2007 Center for Automotive Research (CAR) Management Briefing Seminar - Jim Lentz

August 08, 2007

Jim Lentz
Executive Vice President
Toyota Motor Sales, U.S.A.
2007 CAR Management Briefing
August 8, 2007
Traverse City, MI

"There's No David Without Goliath "

Can there be a time of more turmoil in our industry?

Do we have a bright future? ... ANY future?

Well, if you check the daily news...you'd think the sky was falling.

Let's see...Congress is bearing down on us...the states are suing us... environmentalists scorn us...and we're the villain on global warming ...right?

Plus...industry sales are sluggish...raw material prices are rising... companies are restructuring...health care costs are escalating...and gasoline prices are near record highs.

Talk about challenges...we've got more than our fair share...and then some.
So, what do we do as an industry?
Well, we can dig in...hold our ground...and hope for the best.
Or...we can do what we've always done...adapt to the new order...change for the better...and come out stronger than ever.

After all, nothing is more POWERFUL than this industry, taking decisive action and putting its full force behind it.

By now, some of you are may be saying... "It's easy for Toyota to talk about a bright future...everything is going your way right now... so why worry?"

Yes, things are going well for us right now...but that by itself ... doesn't guarantee future success. Just look at the Oakland Raiders or my Los Angeles Lakers.

Toyota is far from perfect...and we know it's easy to stumble in this complex business.

So despite our current success, we are very concerned about the future.

Like you...we're worried about unreasonable fuel-economy increases ...global warming regulations... material costs...gasoline prices... truck sales...plant efficiency...health care costs...and incentive spending.
These are things we ALL have in common...and it's not getting any easier.
So I think it's important...during this brief summer respite...that we take time to explore issues we have in common and agree on solutions to some of our most pressing industry challenges.

And that's what I want to talk about today.

This is the first time I've attended this all-star industry gathering...and I'm very impressed.

There's an amazing spirit of energy...goodwill...and cooperation here.

Dave...thanks for organizing this much-needed summer boost. It will fortify us to face the fall Congress...a new model year...and the close of another challenging year.

We all love Dave Cole...but I must admit...his theme this year sent me scrambling to find out what "discontinuous" meant.

It's defined as "broken...not continuous...interrupted...intermittent."

Kind of sounds like the windshield wipers on my first car!

It was a 1963 Corvair...and I loved that car.

It did have an unusual "option", however...a big hole in the floor on the driver's side. It was useful for cooling during the summer months, but tough to take during the harsh winters in Chicago where I grew up.

So...I fixed it myself. Yep... a very high-tech solution. I put a piece of cardboard over it!

Well...fortunately...cars...and my career...have improved significantly since then, but there has been one constant throughout it all...change...and the need to adapt to it creatively.

Think about it. The challenges we've overcome during the past 100 years have made us stronger... better...and more successful.

Challenge gets our juices flowing...brings out our best...and forces us to try new things...often producing great results.

There could be no King David without Goliath...no Luke Skywalker without Darth Vader...and no Toyota without the Toyopet....

OK...let me explain that last one...

This year marks the 50th anniversary of Toyota in America...and because of our current growth...most people think Toyota was a runaway success from day one in 1957.

But just the opposite is true.

Our first product here...the Toyopet...was popular in Japan ... but a complete flop here. One of our early managers said it was over-priced, under-powered and drove like a tank.

Sales for our first year totaled a whopping 288 Toyopets...and one Land Cruiser.

Things were SO bad...that a few years later...we stopped selling cars ...all together...and survived by selling just Land Cruisers.

Talk about a challenge. It would have been easy for us to take our marbles and go home. But...instead...we spent 7 years carefully studying American consumers, then designing a car that would truly meet their needs.

In 1965...that car...the Corona...went on sale.

Perhaps some of you remember this classic TV commercial...

I imagine we spent our whole advertising budget on that spot back then...but it was worth it.

The Corona was an overnight sensation...and we've never looked back.

Four decades later, Toyota is a major player here with more than 2.5 million annual sales and 10 vehicle and component plants, creating nearly 400,000 American jobs... roughly equivalent to a city the size of Miami.

The point is...success comes...not from playing it safe...but by being challenged and working your butt off to overcome it.

With that in mind, let me share our industry forecast.

We're projecting industry sales this year of about 16.3 million vehicles…down slightly from last year...but still a very decent year.

It's hard to pinpoint the market's current softness. Higher fuel prices? ...the housing slowdown? …lower fleet sales? … some payback from incentives of the past? Who knows?

Yet...despite all that...retail sales this year are strong and our country's economic fundamentals are solid.

