Tuesday, 19 June 2018

Toyota's Jim Lentz nervous about profits as incentives climb

AUTOMOTIVE NEWS: Other manufacturers have said they are not making money on cars. How about Toyota?
LENTZ: Yeah, we’ve got scale. We’re making money there.

DALLAS — Toyota North America CEO Jim Lentz has lived and led through interesting times in the auto industry. Electric vehicles, automated driving, connected-car technologies and complicated trade deals are disrupting the sector.

His boss, Toyota President Akio Toyoda, is shaking up the company from top to bottom in a life-or-death battle to adjust to the shifting sands of emerging technologies, government mandates and consumer tastes. He’s counting on Lentz to make the big changes possible and affordable.

As chief of the key U.S. market, Lentz has to shore up profits, make critical product decisions and balance the brand’s car expertise with the consumer’s rapid move toward light trucks.

In an interview this month at Toyota’s North American headquarters with Staff Reporter Laurence Iliff, Lentz, 62, laid out his case for why he thinks Toyota and luxury brand Lexus are on their way to meeting the myriad challenges they face in North America.

Q: Is Toyota concerned about profitability in North America as sales come off record levels?

A: Anytime there is transition in the market from peak to plateau to a new stable level, you’re always concerned about profitability because nobody wants to give up share, no one wants to reduce production. And as a result, you’ll have some players that overproduce, start parking them at the fence, and then have to come up with huge incentives to move that.

While we’re not doing that — we don’t have anything parked at the fence — it does force us into an incentive game to be competitive over that time period. So, I’m concerned about that profitability because there are some OEMs that have stuff parked at the fence.



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As the market continues to adjust to this new reality of a 70-30 truck-to-car mix, we’re all still looking over our shoulder at the off-lease stuff coming in, and they’re not exactly screaming off the auction floor. So that’s a drag on profitability.

We’re going to see probably three rate increases this year, likely three again next year, so all of that tends to drive prices up, and that tends to pull the market down a little bit.

But obviously we’ve got to keep an eye on profitability because those profits need to drive our initiatives in mobility, in EVs, in autonomous vehicles. There’s a lot of investment going on today to set us all up for the future.

Ford plans to drastically scale back its car business. Does Toyota plan to follow suit, or does Ford’s exit give Toyota a chance to grab more U.S. market share?

We’re going to remain a full-line manufacturer. If you look at some of the really critical segments — midsize passenger car, compact passenger car — those are 2-million-plus-a-year segments, so we have no desire to back out of segments.

In terms of who may get Ford’s share, it’s difficult to say. There’s not a lot of cross-shop between Ford passenger cars and Toyota passenger cars, so it really depends on what happens with those buyers. Are those buyers going to remain loyalists to Ford and move out of passenger cars and maybe into SUVs? I’m sure that’s Ford’s strategy. Or are they going to remain loyal to passenger-car segments? And if that’s the case, we’ll have a chance at them with our product.

Obviously, Ford’s done a calculation that their expertise is more in light trucks. We’re always going to have a little bit of a bias relative to industry numbers toward passenger cars, whether it’s Prius, Corolla or ES. We think that that is an area that we have expertise in. We think we have a competitive advantage in things like hybrids. So we think we’re always going to be able to provide a value proposition to the customer in passenger cars, and as a result hopefully get a big share of the business.

There is a lot of uncertainty around the renegotiation of the North American Free Trade Agreement, along with proposed tariffs on imported aluminum and steel. It could be months before these issues are finalized. How does this affect Toyota’s short- and long-term planning?

In the steel case, 95 percent of our steel is sourced from the U.S. About 5 percent comes out of specialty steel out of Japan that we can’t get in the U.S. So the steel and aluminum piece really doesn’t impact us.

Overall, it’s important to have NAFTA. If you look at plants in the U.S. since NAFTA, 14 manufacturing plants have been added. In all transparency and fairness, 11 have been added in Mexico, one in Canada.

The U.S. auto industry has grown over NAFTA. And even the plants that are in Mexico, U.S. employment has grown to help supply those plants with parts. So NAFTA’s been good overall to the U.S. and U.S. workers. Having Mexico as part of NAFTA has allowed the U.S. through its exports to be competitive with other parts of the world, Asia and Europe. So it’s important.

