Toyota in turmoil?

It's a rare day when two of the editorials in the Wall Street Journal, specifically the February 21 issue, are devoted to the car business. But these are tumultuous times. Consider the topics: one editorial deals with possible suitors for Chrysler and how the company seemed to come unraveled. In the other, titled "Who's Afraid of Toyota?" writer Holman Jenkins lists all of the reasons why "The hybrid company doesn't walk on water." While Jenkins' claim that Toyota isn't a deity is true, which we know from our testing and subscriber data, many of the points he makes don't quite wash.

To start, Jenkins reports that Toyota is resorting to incentives for the Prius (mostly cut-rate leases, which are aided by low depreciation) to move the cars off of dealer's lots. "What Toyota really proved with the Prius, ironically, is that Americans have little appetite for high mileage vehicles," he writes. The thing is Toyota has sold more than 100,000 Prius hybrids for each of the last two years. While they probably haven't made a profit on them, as Jenkins reports, that's by no means a small number of sales. And judging by their extremely high level of customer satisfaction in Consumer Reports surveys, lots of Prius owners eagerly would buy the car again.

From there, Jenkins claims that Toyota "got lucky" with its hybrid technology, adding that consumers "could have found a vehicle that produces mileage as good or better than the Prius's..." Really? A new car? Even in our test of subcompact budget cars, including the Toyota Yaris, Nissan Versa, Honda Fit and the Chevrolet Aveo, none came close to getting the 44 mpg overall of our tested Prius. Jenkins comment that "Designing a car that uses less gas, after all, is a snap" is also a bit odd.  He correctly notes that the old Honda CRX HF and Geo Metro XFi did get superior fuel economy but, of course, none of these vehicles are for sale anymore. And if he thinks there is little appetite for the Prius, there would be even less desire for these fuel-sippers today. Such impressive mileage was possible 20 years ago because those cars weighed virtually nothing (automotively-speaking). Load in today's safety features, crash-test-capable structure, sound-deadening, and other creature comforts people expect, and that mileage would plummet. Beyond that, the Prius gets to 60 mph in 10.5 seconds and can seat five comfortably -- feats the eco-minded CRX and Metro couldn't pull off. Plus, the Prius has standard side- and curtain-air bags, antilock brakes, and optional stability control.

Technically speaking, when you look at the evolution of economy cars, the Prius is an engineering marvel.

Regarding the rest of Toyota's line, well, let's face it-Camrys and Corollas are fairly bland sedans. Very competent and comfortable, but they're not going to wind up on our most fun-to-drive lists. Still, Toyota sells over 400,000 Camrys a year. With the component sharing that goes on between Camry, Avalon, Highlander, Sienna, and the Lexus RX350 and ES350, that equals huge economies of scale that helps Toyota earn billions of dollars in yearly profits. However, Jenkins says "profits are not assured by economies of scale" and feels that "becoming more important in a crowded marketplace is turning out cars with ineffable cultural appeal. Toyota's worldwide success so far has come without being strong in this department. And Toyota knows it." (Owners of Toyota's defunct Supra and MR2 might beg to differ.) Toyota's enviable brand loyalty further weakens this position, as there is clear appeal, cultural or otherwise, as indicated in our Brand Report Card survey.

As an example of this, Jenkins notes that Toyota mined its past when styling the FJ Cruiser, which "earned [it] unprecedented gushing from the automotive press." But we found the FJ wasn't all it's cracked up to be; it didn't even score high enough in Consumer Reports' tests to be recommended. The FJ isn't winning every other comparison test from other car magazines, either.

While we think the FJ looks cool, Toyota's bread and butter is in selling vast quantities of reliable, competent transportation. This requires strong products that meet consumer needs across the board. Toyota took a while to achieve this. They are an industry leader in the car-based SUVs that are replacing body-on-frame SUVs in many families' driveways. But it wasn't until the mid-1990s that the Toyota 4Runner was strong competition for the Jeep Grand Cherokee. A "proper" sized Sienna minivan to equal the Dodge Grand Caravan? That took until 2004. And just now, Toyota is finally rolling out a true full-sized Tundra pickup truck.

Jenkins rightly notes that the "Big Three...raked in billions correctly judging a consumer appetite for large SUVs and pickups. These were and remain impressive feats in consumer design - as befitting products in which the Big Three were willing to invest precious capital, as distinct from the workaday sedans they churn out just to break even on their UAW labor contracts."

It was a mistake, however, to neglect sedans. Those truck profits didn't get invested back into those workaday sedans quickly enough--and sedans are the largest market segment in the U.S. Cars like the Ford Taurus grew moldy on the vine, withering from lack of investment. While still profitable overall, with a recent shift in consumer purchasing trends, sales of big SUVs and pickups slowed, requiring big incentives to move them. (These multi-thousand dollar incentives far exceed the Prius incentives Jenkins harps on.) Less truck profits meant the Big Three couldn't continue to prop up unprofitable, unpopular, and uncompetitive sedans. Combined with huge labor costs, it's a recipe for record losses.

So where does that leave the industry? Jenkins summarizes that "their big problem is that, thanks to their legacy labor issues, the financial markets simply will not afford them the leeway to make large capital investments in sedan styling and technology." We agree that -- labor costs or no labor costs -- the domestics need to focus on those "workaday sedans" to make it back. Chrysler invested in the styling of the 300, and borrowed some technology from Mercedes-Benz to leverage the costs. For a while, strong sales of those cars helped a lot--but one family of sedans ultimately couldn't keep that company profitable.

In reviewing the subtitle of the editorial (about Toyota not exactly being able to "walk on water"), we'd say that it's doing more than staying afloat.

--Tom Mutchler