So, we believe the market will rebound in 2008...then continue growing steadily into the next decade.

In fact, we see industry sales potentially growing by one hundred thousand vehicles...or more...per year...eventually reaching 18 million sometime in the late 2010s.

We're bullish because the United States population is booming...and key economic drivers...like GDP, job growth, productivity and inflation...are positive.

In fact, 4 million potential new drivers are entering the market...each year...for the next 10 years! (source: Market Outlook)

And for the first time in history...around 2011...FIVE generations... from the traditionals and baby boomers...to Generations X, Y and Z...will be our customers...ALL AT ONCE.

FIVE generations! That's right...high school kids be asking, "Great grandfather...can I borrow the car?"

It will be the greatest market we've ever seen...and all automakers will have a chance to profit from it.

But to reach that "Promised Land" in the next few years, we must overcome some tough challenges.

I think there are three key challenges......politics and powertrains ...pleasing new youth buyers...and improving our retail reputation.

By politics and powertrains, I mean that we are at an historical turning point in our relationship with government and society.
Some of the biggest issues America now faces involve the auto industry.

Fuel prices...energy independence...global warming...and growing environmentalism...all touch our industry in some way. Some might even call it the "perfect storm" since these are atop the legislative agenda now.

We've faced regulatory threats before, but never the tidal wave heading our way. And it really doesn't matter that we're a relatively small contributor to some of these issues.

The vehicles we make create just one-fifth of major greenhouse gases in this country...and we have NO control over fuel prices.

But cars and trucks ARE a highly visible part of American life...an easy target for regulators.

As a result, we face an uphill battle on fuel economy standards.

So...what do we do about it?

...we face the challenge...work together... and find ways to make things better.

Americans don't expect us to solve ALL their problems, but they do want to know that we ARE part of the solution.

And ...I'm happy to say...we are starting to make a difference.

For the first time, the industry has come together to propose compromises on fuel economy and other issues. Plus, we're doing a lot to create the clean, ultra-efficient powertrains of tomorrow.

In California...where I'm based...there are 41 car models from 17 brands rated Partial Zero Emission Vehicles ...including our Camry and Prius. (source: driveclean.ca.gov)

These vehicles have the cleanest gasoline engines ever produced and are built to maintain near zero emissions throughout their entire life on the road.

But that's not enough... so our industry is inventing a new wave of powertrain technologies.

Right now, 60 hybrid or alternative fuel vehicles are on sale in the United States...and 11 million are on the road. Plus, another 19 models are in development or are being considered for the U.S. market. (source: autoalliance.org)

I'm proud to say that Toyota...last month...launched a program to road test plug-in hybrids with the University of California. We'll learn a lot from this project and apply it in the future. And I'm confident other automakers will develop similar programs.

For our long-term future, all major automakers are working on zero-emission...hydrogen...fuel cell vehicles.

So we are making good progress as an industry...but we need to do more and must continue working together on these issues. And we need to constantly let the world know what we're doing to be part of the solution.

In short, it's time to transform our image from an industry that drags its feet...to one that RUNS on innovation.

The second major challenge we face is to better prepare for the new youth buyers now in the marketplace.

At Toyota...we've had a front-row seat to this seismic shift through our Scion brand. And let me tell you...these new buyers are the most challenging we've ever faced.

They are extremely smart...internet-savvy...skeptical of advertising ...and used to being catered to. They want to customize products to fit THEIR time schedule and THEIR lifestyle.

Not the best match for an industry that has relied on mass production ...heavy advertising...big incentives...and old-school ways of doing business.

These new consumers are NOT going to adapt to us...WE have to adapt to them if we want them as customers.

And ... trust me...we WANT them as customers.

America has 148 million people aged 35 and under... and Generation Y...the largest group...already has $2.3 trillion in buying power.

In the future...they stand to inherit another 17 trillion dollars...or nearly 3 times the current national debt!

So...Moms and Dads...spend it while you can!

More importantly for us, young consumers now represent more than one THIRD of the driving population and will continue at that pace for 17 years...through the year 2025!

We have to get ready now and it won't be easy.

They've grown up in a world of personalization and expect businesses to give them unlimited choices to create their OWN products. And successful companies are doing just that.

Coca-Cola has gone from Coke and Diet Coke to 21 different varieties. Their newest is called...Diet Coke PLUS...a no calorie cola with 5 nutrients for your body. Hey...it beats eating vegetables!

You can customize your shoes on Nike.com...order special edition iPods from Apple...and get your coffee 79 million different ways at Starbuck's.

Even braces for your teeth come in different colors!

