THE WORLD OF TOYOTA

After toppling General Motors as the world's largest automaker last year, can Toyota avoid the apparent potholes and stay in the lead? Despite rising oil and steel prices Toyota aims to sell 9.85 million cars and trucks this year, 5 per cent up on 2007

TOYOTA CITY, about 200 miles east of the Japanese capital Tokyo, once appeared on the map - if it appeared at all - as Koromo. But in 1959 local leaders decided to name it after a rising car producer, and twinned their then modest town in rural Aichi Prefecture with the global centre of auto-production, Detroit.

The move must have seemed laughably ambitious to the residents of Motor City at the time, but nobody is laughing now.

Today, Toyota City is a bigger, incomparably richer place, mirroring the fortunes of the multinational behemoth headquartered here.

Like its namesake's cars, it is a neat, efficient, slightly featureless place, in contrast to the once all-conquering Detroit, which has become a byword for urban decline.

All year round, the surrounding prefecture hums with the sound of probably the most pristine, fastest factories in the world.

Here, at least, it is hard to find anyone with a bad word to say about the huge local employer. "What would we do without them?" asks housewife Reiko Shimamura, who says that two members of her family work at local plants.

Toyota, which directly employs 40,000 local people, is largely responsible for one of the lowest regional unemployment rates in Japan, and one of its busiest hubs: nearby Nagoya Port has for years accounted for about half of the country's trade surplus.

"Can anything stop Toyota?" In 2003, the US-based Business Week magazine asked the question on the lips of millions of Americans. The answer would appear to be no.

The world's sixth largest company (according to Forbes magazine) last year briefly ended General Motor's 76-year reign as its largest automaker, with global sales of 2.41 million (to GM's 2.25 million) in the first quarter of 2007.

Although the Detroit-based GM inched ahead in shipments for the year, the writing is on the wall for the US icon, reckons The New York Times, which called the first-quarter results "another milestone in America's long decline from unchallenged industrial pre-eminence."

Despite steeply rising oil and steel prices, Toyota aims to sell 9.85 million cars and trucks this year, a 5 per cent increase over 2007, breaking a GM record of 9.55 million annual sales set exactly 30 years ago.

The plans include sharply increased production of petrol-and-electric hybrid cars, a market Toyota dominates with sales so far of nearly 1.5 million, including over 100,000 in Europe.

Since its birth in 1937, the Japanese carmaker has shipped about 163 million vehicles (not including sales by subsidiaries such as Hino trucks and Daihatsu) and now employs 300,000 people around the world, selling in 150 countries.

Over 30 million Corollas alone have been sold since it was released on an unsuspecting world in 1966.

Fittingly, perhaps, even the Japanese emperor and his family use a Toyota: the Century.

The tale of how Toyota got here is now one of the better-known industrial success stories, thanks to a burgeoning library of books published over the last two decades seeking to explain it.

An offshoot of a loom-manufacturer set up by the Toyoda family in a prefecture with a reputation for frugality and industriousness, the company took the mass production system for cars created by Henry Ford and added a series of pioneering innovations.

The most famous was "just-in-time" or kanban production. Essentially a method that orders parts from suppliers on an as-needed basis, kanban gave Toyota flexibility and allowed it to delegate much of the manufacturing work to subsidiaries.

Later came kaizen, meaning "continuous improvement," another Toyota neologism that has become a global management buzzword, and which was heavily influenced by W Edwards Deming, a US quality control expert who became a guru to post-war Japanese industrialists.

Both initiatives depend on employees trained to a higher standard than car workers outside Japan, argues Toyota expert Takahiro Fujimoto, a professor of economics at the University of Tokyo.

"The Ford system was based on single-skilled workers, but the Toyota system is based on multi-skilled workers."

He describes the process that drove these improvements as "evolutionary" not revolutionary.

"People sometimes dream of developing a revolutionary product to defeat their competitors," he says, but Toyota started with small, incremental steps.

Like many Toyota-watchers, he cites legendary engineer Taiichi Ohno for creating what eventually became known as the "Toyota Way", a system of lean-production aimed at eliminating waste, producing zero defects and continually improving line performance.

Some commentators also credit Toyota with a more profound innovation: shifting responsibility for production back to the shop floor.

"Onsite foremen were empowered with extensive factory-floor authority to boost quality controls," explains Yozo Hasegawa, author of the just-released Clean Car Wars: How Honda and Toyota Are Winning the Battle of the Eco-Friendly Motors.

Hasegawa says American factories were hampered by stalling production lines, but Toyota improvised.

"When a problem arose, it would undergo repeated questioning until its roots could be traced, and a kaizen or improvement measure put in place to prevent a repeat."

Toyota workers are not penalised for spotting problems and stopping a line, they are praised, he points out. In fact, Toyota factories employ teams whose sole job is to find problems and save time and money.

