The Man Driving Toyota

Katsuaki Watanabe made his name at the company with a cost-reduction program. As the new president, he's not about to slow down now
If Toyota Motor's recent growth is any guide, it seems more a question of when rather than if the Japanese giant will overtake General Motors to become the world's No. 1 car producer. It's easy to see why. Next year, Toyota (TM ) is expected to sell some 8.5 million vehicles -- just 400,000 fewer than GM's (GM ) projected sales.


Meanwhile, industry-busting earnings -- $10.7 billion in the year through March, 2005 -- are being reinvested in new production facilities the world over. Toyota's newest factories are in such far-flung places as the Czech Republic, China, and Texas, while further expansion is planned in Russia, Thailand, and Canada.

Yet for Katsuaki Watanabe, who succeeded Fujio Cho as president of Toyota on June 23, quality improvements and cost cutting are more immediate goals than ramping up output. Indeed, Watanabe, 63, recently claimed that despite some suggestions that Toyota could overtake GM as early as 2008, he doesn't expect Toyota to outstrip GM's sales during his tenure.

MATERIAL EFFECTS. It's no surprise that Watanabe is more focused on quality and cost savings. He made his name at Toyota as the brains behind CCC21, a cost-reduction program that has spawned $10 billion of savings in the last five years by squeezing lower prices out of suppliers. What's more, with rising raw-material prices taking their toll -- despite record annual profits, Toyota's profitability fell 17% in the quarter to Mar. 30 compared with a year earlier -- Watanabe is acutely aware of the dangers of complacency.

On July 19, Watanabe addressed these and other issues in an interview at the company's headquarters in Toyota City with BusinessWeek Tokyo correspondent Ian Rowley. Edited excerpts of their conversation follow:

Q: As Toyota's president, where will you expending most energy?
A: There are two points I need to mention. The first relates to the fact that the global deployment of our business has expanded very, very rapidly. We how we can best begin the projects that we have already planned.

The second thing is to assess our capabilities in design, production, engineering, manufacturing, procurement, quality, cost, and human resources. By doing so, we can enhance our strengths and make up our weaknesses.

Q: Shortly after being appointed president, you talked about the risks of "Big Company disease." What did you mean by this and how can Toyota avoid catching it?
A: Toyota has grown in the past few years, but that a belief that the current status is satisfactory creeps into the minds of employees. That's what I'm worried about.

We should never be satisfied with the current status. In each division, function, or region, we still have numerous problems to cope with. We need to identify each one of those tasks or problems and fully recognize them and pursue the causes. This needs to be done by all the people working for Toyota.

A second risk is that as an organization grows bigger, there's a tendency to believe that one's own area is always right and that problems are always somebody else's. Silos prevent good products from being created. Making cars cannot be completed by a single division.

The solution is to make the problems visible and expose them for everyone to see. For us in management, it's very important that we have the ability to identify those problems.

Q: How do you that in practice?
A: Management has to visit the shop floor and gain first-hand experience of what's taking place. We need to look at the manufacturing processes, listen to voices, and clearly recognize problems.

The same applies to quality and cost. Just by looking at something you can identify many problems, but watch and observe.

Q: Does it help that the current market environment is tough?
A: Yes, you could say that. The fact that profitability decreased indicates that there are problems. For each region, vehicle type, or function, we must analyze what's behind the decrease in profitability. There's always room for improvement.

Q: Given the strength of Japanese auto producers in North America, are you concerned over the possibility of a backlash?
A: As of today, there are no trade issues between Japan and the U.S. -- nor do I expect one in the future. Also, our relationship with the big carmakers in the U.S. is friendly, and I intend to make it even friendlier. The circumstances today are totally different.

For one thing, all the Japanese carmakers have aggressively promoted localization of operations in the U.S. The U.S. is a very important country for us, and we have to be mindful to avoid any restrictions or strains.

Q: Is that why Toyota recently increased prices of some vehicles in the U.S.?
A: No. Pricing is determined by a comprehensive analysis and evaluation of our product features, their attractiveness in the market, the cost of producing cars, and the profitability we would like to achieve. Taking these factors into account, we decided to make the changes.

Q: Is it correct that Toyota and GM will soon announce plans to co-produce fuel cells?
A: We're still at the stage where we're discussing this from different angles and we can't give any specific timing.

Q: What are your plans for increasing production in emerging markets?
A: We believe that BRIC will grow into a very important market, and we'll have production bases in all of those countries. Given the size of the population and the prospect for a very large market in China, we've already made preparations for production bases from the north to the south. In Russia, we're and in India we're already producing in Bangalore, where we're making 60,000 vehicles.

Q: Is it true you'll produce a car in India jointly with Daihatsu?
A: We have this in mind but it hasn't yet taken any concrete form.

Q: China's a hugely competitive market. What does that mean for profitability?
A: I know that competition in China is very intense, but if you can develop and produce vehicles that satisfy customers, the profitability will come.

Also, in terms of costs, there are still lots of areas for improvement because the local procurement rate is low . We're making extremely intensive efforts in this area.

Q: After the success of CCC21 how can Toyota continue to make cost savings?
A: With CCC21, we tried to reduce cost at the level of individual component parts, whereas with Value Innovation we're going to pursue cost improvements across the whole system . This means starting at the conceptualization stage and exploring new ways of making savings.

We must continue indefinitely -- alongside improving quality, it's an eternal theme.