Personalization is the key to these new buyers...here...take a look at what I mean...

Amazing, isn't it? They represent a whole new wave of consumers who will demand changes in the way we do business.

To meet this need, Scion developed a "blank canvas" approach.

All Scions are well equipped and come with limited options from the factory. Customers simply have to choose the model...color...and transmission.

Then comes the fun part ... personalization.

We started with 40 different accessories for Scion vehicles and now have more than 150...from subwoofers to performance clutches.

So, the initial product purchase is just the starting point for Scion owners. The true connection with the brand is through the process of personalization of the product.

And connect...they do.

I'm just amazed at what I see every time I go to a Scion event. I've seen Scions with 8 video monitors and 3 computers!

We'll continue using Scion as a listening post and a lab for learning the needs of youth customers...and we're transferring what we learn to Toyota and Lexus.

Looking at all of these clues, I think our focus for the future is quite clear.

We have to start listening and responding to new generation customers NOW.

The third major challenge we face as an industry is improving our image at retail.

The truth is...most people get to know the auto industry through visiting one of 22,000 independent automobile dealers in this country. (source: 2007 Automotive News market data)

Unfortunately, that experience isn't always positive.

A recent Gallup poll rating key professions for honesty and ethics was quite revealing.

At the top were nurses and pharmacists. In the middle were bankers and journalists. And toward the bottom...Congressmen and insurance salesmen. But car salesmen were dead last.

Only 7% of those polled said car salesmen were honest and ethical.

That's a huge problem...folks...because we're ALL being judged on what happens at the dealership level...and it's not always good.

Verbatim comments from our focus groups and customers are quite blunt about the situation.

The most telling was this..."I'd just rather go into a FUNERAL home than a car dealership!"

And this gem..."The auto sales industry has a cloud hanging over it. All of them are out to take advantage of you."

Now I'm not here to blame dealers for this dilemma.

For the most part, new car dealers in the United States do a marvelous job caring for customers and servicing the 240-million vehicles on U.S. roads. (source: 2007 Automotive News market data)

And that's a tough job because most of us are pretty demanding ...have limited time...and hate the paperwork involved.

But that has to change.

When I was a kid, going to buy a car with my family was an exciting experience.

Today, there are so many choices... options... people to deal with ...and mountains of paperwork...that it's sucked all the joy out of the experience.

We know the car-buying customer wants to spend 2 hours...or less...buying car. But...too often...that stretches into 5, 6 or even 7-hour marathons.

And if you think current customers are impatient, just wait until Gen Y and Z show up in numbers. They measure time in nanoseconds.

They tell the joke about these young people standing in front on a microwave oven, yelling at it..."Come on! I haven't got all minute!"

We HAVE to improve...streamline...and put fun back into the retail experience...and our dealers need our leadership.

For starters...as automakers and suppliers...we need to make sure we're not adding to the problem.

We have to ask ourselves, "Do OUR policies encourage the behaviors our customers seek at our dealerships?" "Do OUR associates model and support the efforts dealers need to excel with our customers?"

Clearly, we're not doing enough to address this long-standing ... critical...front-line activity in our business.

One FOURTH of customers who walk into a dealership to shop for a car...walk out without buying...because of poor treatment.

Fortunately, most go on to purchase a vehicle elsewhere, but imagine the toll it takes on our collective reputation...day-in and day-out.

No wonder we have a hard time pleading our case in Congress. If we're not seen as being considerate to our customers, why should WE receive any consideration as an industry?

At Toyota, retail treatment is one of our most pressing issues. I've challenged our entire organization to find ways to help improve the customer experience.

We're trying to change obsolete policies and challenging our dealers to do the same. Among other things, it includes taking a hard look at "sacred cows" like our vehicle allocation system and dealer award programs.

This is a sensitive, tough area for our industry, but it's also ripe with great opportunities.

So let's work together as automakers...suppliers...and business partners...to help our dealers turn their "mean machines" into "dream machines".

Politics...powertrains...youth buyers...and our image at retail...huge challenges on their own and daunting in total.

But we're not just any industry. We are the mightiest industry in the world...full of people with immeasurable talent and energy. People like you.

We must resolve to make things better for ourselves...and our society.

This may be a time of discontinuous change, but it's also one of immense opportunities as we co-develop new ways to drive America forward in the 21st century.

Good times ARE coming again...and by changing...adapting...and overcoming our biggest challenges...
- We WILL find ways to take better care of our customers...
- We WILL find ways to take better care of our planet...
- And we WILL succeed and prosper for many years to come...

Thank you...and good luck...


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