At a time when diversification is often suspect, the Japanese auto giant, guided by a historical perspective, is moving into other areas such as prefab housing and, especially, telecommunications. : Toyota Heads Down a New Road


Toshiki Kanno works a Toyota assembly line in a factory boasting of some of the company’s best technology: a heavy-duty electrified paint bath and computer-guided driverless carts to carry parts.

In a country where status is linked to the prestige of one’s company, Kanno is proud to work for the famous auto firm. But he doesn’t make cars. His factory, 75 miles west of Tokyo, turns out prefabricated housing.

At a time when “diversification” has become a dirty word among the world’s leading corporations, Japan’s premier car maker is unapologetically moving in the opposite way. Toyota President Hiroshi Okuda says that by 2000, he wants 10% of sales--perhaps $10 billion, or about what Federal Express manages companywide in a year--to come from outside the car and truck business.

An even bigger gleam than prefab housing in Toyota’s eye is telecommunications. The company’s executives hope it will someday be as big globally in telecommunications as it is today in autos.


Sort of a TT&T.;

They foresee strong links between telecommunications and cars, in ways ranging from traffic safety to navigation and built-in multimedia systems. Other areas drawing Toyota’s interest are light aircraft engines and motorboats, but ambitions in these fields are smaller.

Toyota’s strategy gives new meaning to the legendary long view of the Japanese. Okuda said the company’s plan is driven by historical cycles dating to the 1700s suggesting that a single line of business rarely prospers for more than 60 years.

Some observers are amazed to hear a legendary firm like Toyota--the company that more than any other personifies Japan’s phenomenal post-World War II economic success--talking this way.


“I can’t believe this is Toyota,” Peter Boardman, an auto analyst at UBS Securities Ltd., said with a laugh when asked his response to Okuda’s comments about every-half-century industrial cycles. “I thought they just built cars. I didn’t realize they’re also philosophers.”


But Toyota doesn’t appear to have gone off the deep end, nor does it expect that cars will disappear. After all, ships and trains are still around. But they don’t dominate the world the way they once did. Toyota’s top management is now saying the same may one day be true for autos.

“We are not arrogant enough to believe that the automotive business can prove to be profitable perpetually,” Okuda said. “We are now . . . entering nonautomotive businesses as well . . . in order to prepare ourselves for the eventual conditions in the automotive industry.”

Toyota will focus on autos for the foreseeable future, but an ultimate shift in its core business, perhaps many decades from now, would not be unprecedented: After all, Toyota was founded 60 years ago as a textile firm and only later moved into autos.

Expanding non-vehicle sales now will provide some “insurance” for the long term, Okuda said.

It’s easier to diversify, of course, with a treasure chest to fund expansion: Toyota holds about $26 billion of cash, bonds and shares in other firms--enough to buy, say, a couple of Baby Bells.



Yet many observers are skeptical of Toyota’s strategy. Sure, Toyota’s record in autos is phenomenal, and it has long had a reputation as a very well-managed company.

But analysts are now scratching their heads, wondering whether Toyota may be making an ill-fated choice.

“It doesn’t make sense for . . . an expert in building cars,” said Steve Volkmann, an auto analyst at Morgan Stanley Japan Ltd. “How does that translate into an advantage in cellular phones or housing? Where are the synergies? I haven’t heard anything that leads me to believe it’s a smart idea. It’s odd to me.”

T.W. Kang, managing director of the Tokyo-based consulting firm Global Synergy Associates, said Toyota’s moves into housing and telecommunications look risky because when a firm enters a new area, it is an “amateur” facing entrenched companies with more experience.

“If you are an amateur competing with pros, usually the pros really clobber you,” he said.

Indeed, the landscape is littered with the carcasses of diversification moves made in the 1980s and 1990s. Among the more spectacular disappointments were forays by the Japanese companies Sony and Matsushita into Hollywood. PepsiCo blundered into restaurants, Viacom into retailing, Xerox into finance, Southern California Gas into sporting goods.

The common wisdom in boardrooms around the industrialized world these days: Tend to your knitting.



But here comes that long view again: Toyota has been gradually building experience in telecommunications since the mid-1980s.

Almost unnoticed by outsiders focused on Toyota’s auto business is the fact that the company rang up telecommunications sales--calculated on the basis of its percentage of ownership in various firms--of a tidy $820 million in the latest fiscal year, according to Susumu Miyoshi, a Toyota director responsible for telecommunications. (This is still less than 1% of total Toyota sales of $88 billion.)

Building on this base--which includes firms for mobile, domestic long-distance and overseas calls--Toyota is now courting international partners, and has been approached by an unnamed German telecommunications firm.

“The telecommunications business remains in a state of flux, with different partners likely to engage in alliances on a global scale,” Okuda said. “At this point in time we are still very closely observing who will tie up with whom. In that context, we are trying to identify which will be the best partner for us in terms of a strategic alliance in future years.”

