Toyota Pins Big Hopes on Daihatsu’s Small Cars – Wall Street Journal

NAKATSU, Japan—The world’s biggest auto maker is leaning on a maker of tiny cars to expand its empire.

Toyota Motor Corp.
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has long been associated with compact, gas-sipping cars, but its executives say another firm does it better right in their own backyard. That is Daihatsu
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Motor Co., a century-old manufacturer set to become a wholly-owned subsidiary of Toyota in August.

In January Toyota boss Akio Toyoda announced the $3 billion move to take full control of Daihatsu with an eye on markets in developing countries where most people can’t afford a big car. He is among the executives who have made the pilgrimage to a superefficient Daihatsu plant in the city of Nakatsu in southern Japan that cranks out minicars with engine displacements of 0.66 liters or less—about the same as a modest-sized motorcycle.


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“With the rise of environmental issues and emerging markets, small cars carry even greater importance than before,” Mr. Toyoda said when the deal was announced. “Unless we obtain knowledge of small cars, we can’t have a breakthrough.”

Buying Daihatsu outright will help Toyota beef up its small-car business by allowing it to work more closely with engineers from its smaller counterpart.

Daihatsu’s No. 2 plant in Nakatsu opened in 2007, three years after the company’s No. 1 plant on the site. The newer facility is half the size and can make the same number of vehicles as the older one, but needed just 60% of the usual investment.

The company crammed its welding robots into a third of the space of a traditional plant. On the paint line, half-built minicars slide down side-by-side instead of bumper-to-bumper, cutting the line length by a third.

The company learned from mistakes at the No. 1 plant, where it had to get rid of robots worth millions of dollars after they kept breaking down. It replaced them with workers who have undergone military-style drills on fast vehicle assembly.

Robots weld a half-built car at Daihatsu’s No. 2 plant in Nakatsu, southern Japan.
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Daihatsu, whose main markets are Japan and Southeast Asia, also reached out to new, smaller suppliers that were willing to design cut-rate parts for its minicars.

“People are always asking us how we manage to run a business with minicars that aren’t so profitable,” said Masanori Mitsui, Daihatsu’s president. “But it is precisely because we make these cars with thin profit margins that we had to come up with new ideas.”

Toyota and Daihatsu have had an alliance since 1967, and Toyota has owned a 51% stake in its partner since 1998. The two car makers have operated mostly independently in the past, although they have worked together in Southeast Asia, with Daihatsu supplying certain models to Toyota.

Small cars can bring in servicing business for dealers, and can help Toyota attract entry-level buyers who may trade up to more lucrative models later. But the cars themselves aren’t seen as major profit centers. Like its U.S. and European rivals, Toyota makes most of its money on bigger cars. In the U.S., Toyota’s largest market, inexpensive gasoline has boosted sport-utility vehicles and pickup trucks, helping the company forecast a net profit of about $20 billion in its most recent fiscal year.

For Daihatsu, smallness is its specialty. In its home market of Japan, Daihatsu sells “kei” minicars whose small engines qualify them for lower ownership taxes. Though some minicars cost as little as $7,000, the vehicles made at the Nakatsu plant have a profit margin of around 5%, said a Daihatsu executive, a rare feat for a small-car maker.

Those numbers caught Toyota’s attention because of its aspirations in developing markets.

Such small cars now account for around 28% of global light vehicle sales, according to IHS Automotive, which forecasts that this figure will rise over the next decade thanks to growth from India and other developing nations.

Getting small cars right is a headache shared by many major global car makers, some of which have sought expertise through partnerships. In 2009, Volkswagen AG
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forged a tie-up with Suzuki Motor Corp.
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, which specializes in small cars and has a big presence in India. The partnership later went sour and ended last year. General Motors Co.
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is working with China’s SAIC Motor Corp.
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to overhaul how it creates cars for developing markets.

Akio Toyoda, president of Toyota Motor Corp., speaks during a news conference in Tokyo last year.
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Tightening fuel-economy standards world-wide also raise the importance of small cars. In a sign of market pressure, Mitsubishi Motors Corp.
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recently admitted it cheated on fuel-economy tests for some minicars sold in Japan.

For Toyota, small cars account for about 27% of its global sales. That is up from 22% 10 years ago, according to IHS, but in certain emerging markets including India, Toyota has struggled to satisfy local tastes.

By restructuring its small car strategy, Toyota wants to consolidate its control in markets like Southeast Asia and “expand in South Asian markets where Japanese car makers have a strong foothold,” said Takaki Nakanishi, an automotive analyst running his own research firm.

That could raise the bar for U.S. and European auto makers to compete there, he said.

The Daihatsu brand will remain even after it becomes fully owned by Toyota. Daihatsu staff will lead development, procurement and production of small cars in emerging markets for the Toyota group, the two companies said in January.

Daihatsu wants to take its lessons from the Nakatsu plant to emerging markets, said Mr. Mitsui, the president. “Our manufacturing advantages stem from minicars, and we want to take that global,” he said.

Write to Yoko Kubota at yoko.kubota@wsj.com

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