Auto Giant Stumbles: The End of the Toyota Legend

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When US President Barack Obama took office, Toyota was looking invincible. It had outpaced its US rivals on several fronts, with higher sales, higher profits and a better reputation.

One year and 34 mysterious deaths later, however, that winning reputation has taken a severe beating. Toyota faces dozens of lawsuits for technical defects that led to the deaths of drivers and passengers, and 8.5 million cars have been recalled. Experts estimate that Toyota will sell at least 1 million fewer cars this year, and the company's market value has plunged by $33 billion (€24.4 billion) in the last six weeks.

CEO Akio Toyoda had no choice but to travel to the United States to perform his act of contrition. The nation is furious. A Republican politician characterized Toyota's handling of the affair as disgraceful, while Democratic Congressman Dennis Kucinich said the company fostered a "cutthroat" corporate environment.

Toyota initially claimed that floor mats jamming the accelerator pedal were the cause of the problem. The company denied that there were any serious defects with the gas pedals or even the cars' electronic systems. Even today, the company refuses to admit to any more deep-seated defects in Toyota technology. Last Wednesday, CEO Toyoda said that he was "absolutely confident" that the electronics were not at fault.

Other Toyota executives expressed themselves more cautiously. A day earlier, the head of Toyota's North American division said that he couldn't be entirely sure about the cause of the problem.

The Americanization of Toyota

In authoritarian, semi-monarchist Japan, the method of concealment and denial is still the most effective. The Japanese auto industry goes about its business largely unchecked by government regulatory agencies. The government agency responsible for road safety has a staff of only 16 employees, 15 of them part-time.

But Japanese customs are far from responsible for Toyota's plight. In fact, the main culprit is the Americanization of the company.

Speaking in the admiring tone that used to be customary when talking about the company, Christoph Stürmer from the consulting firm IHS Global Insight once said that Toyota adapts itself to become the "mirror image" of each country it operates in.

Toyota has in fact become an American company, but this is hardly a compliment. The company, once known for quality, shifted its focus to volume, just as the Americans had done. Between 2000 and 2008, production grew by 78 percent, to 9.2 million cars a year. Of the total increase in worldwide production of 12 million cars in those eight years, almost half was attributable to Toyota.

The Mantra of Growth

Toyota, it seemed, no longer wanted to be the best on the market -- its cars were often merely the cheapest. As was the case at Ford and GM in the past, unbridled growth was the company's new mantra. Toyota became a giant, and lost its greatness in the process.

The Japanese and the Americans are already similar when it comes to management culture. What Detroit is to GM, Toyota City is to Toyota -- not just a headquarters, but a sort of automotive supreme command center.

Both corporate cultures view the production and selling of cars less as a contribution to human mobility than as a continuation of war by economic means. In this mindset, the other side is not viewed as the competition, but as the enemy. And in this battle, quality was never the decisive argument. Long before the Japanese, the Americans were world champions in the production of poor-quality automobiles.

Between 2004 and 2009, most of the complaints of unintended acceleration submitted to the National Highway Traffic Safety Administration (NHTSA) were associated with cars made by Ford. Adjusted for the Japanese company's market share, Toyota would only be in 17th place on the US recall list for defective vehicles, says independent market research company Edmunds.com.

But the Japanese also emulated the Americans in this respect. The demise of their quality culture did not begin with stuck gas pedals. In fact, more than 2 million cars had to be recalled in 2005 for various reasons, ranging from failing catalytic converters to imploding fuel injection pumps. Brakes were also a recurring problem. Back then, Toyota's reputation was already suffering.

Squeezing Water from a Dry Shirt

In the 2009 breakdown statistics for midrange vehicles, the Toyota Avensis ranks behind not only German cars made by the likes of Mercedes, Audi, BMW and VW, but also the Octavia by Czech automaker Skoda. The Japanese had deserted the unconditional commitment to quality to which they owed their rise to success. The brand image was no longer consistent with reality.

Toyota came under growing pressure as a result of the American carmakers' low-cost strategy. Dealer discounts rose while profit margins declined. Today, Toyota management subsidizes the sale of its vehicles in the United States to the tune of up to $4,000 apiece.

The company also tried to force its suppliers to make more and more price and quality concessions. The adage that it is possible to squeeze another drop of water from a dry shirt was always part of Toyota's philosophy. The once quality-conscious company and its archrivals, General Motors and Ford, became more and more alike.

'We Want to Provide Help'

Now Toyota's Detroit rivals are finally seeing a chance to improve their own prospects again. They have quickly put together a rebate program to target anxious Toyota drivers.

Steve Hill, GM's general manager of retail sales support, urged all GM dealers to hurry up and lure Toyota drivers to their showrooms. "A lot of these customers were our customers," he said. "We want to provide help."

Under the GM program, drivers who were leasing a Toyota are now being offered four-figure rebates to lease a GM car instead. Those who prefer to buy a GM car can qualify for 60-month, interest-free loans. These offers, says Hill, are valid for all Toyota drivers, not just those whose cars are on the company's recall list.

The loser is clearly determined to become a winner again.

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• Part 1: The End of the Toyota Legend
• Part 2: Deaths and Lawsuits