Wall Street Journal 11 November 1996
By VALERIE REITMAN and OSCAR SURIS
Staff Reporters of THE WALL STREET JOURNAL
Toyota Motor Corp., the world's most efficient auto maker, is about to unveil a new weapon -- the dirt-cheap engine.
Japan's No. 1 auto maker says a new car it will introduce in Japan next month will be equipped with a "simple and powerful" engine developed by Toyota that will be one-third cheaper to produce because it has one-third fewer parts.
Although Toyota isn't disclosing many details, auto-industry experts say that means an engine that would normally cost about $600 to produce will cost Toyota just $400. In an industry that tries to shave nickels and dimes off production costs to seize any edge, that amounts to a huge competitive advantage. And the potential weight savings could have a ripple effect on the overall design of a car.
Toyota's extraordinary claim is certain to stun its rivals in the East and the West -- particularly Detroit's Big Three auto makers. If it has found ways to make itself even more efficient, Toyota has raised the bar for rival auto makers that still hadn't caught up to Toyota's already-tough standards.
"When you look at Toyota, and what they can bring to cost and manufacturing efficiencies, they are always the benchmark," says Dave Andrea, an auto industry analyst with Roney & Co. in Detroit. "This just ups the ante."
Savings Through Designs
Toyota's director of finance, Ryuji Araki, confirmed that Toyota is seeking cost reductions through better designs. In addition to engines, Mr. Araki said other "power-train" components such as transmissions, axles and drive shafts are also being targeted, as well as vehicle platforms, or chassis. That shifts Toyota's focus in cutting costs from the plant floor -- where it has long led the industry -- to the drawing board.
The cost-cutting potential in most of Toyota's current designs "has been played out," Mr. Araki said. "Now we need to change the platforms, and once we do that, we'll see a strong effect" on profitability.
Already, Toyota says it saved $500 million during the six months ended Sept. 30, mostly through design innovations adopted during vehicles' concepts stage. Such claims are unnerving for Detroit's auto makers, which just last year were benefiting from a distinct pricing advantage over Japanese rivals created by an usually strong yen.
The yen has since weakened against the dollar, while cost-cutting efforts in the interim have made Japanese auto makers much more competitive. Many 1997 models from Toyota, Honda Motor Co. and Nissan Motor Corp. made their debuts this fall with freezes or cuts on base prices. That has sent U.S. auto makers such as Ford Motor Co. scrambling to trim costs from key models such as the Taurus sedan in a bid to remain price-competitive.
Toyota's competitors "are basically going to take it in the heart, particularly if you can offer more value at a lower price," says Bill Pochiluk, publisher of AutoFacts, an industry newsletter based in West Chester, Pa.
Forward to the Past
Industry experts speculate that Toyota's new engine may be nothing more than a simple push-rod engine. Such engines require fewer parts than the high-tech, multivalve, overhead-cam engines that populate many of today's vehicles, including most Toyotas. Although they cost hundreds of dollars more per vehicle, such complex engines have been popular with consumers because of their fuel economy and have been seen as a competitive advantage.
General Motors Corp., however, has won grudging praise in recent years for sticking with its old-tech push-rod engines in the face of an industrywide rush to overhead-cam technology. The No. 1 U.S. auto maker didn't have the money to invest in developing new engines, so it put engineers to work solving push-rod engines' fuel-economy and emissions problems -- in which they ultimately succeeded.
There is some skepticism in the industry about Toyota's latest claims of significant cost-cutting in engines. Jim Harbour, an auto-industry consultant, says an austere engine from Toyota would represent a marked departure from its recent strategy of giving its Camry and Corolla cars near-luxury qualities.
"The Toyotas, Hondas and Nissans have put a lot of technology, content and features into their cars to make them more palatable," Mr. Harbour says. "I haven't seen them take a dime of cost out of anything."
Still, word of a new efficiency drive at Toyota is being taken seriously by those who appreciate Toyota's culture. Toyota encourages engineers and suppliers to hunt for big savings, not cost reductions of a few yen per part. Suppliers also are given financial rewards based on the savings their designs generate.
"This is just further and continuing evidence that Toyota is the master out there at cost reduction," says Christopher Cedergren, an industry analyst in Santa Ana, Calif.
Toyota's commitment to lower costs is also backed by a hefty research-and-development budget. Research-and-development costs at Toyota soared by 52.5 billion yen ($468.6 million) over original plans during the six months ended Sept. 30 alone. It plans to sink 300 billion yen into capital expenditures in the fiscal year that ends March 31.Copyright © 1996 Dow Jones & Company, Inc. All Rights Reserved.