Toyota owns parts of three major Japanese telecommunications firms: a controlling 38.3% equity stake in a domestic long-distance company, Teleway Japan Corp.; a controlling 27.2% stake in a mobile-phone firm, Nippon Ido Tsushin Corp.; and a 17.6% stake in a firm for overseas calls, International Digital Communications Inc., which gives Toyota a management voice but not control in that company.

The auto maker also owns equity stakes ranging from 0.2% to 23.3% in no fewer than 36 other telecommunications, cable television, broadcasting and satellite television firms, which means it is linked to nearly every facet of the business.

Toyota is moving into this field “because we thought the telecommunications business will become one of the main businesses in the 21st century,” Senior Managing Director Fujio Cho said.

Toyota executives argue that the firm is not only expanding into growth areas, but also that it is choosing its steps in ways that can leverage its strength in autos.

Its prefab homes, for example, are typically assembled on site from about a dozen factory-built room-sized units, each built around a steel frame.

Some auto factory techniques are used in producing the homes, including an extremely powerful painting method for automobiles that keeps the steel frames from rusting in Japan’s humid climate.

In this earthquake-prone country, steel-framed homes are attractive to some safety-conscious home buyers. Toyota’s promotional videos point out that its homes came through virtually undamaged in the killer earthquake that devastated Kobe in early 1995. Many details of its homes, from window size to optional oversized beams, are made to order.

Yasuto Shiramura, 32, a power company employee, said he bought from Toyota because he “came to trust” a Toyota Home salesman who was “very kind.” Shiramura ordered a home with extra-large steel beams for earthquake safety, and said he is confident they will not rust.

Another point executives say works in Toyota’s favor is that 60% of single-family home construction in Japan is on sites where the owners are tearing down old residences.

A major selling point for Toyota homes, according to sales division head Minoru Kurita, is that with prefabricated housing it only takes 40 days from the time an old home is torn down to the time the new one is ready for occupancy.

With three prefabricated housing factories up and running, Toyota is only a couple of years from the break-even point in the home-building field, with a potential for solid profits after that, executives say.

Toyota says it sold 3,600 homes for $410 million in the fiscal year ended March 31. It aims to build 5,300 homes in 1998 and hopes to double that again three years later, sales executive Hiroshi Takaya said. That would send annual housing revenue above $1 billion. It does, however, face competition from larger and better-established prefabricated-housing firms.

Then there is Toyota’s unexpected futurist bent.


Toyota is determined to press forward, despite risks, partly because the firm’s top executives take very seriously the theory that industrial progress comes in roughly 50-year waves, said Miyoshi, the director handling telecommunications. These waves of change are reflected in the dominant infrastructures of the time, he said.

“I often talk to Okuda,” Miyoshi said. “There are a lot of prophecies that try to forecast the future. He thinks this is one that has a high chance of being right.”

Toyota has even developed charts based on scholarly research illustrating this concept. Miyoshi displayed one that shows the development from the early 1800s into the 21st century, first of canal shipping, then railways, then superhighways, then telecommunications. Another shows a transition from an age of autos and electronics to a multimedia era.

This doesn’t mean cars are soon to disappear, but rather that telecommunications and multimedia will have a direct relationship to the auto industry in the future, Miyoshi said.

For one thing, navigation devices--already fairly common in cars sold in Japan--will become more widespread and far more sophisticated, he said.

In addition to displaying maps detailing a car’s location and how to reach a destination, navigation devices will also show which parking lots are full or empty, what’s playing at movie theaters, and where traffic is congested, he said.

Although the devices will count as automotive sales, the infrastructure to support them is part of the telecommunications business, he explained.


And this will be only the beginning, he predicted. Toyota’s goal, along with that of other auto makers, is to develop systems of vehicle control that ultimately will allow cars to travel on autopilot, freeing the driver as well as passengers to pay attention to multimedia devices in the car.

“To survive through the 21st century, the auto business needs to have the support of the telecommunications and information industries, so that pretty much anything you can do at home, you can do while in motion,” Miyoshi said.

“The car will be more like your house. . . . In the future, even while sleeping, you’ll be able to get to your destination safely,” Miyoshi said.

To be sure, other auto companies around the world see the same technological future.

The difference, Miyoshi said, is that most car makers plan to leave the telecommunications to other firms, whereas Toyota wants to be a player in both fields.

His own hope, Miyoshi added, is for Toyota to become one of the world’s great telecommunications companies.

That may or may not happen. But analyst Boardman, while chuckling at Toyota’s top-level philosophizing on half-century trends, credits its vision.

“It’s a company that’s always trying to move ahead,” he says.


Very Long View

Toyota is making strategic decisions based partly on industrial cycles dating to the 1700s and projected out to 2050. The above chart suggests that the highway has reached its zenith after a 55-year run as the dominant infrastructure and is being eclipsed by telecommunications. The auto maker’s newest investment: telecom.

Source: Toyota Motor Corp., based on various academic studies