We hope that it remains. We hope that it remains simple, that it remains fair to all manufacturers, and we’re confident that something positive will happen. But in terms of making any strategic decisions today until we know what it is, it’s difficult to do.

How is the renovation of the Toyota and Lexus lineup with the Toyota New Global Architecture global platform going? What has the company gained from it?

That journey started with Akio five or six years ago, and Akio understood, especially in the U.S., that just quality, dependability, reliability and safety wasn’t going to get it done. We needed more emotion in our product.

When you look back to FJ Cruiser, when you look at Corolla Sport entering the market, when you look at SE Camry, older-generation product, we were pushing styling about as aggressively as you could given the platforms we had.

We pushed our tuning about as aggressively as you could.

So TNGA is really that linchpin that allows us to drive the driveability and performance and the styling to new levels. And I think we’ve seen that in Camry.

Camry’s now 21 percent of that segment. We actually have people waiting in line to get two-tone XSEs. When was the last time somebody waited in line for a midsize passenger car?

Can Toyota go after a bigger pickup market with the capacity it is adding? How far can the company push that?

We’re never going to have the scale that Ford or Chevrolet has on full-size pickups. When Guanajuato is online with 100,000 and you have 160,000 in Baja [plus Tundra in San Antonio], we’re going to move from the 350,000 range to about 500,000, plus or minus, based on overtime. I think that’s probably a good number for us to be at.

Lexus has a new hybrid strategy of reducing the price gap compared with the gasoline models. Is that part of a broader strategy for Toyota? What’s the goal?

If you look at the overall industry, it’s about 2.7 percent hybrid. We’re about 9 percent, Toyota and Lexus combined. By 2020, that number is going to be about 15 percent. To a degree, our success on Prius has created challenges for hybrid.

Prius was so successful as a mileage play that it’s more difficult to convince consumers that hybrids actually generate a lot of power and a lot of torque. So as we move from 9 percent to 15 percent and likely beyond that over time, hybrid has to mean different things to different people.

By 2025, our goal is to have an electrified powertrain available for all vehicles. It could be a hybrid, it could be a plug-in, it could be a fuel cell or it could be an EV. By 2030, half of what we sell, over 5 million vehicles, will be electrified. And of that 5 million, a million will be pure battery EVs or fuel cell. So, we really need to convince consumers that hybrids are more than just mileage.

Do you get nervous about not having a full-electric play, like the Nissan Leaf and Chevrolet Bolt? And on the luxury side, with all the investment there by Porsche and others?

I don’t think that the market will move that quickly. If you look at 2016, the market in the U.S. was 0.47 percent EV. Last year, it was 0.62 percent. So, yes it’s moving. But is it really going to move quickly enough to create enough demand for all the supply all the OEMs are talking about? I don’t think it is.

By the time the U.S. is ready for EVs, will Toyota have a lot of product in China or other markets that can be sold here?

Akio has a new EV division that reports to him. It’s going to develop, I think, 10 EVs by early ’20s. That is primarily driven to be competitive in China and as Europe weans itself off diesel, it will likely be more important to have in Europe. So at the time that the U.S. market shows that it’s a business, we will have product to choose from. That’s why I don’t lose any sleep.

With Toyota Connected, does the company want something like General Motors’ OnStar, does it want to sell stuff to its customers or does it want a revenue stream from third parties like it is doing with the rental car companies and the insurance companies?

The answer is yes, we want revenue streams [laughing]. First and foremost, we want to make the driving experience enjoyable for our customers. As they want cars to be smarter, the technology to be smarter, that can help them with their busy lives, whether it’s navigation systems that communicate with calendars to understand if they’re running late for meetings, that can connect to cellphones to connect into meetings. That’s what the customer of tomorrow wants.

So first and foremost, Toyota Connected is about getting more out of the cars that we sell to customers.

But the ability for us to create software and platforms that can manage fleets, whether they’re fleet and leasing companies or rental car companies or mobility companies, all of that will be the future of mobility even beyond where we are today.

So, the answer is yes, we want to be involved in both.

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