industry consultancy.

"I wouldn't say it won't be successful, the evidence so far is that they are likely to struggle."

Toyota is responding by releasing diesel-powered versions of its Yaris, Avensis and Corolla models, according to Automotive's Schmidt.

Toyota and Honda were also hurt by having plants in the UK that lost money when the euro fell against the pound.

"One of the reasons why Japanese automakers lost money in Europe is because of their plants' location," said Dai Nishiyama, of SG Yamaichi Asset Management Co. "The major concern for Toyota is when it does become profitable in Europe, will it be sustainable?"

Rivals aren't idle. Volkswagen AG and Renault SA are preparing to overhaul models while General Motors Corp and Ford Motor Co are shrinking European operations to reverse losses.

Cho's answer is to seek partners. Toyota and Peugeot are investing 1.5 billion euros ($2.7 billion) to build 300,000 cars annually at a Czech plant from 2005.