Toyota's Cost-Cutting Drive: Making the Tough Choices

Facing its first loss in 70 years, Toyota is trying to squeeze out an extra $1.4 billion in savings, and it looks as if nothing is sacred

By Ian Rowley

Toyota Motor (TM) is no stranger to cost-cutting. In recent years the automaker has slashed expenses by as much as $3.3 billion annually by implementing thousands of changes suggested by employees and keeping a tight rein on spending. But now, with global auto sales in a tailspin and Toyota expecting its first loss in 70 years, the push for frugality is entering overdrive: Last fall, the company formed an "Emergency Profit Improvement Committee" to ferret out an extra $1.4 billion in savings this year.

When the need for profit improvement reaches emergency status, apparently nothing is sacred. In Japan, the company is shedding 5,000 temporary workers and is likely to cut production by as much as 40%—450,000 cars—over the next three months. According to reports in the Japanese media, Toyota is considering shedding 1,000 permanent workers in the U.S. and Britain. Toyota says nothing has been decided and that it does its utmost to preserve employment, but, if it happens, it will be only the second time since 1950 that it has trimmed permanent staffers.

No saving, it seems, is too small. Workers are being encouraged to take the stairs rather than elevators, to save electricity. The heat in factories has been turned down, so workers are now wearing extra sweaters to stay warm. And on Jan. 19, Lexus engineer Takayuki Katsuda and two colleagues drove from headquarters in Toyota City to Tokyo for the Japan launch of the Lexus RX sport-utility vehicle. Though the trip took four hours, vs. 90 minutes on the Shinkansen bullet train, they saved about $300 in train fares. "We're facing a once-in-a-hundred-years crisis," Akio Toyoda, a scion of the founding family, who will become president in June, told reporters on Jan. 20.

Even the announcement of Toyoda's promotion got hit by the cost-cutting drive. When he was introduced to the media, the company didn't rent a hotel ballroom as it normally does for such events. Instead, Toyota simply cleared a few Priuses and Corollas from a Tokyo auto showroom on the ground floor of its offices and brought out folding chairs.

Beyond the Downturn

Reflexive cost-cutting is a time-honored response to crisis at Toyota, but some of the current problems can be blamed on un-Toyota-like moves on the part of senior management. Sure, every automaker on earth has been hurt by the downturn. But the breakneck speed of Toyota's expansion in recent years, its continuing reliance on production at home, and slower decision-making as it has grown have all aggravated Toyota's woes.

Since 2001 the company has added production capacity of around 500,000 vehicles every year, building new assembly plants from China to the Czech Republic. After winning praise for its foresight in developing the Prius hybrid, Toyota opened a huge Tundra pickup plant in Texas in late 2006, just months before the subprime crisis exploded. With Toyota having invested so much in new factory space, some company watchers reckon the automaker needs to keep its plants busy 80% of the time to make a profit, higher than the 70% level preferred by most Japanese rivals. Toyota doesn't give figures on capacity utilization, but current President Katsuaki Watanabe has spoken recently of the need to be profitable even with volumes of 7 million. The company sold 8.9 million vehicles in 2008.