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  1. Analysis
May 22, 2008

EMERGING MARKETS ANALYSIS: Toyota’s low-cost car plans start to shape up

A combination of Toyota efficiency and the Keiretsu system could produce a potent rival to the Renault Logan. And with profits under pressure from rising oil prices, the timing of Toyota’s so-called Entry Family Car could be very fortuitous, writes Mark Bursa.

A combination of Toyota efficiency and the Keiretsu system could produce a potent rival to the Renault Logan. And with profits under pressure from rising oil prices, the timing of Toyota’s so-called Entry Family Car could be very fortuitous, writes Mark Bursa.

False starts and restarts have put Toyota’s plan to launch a low-cost rival to the Renault Logan behind schedule. The company has confirmed that the car, codenamed EFC (Entry Family Car), according to supplier sources, will be made in India, and it looks likely that a new factory to build it will also be established in Brazil.

But there’s still no sign of a prototype after the design team was sent scurrying back to their CAD-CAM stations last year by Toyota Motor President Katsuaki Watanabe.

Since then, the game has changed – the credit crunch has even hit the figures of the supposedly bomb-proof Japanese auto giant, with Toyota posting a surprising $119m first-quarter loss in North America. The big cars on which much of Toyota’s success is based are not flying out of the showroom in these financially challenging times.

So acute is the problem that Toyota has slowed down production indefinitely at its Indiana and Texas light trucks plants, and has even decided to export some of the large US-made vehicles to emerging markets. Some Sequoia SUVs will be shipped to the Middle East this year, and some Sienna minivans will be exported to China and other markets from 2010, according to the Japanese Asahi Shimbun newspaper. Both models are produced at Toyota’s Indiana factory.

Rising gasoline prices are challenging the accepted logic that large cars equal large profits. Car buyers are thinking small, green and cheap. And not necessarily in that order.

Toyota has this week trumpeted the sale of its millionth Prius hybrid, and clearly the Prius has been a PR masterstroke for Toyota. But it’s not cheap, and its green credentials are increasingly called into question. It might be clean in terms of tailpipe emissions, but it’s not that economical – no more so than a modern European diesel, for example. And it’s expensive to produce – which adds to its whole-life environmental impact.

And with a sticker price well above conventionally-engined competitors, will Prius’ appeal be sustained through an extended credit crunch? Or does Toyota need a different kind of small car altogether?

There’s plenty of evidence to suggest that it does. When Renault announced its annual results earlier this year, chairman Carlos Ghosn revealed that the Dacia Logan low-cost world car returned an average profit margin of 6 percent per car – compared with an average of 3 percent across the Renault range. Which implies that most of the other Renault models yielded a lot less than 3 percent.

Toyota must realise this – so perhaps now the pressure will be on to speed the EFC to market. Watanabe rejected the original design last year because he wanted improved quality and greater cost reduction. Originally the EFC was to have been built on the Yaris platform – but it now seems an all-new, and presumably cheaper to build, platform will be used instead. Watanabe says there has been “significant progress” in the past 12 months on developing the car, and it is expected to be signed off in the near future.

Now Toyota is starting to line up its manufacturing ducks on the project. In India, Toyota Kirloskar Motor (TKM) has announced a plan to build a second plant alongside its existing operation. This $350 million plant will begin operations in 2010. It will have an initial annual production capacity of around 100,000 vehicles, and that could increase over time.

Indian reports suggest the second TKM plant will produce passenger vehicles, including more Corollas as well as the EFC. This would free up the existing plant to make more Innovas – the Asian-markets MPV that Toyota also builds in Indonesia, and sells extensively and other Pacific Rim. TKM made 54,000 Corollas and Innovas last year, and it could make more.

TKM plans to export the EFC as well, according to reports, which will have high levels of local components. Toyota is also looking to restructure its Indian operations, splitting manufacturing and sales functions, and mirroring the set-up in other markets such as Indonesia.

Indian media reports suggested that sales, marketing and distribution functions would be consolidated as a new unit in Gurgaon while Bangalore would be developed as the manufacturing hub. This lends credence to the theory that India will be the mother hub for global manufacturing of the EFC, in the same way that Indonesia is the hub for the Innova platform.

In any case, Toyota will need a new local marketing chief, as deputy managing director KK Swamy, who headed finance, marketing and corporate planning, has quit the company – it’s rumoured he’s going to head Volkswagen’s Indian operations.

The EFC manufacturing strategy will also involve a new plant in Brazil. The Tokyo Shimbun daily reported that Toyota’s new factory, which would be its second in Brazil, was likely to produce 150,000 to 200,000 small cars for emerging markets from 2011.

This makes sense – Brazil and India have much in common in terms of the sort of low-cost cars that appeal: small-engined hatchbacks with four doors and five seats. But that’s not the sort of car that appeals in other parts of the world. Eastern Europe or Pacific Rim markets such as Thailand or Malaysia prefer three-box sedans.

This is why Renault has developed a very different version of the Dacia Logan, the Sandero, a five-door hatchback. The two main markets for Sandero are, of course, Brazil and India. If, as expected, the EFC will compete head-on with Logan in terms of price and size, you can expect that the platform will be flexible enough to spawn multiple bodystyles – at least hatch, sedan, wagon, pick-up and van. Perhaps this is the real reason a separate – and more durable – platform is needed, rather than basing EFC on Yaris?

So EFC is likely to hit the market around 2010 or 2011 – about the same time as the second-generation Logan, and not long after the second-generation Fiat Palio/Siena. Toyota will be hoping its legendary manufacturing efficiency, plus its Keiretsu supply chain, will give it the advantage over its European rivals, which had to learn manufacturing efficiency. With Toyota, it’s deeply ingrained in the corporate culture.

Watanabe told reporters at the Geneva show that Toyota was considering a number of options for the car, including radical distribution chains or even a separate brand – something Toyota is not averse to doing, as it has shown with Lexus and Scion. He believes there could be demand for a low-cost car in developed markets “as the third or fourth car”.

Crucially, Watanabe said he wanted the EFC to create a “small revolution” within Toyota, with research into how to build low-cost cars “to be spread around our other cars as well”. Son of Keiretsu, or Toyota Manufacturing System v2.0? Rivals should be afraid. Toyota may have had a bad Q1 of 2008 – but after all this is a company that works on a 50-year business plan. The EFC revolution might not be as small as Watanabe thinks.

Mark ‘Coolbear’ Bursa

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