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Only the Fittest Car Giants Will Outlast the ‘90s

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What does it tell you that Toyota Motor Corp., the leading automobile producer in Japan and the world’s third-largest car maker, has $15 billion in cash--as much in spare cash, that is, as Volvo has in total worldwide sales? It tells you lots of things, including that Toyota has the staying power necessary for the decade of the 1990s, when the automobile will become an exciting, constantly changing product again.

A new kind of motor “may well replace the gasoline engine,” says Tsutomu Ohshima, executive vice president of Toyota. Electronic traction control will deliver power to each wheel, preventing skidding and making four-wheel drive obsolete. Computer chips and plastic compounds will take the place of valves and metal, and the familiar car--which hasn’t changed in basic technology since the 1920s--will become a high-tech machine.

Which means that the cost of competing in the world market--where dozens of companies now produce 46 million cars each year--is going to go up. “In order to compete internationally, we have to invest in research to develop new cars, new products,” says Ohshima, one of four top vice presidents who rank right under Chairman Eiji Toyoda and his son, President Shoichiro Toyoda, in management of the $50-billion sales company.

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Companies that can’t afford to spend billions on product development will lose ground until they ultimately merge into the car making giants that will dominate the industry. Who will those giants be?

The American Big Two, General Motors and Ford, will be among them. GM today has 17% of the world market and foresaw the technological challenge even before Toyota. GM’s much criticized chairman, Roger Smith, bought Hughes Aircraft in 1985 to introduce a high-technology mind-set to a mechanically oriented industry. And, say knowledgeable people, it was a Roger Smith speech during a visit to Tokyo that convinced Japan’s auto makers of technology’s importance for future industry leadership.

Joint Ventures Likely

Ford, which has 13% of the world market and $10 billion in cash seeking acquisitions in electronics, will be a survivor, as will Toyota, which today controls 8% of world auto production. But after that, even Chrysler, which like Nissan has a 5% world market share, may have to merge. And specialty producers, possibly including big names such as Mercedes, Volvo or BMW will almost certainly become divisions of larger mass-production companies.

It is among those specialty producers that Toyota sees opportunities for joint ventures, says Ohshima--”in the near future, as the world market becomes more competitive.”

Ohshima is talking about arranged marriages, with Toyota gaining local production for its cars by playing rich husband to some of Europe’s renowned names. Which names? Peugeot? Jaguar? Ohshima, during an interview at Toyota headquarters near Nagoya, waves off the question with a smile. “We are only doing feasibility studies now,” he says.

But why, after all the decades, are cars changing now? “Because there are no longer big differentials in size and quality, and cars are becoming look-alike the world over,” says premier auto analyst Maryann Keller, of the investment bank Furman Selz Mager Dietz & Birney. “High tech, therefore, is the last competitive edge.”

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An expensive edge, especially for Toyota, which must expand outside Japan to reach its goal of a 10% world market share. In the United States, Toyota begins production next year at its new $1-billion complex in Georgetown, Ky., and hopes within five years to lift U.S. sales to 1.5 million cars and trucks a year from just under 1 million now.

In Europe, it will have to spend heavily to secure a place in the huge market emerging in 1992, when 12 nations eliminate almost all barriers to trade between them. “It will be 325 million people,” says Ohshima, “almost as much as the population of the United States and Japan combined.” And beyond that, many countries, including China, have yet to enter the motor age. Toyota is now producing through joint ventures in Taiwan, the Philippines and Thailand.

Yet thanks to its cash hoard, and the support of the Tokyo capital markets, the company has no money worries. In fact, in late July, when it had roughly $13 billion in cash, Toyota borrowed $2 billion more by selling convertible bonds to investors in Tokyo. Why borrow? “The timing was good,” says Ohshima with a smile. The interest rate on the bonds is only 1.2%, and Toyota can turn around and earn an immediate 8% on world money markets. Some of the healthy fiscal year profits Toyota will report later this week result from money market investments.

So what does Toyota’s $15 billion tell you? That, as it does late in a poker game, the ante is going up in the automobile business--and Toyota has the chips to stay at the table.

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