Analytical Wealth

Let's take a look at some of the changes in store for Toyota as a new CEO takes the reigns:

(From The WSJ): "TOKYO -- Toyota Motor Corp.'s incoming president, Akio Toyoda, has a sobering message for the giant company founded by his grandfather: It has gotten too fancy for its own good.

On Monday, three top executives who helped lead Toyota the past four years -- including Mitsuo Kinoshita, one of the primary architects of the company's global expansion -- announced their retirement. The departures clear the way for Mr. Toyoda's planned makeover of the world's biggest auto maker.

He is expected to focus, most of all, on abandoning kakushin, or "revolutionary change," current president Katsuaki Watanabe's term for changing the way Toyota designed its cars and factories. It spawned technological advances, but led to cars that were often costlier to produce.

The 52-year-old Mr. Toyoda is also working to fix a pricing strategy that put the company at odds with some U.S. dealers, who felt its cars were getting too expensive, according to people familiar with the situation.

Auto makers world-wide are in pain, and Toyota is much stronger than rivals such as General Motors Corp., which is flirting with a bankruptcy filing. Still, Toyota is expecting its first annual net loss in 59 years.

Mr. Toyoda may shutter factories in North America and Japan, where Toyota bulked up in recent years and is now stuck with too much manufacturing capacity. It might also be faced with its first layoffs in Japan since 1950, when 3,000 workers were let go.

Mr. Toyoda blames more than the recession, according to people familiar with the matter. He is sending the message that his predecessors worsened the problem by straying from core ideas of thrift and efficiency.

Among other things, there's a move away from technologically sophisticated in-car gizmos like a solar-powered cooling system designed for the new Prius. In addition, an expensive new assembly-line technique of dipping car bodies into a vat of paint and swirling them around -- nicknamed shabu shabu, after a popular Japanese hotpot dish -- is under the microscope."

Graphic courtesy of the WSJ

From the looks of the article it appears that Toyota may have been a victim of its own success, in that it engaged in certain "excesses" that were easily funded by the company's growth and profits. While it gives them obvious targets as far as where to cut back, I hope that the company doesn't go overboard and cut back in ways that stifles innovation. The key will be differentiating between the "kakushin" that enables you to produce a better product, vs. the "kakushin" that added more cost to the manufacturing process.

Mr. Toyoda's mission will be to reign people in and direct their efforts towards innovations that support the company's core values, as opposed to innovating for innovation's sake.

Overall I'm not especially concerned about Toyota's future as the company is only in need of a few tweaks around production capacity, methods and pricing, as opposed to the full fledged restructuring that many of its competitors are trying to execute. I also think the goal of "reasonable profits" seems to suggest that they have a fairly good handle on what the market will look like over the coming years, and that they'll be adjusting both expectations and the company appropriately.

I.e. I have more faith in a company that is reducing its medium term outlook and accepting lower margins moving forward, than I have in a company that is placing its bets on a market recovery.

As I mentioned earlier the old market isn't coming back, truck and SUV sales aren't going to fully recover and people earning $40k/yr aren't going to be able to finance $50k vehicles on a go-forward basis.

I would also caution people from lumping all automakers in the same boat, because there is a temptation to say: "Well if mighty Toyota is struggling, than maybe Chrysler isn't doing so bad". Because while all the automakers are suffering from a declining market, they're all in drastically different boats with respect to how they're positioned to recover. Latter day struggles aren't as important as the challenges the company faces on its road to recovery, and the resources it has to effect same.

In other words the combination of having relatively small short-term challenges (in comparison to their competitors), coupled with one of the strongest balance sheets in the auto industry should enable Toyota to get back on track relatively quickly.

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Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.