How Toyota Sees 2009

Hardly anybody wants to predict the future these days, since so many forecasts for 2008 turned out to be dead wrong. But Toyota, with its timely hybrids and steady global growth, is as good as any company at guessing where the economy—and consumer tastes—are headed. Like most other carmakers, Toyota had a dreadful year in 2008, with U.S. sales off 15 percent, only slightly better than the 18 percent drop in the industry overall. I met recently with Jim Lentz, president of Toyota's North American arm, and discussed the outlook for consumers and the U.S. car industry. Excerpts:

It was obviously a terrible year in 2008. And some people think it will be worse in 2009. What does Toyota foresee?
We see three recovery scenarios. There could be a V-shaped recovery that rises very quickly. I think it's doubtful that will take place. What's more likely is a longer, slower recovery, like the Nike swoosh. Or it could be a U-shaped recovery.

[Here are the 12 most important cars of 2009.]

Our sense is that we're close to a bottom right now. We think the first quarter of '09 will be similar to the fourth quarter of '08, which was terrible. But it will get better after that. The question is whether we will bottom out in the first quarter or whether it will take longer.

What has changed for your customers?
The biggest change that we've noticed is while the monthly payment is always important, it's less important today than getting some help with a cash down payment at the beginning. It used to be you could put zero down. Now the banks want to see more money down. To help with a down payment or with negative equity on a trade-in, we're offering more cash at closing. That's a shifting emphasis.

[You can read about why Obama should end the bailouts.]

Are your customers having trouble getting loans?
Yes, but a bigger problem is people who are upside down on their loans, who owe more than their car is worth at trade-in. Over the last four or five years, there's been a lot of negative equity building. In the past, buyers refinanced their way out of it. They'd just trade in their car for a new one or lease a new car and roll the difference into the new loan. But at some point, you have to get off the merry-go-round. Now, some banks have 84- or 96-month loans. I think that's bad for consumers.

A lot of companies—in many industries—are hoping that "pent-up demand" will bring a quick recovery. This is the idea that consumers are just dying to spend money and will go out and buy stuff as soon as they feel more comfortable about their job and their paycheck. Do you believe that?
The average vehicle right now is older than it's ever been. There are about 250 million vehicles in operation, and the typical scrappage rate is about 6 percent. Now it's about 4 percent. People are keeping their cars longer. That's why we think there's pent-up demand in the marketplace. But the overall credit issue and the lack of trust is going to take a little bit longer to work out.

The big story right now is obviously what's happening to the Detroit Three, with GM and Chrysler getting bailout money to avoid bankruptcy—and maybe Ford as well, down the road. Toyota and others have been supportive, while trying to stay out of the limelight. Is there a risk of backlash if the Detroit automakers fail?
There's always a risk of political backlash. We're very aware of that. But 45 percent of our dealers also own a GM dealership, 35 percent own a Ford dealership, and 30 percent, Chrysler. So what happens to the Big Three has a big impact on our dealers. 

The risk that we always have is that they could cross-subsidize a dealership that's losing money with one that's making money, and bring down the Toyota dealership. So we're tied pretty directly to what happens in Detroit.

[These are the cars that drove Detroit's customers away.]

You had plans to build the Prius at a new factory in Mississippi. What happened with that?

You're right. We had planned to build the Prius in Mississippi, and those plans are now on hold. The plant is 90 percent complete. We'll finish building the plant, then suspend installation of the equipment. Once we see where the market is headed, we'll decide what to do there. 

Why the change?
What makes this downturn unique is that it's global. The world market has come down along with the U.S. market. We don't need any global increased capacity for the Prius right now. 

This will be an important year for hybrids. Honda and Ford are both introducing new hybrids that will compete with the Prius—just as gas has fallen back below $2 a gallon. Do you think Americans will still be willing to pay extra for a green car that may or may not save them money at the pump?
I think two things will happen. Toyota has 75 percent of the hybrid market right now. As we see more voices, it's going to create more awareness and more potential for growth.

We've also got this new political administration, which will help "green" America. I think that will help raise interest, too.

[Here's what the car companies want from Obama.]

There's talk about all kinds of new technology—not just hybrids but electric cars, diesel, fuel cells. Where do you see this settling out?
All of these technologies have trade-offs. Some customers will have a traditional hybrid like the Prius that they'll want for long-distance driving. At the other extreme will be electric cars that can go maybe 50 miles on a charge, which are good for short trips around town. In between will be other kinds of plug-ins.

[You can check out the pros and cons of 8 green fuels.]

What about ethanol? That was popular for a while, but it has a lot of disadvantages. Is that kind of a nonstarter?

Yeah, I think ethanol is a nonstarter.

So what's the future of what we now think of as conventional hybrids, like the Prius?
The backbone of our powertrains will be the hybrid synergy drive, like the one that's in the Prius and our other hybrids. We see peak oil supply around 2020, with peak natural gas around 2040. So around 2020, gasoline as we know it will start to become prohibitively expensive. CNG will be a stopgap until we see hydrogen. But the hybrid, I think it's there forever.