Toyota's reputation for quality, if uninspiring, cars originated with the Crown, which became, in effect, the "people's car" in crowded Japan, but flopped badly when tried out on America's open highways.

The Corolla reversed that setback, eventually becoming the world's best-selling passenger car and giving the company a toehold in the US and European markets.

Throughout, Toyota never lost sight of its strengths . . . and its weaknesses. In 1993, then-chairman Shoichiro Toyoda summed up the feelings of many when he publicly called the company's cars boring. "They all look the same," he lamented.

As exports grew, they helped fuel bitter controversy over Japanese trade surpluses, prompting a Toyota decision to begin building cars in the US from the mid-1980s and more recently in Europe, where it has pumped €4 billion into new plants.

But the company rejects the by-now standard criticism of Japanese companies: that they don't play by normal capitalist rules, focusing on long-term market share over short-term profitability.

As spokesman Paul Nolasco points out, Toyota is one of the world's most profitable companies. "We are perhaps different to US firms, because we focus on the needs of all our stakeholders and that's different to shareholders," he says. "That's not to belittle the shareholders but it is to show that we have a very long-term perspective. Many people depend on our existence, including employees, families and suppliers, so we're aiming for sustainable, long-term growth."

But criticism at home has remained oddly muted, a consequence, say some, of Toyota's enormous economic clout, including its whopping €491 million annual spending on domestic advertising.

It is left to small-circulation magazines and the courts to occasionally point out the dark side of Toyota's runaway success. Last year, for example, the Nagoya District Court ruled that a Toyota employee was worked to death, after he clocked up more than 106 hours overtime in a single month.

The ruling exposed one of the industry's secrets: those kaizen sessions were often done after normal working hours, and were considered "voluntary". In May, the company announced it would start paying overtime for after-hour quality inspections.

Despite its huge footprint, the company treads lightly in Japan's labyrinthine political world, staying mostly silent, for example, throughout the controversy over former Prime Minister Junichiro Koizumi's visits to the Yasukuni war memorial in Tokyo, which threatened to damage Japan's trade ties with China.

But occasionally it stumbles into battle, usually, if not surprisingly, on the side of the ruling Liberal Democratic Party (LDP).

The magazine Friday Weeklyreported, for example, that thousands of Toyota employees were pressed into service to campaign behind Koizumi when he called a general election two years ago. "Toyota wives and daughters organised women-only meetings where company executives lectured how their business would only prosper in an LDP-led government. The company also asked affiliated firms to vote for the ruling party," alleged the magazine, which called the alliance between Japan's biggest company and political party "worrying".

Toyota swats away such criticism like the sumo-sized monster it has become, but other potholes on its road to world domination may not be as easy to steer around. The company has until now been able to absorb costs but rocketing fuel and steel prices are hurting. It has just forecast a 30 per cent drop in operating profit for the year ending March 2009.

The Nikkei newspaper this year called the changing business environment a "turning point" for the Aichi giant. Many analysts worry that Toyota is over-dependent on the US market (the Camry has been the best-selling passenger car there for the sixth straight year) which drives about 70 per cent of group earnings.

China is still firmly under the sway of American, German and increasingly local cars and, despite steady growth, Europe has resisted a Toyota invasion, holding market share to about 5 per cent in the face of stiff competition from Volkswagen, Mercedes, BMW, Peugeot, Renault, Fiat and Detroit's Big Three.

The slow pace of growth in Europe may point to a deeper malaise at Toyota HQ. Can a company that has excelled at producing solid, reliable, if unexciting, cars for millions of owners - average age about 46 - continue to thrive in a market stuffed with sexier competitors, while being harried by cheaper emerging brands from the likes of Korea, such as Kia and Hyundai?

The problem is that when Toyota came to the top, it took a car firm 20 years to become established and accepted on the marketplace. Japan was regarded as home to cheap but rather disposable technology. Now, that timeframe has shrunk to 10 years and Korean firms are well on track to establish themselves and move from price conscious providers to value propositions and even stylish competitors. Kia, for example, recently took on several senior European designers to give its brand a competitive image in the tough European market.

Next up will undoubtedly be budding Chinese car firms, followed by the Indians. China has spent heavily on the latest production technologies and some predict it will take them less than 10 years to created established brands in mature markets, provided they get the quality right. To succeed in the long-term, Toyota may need to offer more than reliability and price.

Even its luxury Lexus, designed in part to answer criticism that Toyota makes lacklustre cars, still has a mountain to climb to challenge the might of its German rivals like BMW in terms of sales.

The company has one answer: a war chest of €19.4 billion. Money like that has given it the clout to hire the best talent, including the Greek designer Sotiris Kovos, who gave the best-selling Yaris its distinctive look. Expect more where that came from, and for signs that Toyota will move more into local production. Whatever happens, it will continue to be Toyota's world, and we will all have to live in it.