Toyota hits bumps on its road to No. 1

Toyota Motor Corp. seems poised to overtake General Motors Corp. as the world's biggest automaker, but lately the Japanese auto giant is finding the road to the top awfully bumpy.

A handful of top Toyota executives have made high-profile exits to rival manufacturers. Environmentalists complain that even as the company says it will sell 250,000 hybrid autos this year, it's still producing gas guzzlers such as the Sequoia SUV and moving to oppose more stringent fuel and emission standards. And, perhaps most critically, it's been beset with bad news on the quality front.

After announcing a record number of recalls in the past three years and witnessing its J.D. Power & Associates quality rankings slip significantly, Toyota was demoted by Consumers Union, publisher of Consumer Reports, on its annual reliability rankings. This month the automaker was hit with a lawsuit accusing it of covering up manufacturing defects at a California plant it shares with GM.

Critics say it's proof that Toyota is growing too much, too quickly. But Toyota brass, used to glowing public receptions, say it's just a reminder that when you're on your way to being the top dog, everybody wants to bring you down.

"It's very puzzling," Toyota spokesman Bill Kwong said of the quality criticisms, rattling off a long list of indicators showing that, in many cases, Toyota reliability is still very high. He added that Toyota President Katsuaki Watanabe recently appointed two executives to oversee quality control, announced plans to hire 8,000 more engineers to work on that issue and decided to make more prototypes of cars prior to release. "We're very concerned about quality," Kwong said.

The story of Toyota is one of expansion, to a degree that hardly could have been predicted 50 years ago when it put its first Toyota Crown up for sale in the United States. Over the years, Toyota developed a reputation for quality and reliability. The company attributes that to its corporate philosophy, known as the Toyota production system, which values the individual and works to deliver cars on an as-needed basis.

The company spends generously on research and development and, because it isn't saddled with some of the labor issues of the Big Three U.S. automakers, has enjoyed sizable profits even in highly competitive segments. Last year Toyota sold 2.54 million cars in the United States, behind only GM and Ford Motor Co., and through the first three quarters of this year it passed Ford, grabbing 16.2 percent of the U.S. market. This year it briefly passed GM in worldwide sales for the first time.

"Toyota wants to be bigger than GM, and the only way to do that is to offer a full line of vehicles," said Aaron Bragman, an analyst at Global Insight, pointing out that Toyota now sells cars and trucks in nearly every class, something that few competitors, other than the Big Three, dare attempt.

To do so it has opened plants all over the world, including large ones in Texas, Kentucky and California. "At what cost, so much growth?" Bragman said.

According to a whistle-blower lawsuit filed this month, it was at the company's facility in Fremont, Calif., where Toyota makes Tacomas, Corollas and Pontiac Vibes under a joint-operating agreement with GM, where some of the pressures of growth began to appear.

Plaintiff Katy Cameron, an auditor at the plant, alleges that managers systematically downplayed and at times changed her reports showing manufacturing defects, and that, when she complained, she was demoted.

"It was all about 'move, move, get the quantity out, get it out,' " said Cameron, who is on leave from the plant and is seeking $45 million in damages. She said she found problems in steering, brakes, coolant, motor mounts and seat belts, among other problems, but, starting in 2005, discovered her supervisors erasing her findings and submitting other, more favorable, results.

A spokesman for the plant, New United Motor Manufacturing, said that it couldn't comment on the lawsuit but that "quality is a high priority."

Regardless of whether Cameron's allegations are valid, quality problems clearly have been arising more frequently with Toyota. Two years ago, the automaker recalled 2.2 million vehicles in the United States, nearly as many as it sold that year. It recalled 766,000 more last year and fewer than 600,000 to date this year.

"Reliability is now a real issue," said Jake Fisher, an automotive engineer at Consumers Union, which this fall ranked three Toyota vehicles below average, a worrisome quality decline that he says tracked the company's recent explosive growth. "The company was stellar up until 2005. The next model year was average. And 2007 was below average. It's the first time we've seen that."

Although Toyota still ranked tops in 17 of 39 Consumer Reports picks, the decline seemed more noticeable considering the great improvements competitors have made. Ford, for example, may have been passed by Toyota in sales this year but it produced five top-rated vehicles, compared with four for Toyota, in the annual J.D. Power initial quality survey released in June.

Norman Bodek, a consultant and expert on the Toyota production system, says one of the biggest problems facing the company is talent loss. In Japan, employees tend to stay with one company for their entire career. But this year Toyota saw several key U.S. executives depart, including Toyota North America President Jim Press to Chrysler and Lexus General Manager Jim Farley to Ford, moves that raised eyebrows in the auto industry.

"When you learn the Toyota system, you become very good and then you get a better job at another company," Bodek said. The result is untested employees overseeing production, which can lead to mistakes, he said.

At the moment, Toyota says it's downgrading its U.S. sales expectations for the year by 80,000 units, to 2.6 million, largely because of the state of the economy. Nevertheless, that figure is larger than its 2006 sales and surprisingly optimistic in light of the challenging economic situation.

Fisher says it remains to be seen whether a company that built its reputation on quality can endure any prolonged falloff in that arena. "Being the biggest is not being the best. It's just being the biggest."

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