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Toyota's Quiet Global Overhaul

By John Rosevear - Apr 16, 2013 at 12:00AM

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For the most part, Toyota (NYSE: TM) has affirmed its strengths in recent months, as Japan's largest automaker has moved to put its two disasters of recent years – the 2011 Japan tsunami and its 2010 recall scandals – firmly in the rearview mirror.

Recent models like the Camry have been big sales successes, helping to restore the luster to Toyota's product story. But while the company seems set on a secure course, it is quietly laying the groundwork for a subtle – but radical – global overhaul.

This isn't a project driven by romantic nostalgia for Detroit's glory days. Rather, it's a determined effort driven by a strong business case: For a global automaker, a strong luxury brand can be a significant driver of profits.

The concept of "platforms" and global automaking

To understand the significance of the transformation being set into motion at Toyota, it's helpful to look at what has been happening at one of Toyota's biggest and most dangerous rivals, German auto giant Volkswagen (NASDAQOTH: VLKAY). But first, a bit of background.

Nearly all of the global automakers make use of "platforms", sets of common dimensions and shared parts that underpin several different models. For instance, Ford's (NYSE: F) Focus compact and Escape SUV are very different vehicles, but both are based on the automaker's "C1" platform. That arrangement greatly simplifies engineering and production-planning tasks, and allows Ford to benefit from greater economies of scale on shared parts that are mostly invisible to the average buyer – while producing two vehicles that are, from a consumer's vantage point, quite different.

A global automaker using this system will typically have several platforms, perhaps a dozen or more. General Motors (NYSE: GM), for example, is in the process of streamlining its global operations around 14 different vehicle platforms. While there will still be a few one-offs here and there, these platforms will underpin most of its offerings around the world by 2018.

How VW is kicking off the post-platform era – and generating huge profits

VW has taken the idea of "platforms" one big step further. The company is now standardizing around just four "assembly kits", or super-platforms. These super-platforms are perhaps best thought of as bags of automotive Lego bricks that can each be assembled into many different kinds of vehicles. By standardizing design features such as engine compartment measurements across large families of vehicles, VW can achieve massive economies of scale and flexibility – leading to greater profits per vehicle sold.

These four assembly kits will cover about 80% of VW's total global production, across VW Group brands ranging from VW and Skoda to Porsche and Bentley. Already, the models being built on these platforms have helped boost VW's profits: The automaker reported $15 billion in pre-tax ("operating") profit in 2012, far exceeding Toyota's healthy $11.1 billion total.

VW's rethinking of its platform strategy (not to mention those profits) has caught Toyota's attention. And Toyota has already put a considerable amount of effort into adapting the approach for its own use.

Toyota's take on VW's idea: a new approach called TNGA

In a presentation on March 27, Toyota product-planning chief Mitsuhisa Kato said that "ever-intensifying global competition" meant that "the times are now requiring us to develop more attractive products ... more efficiently than ever."

TNGA, or Toyota New Global Architecture, is Kato's (and Toyota's) answer to that challenge. TNGA is the company's take on the post-platform concept pioneered by VW, a modular development strategy that will eventually allow vehicles built on common architectures to share as many as 80% of their parts.

Toyota's initial strategy will revolve around three super-platforms in small, medium, and large sizes, which will underpin future versions of familiar models like the Yaris, Corolla, and Camry, respectively. Kato emphasized that the new vehicles based on these platforms will have lower centers of gravity, for improved handling, and more attractive designs.

Kato admitted that Toyota was "behind" in its adoption of such a strategy, a remark that most of Toyota's rivals (who are even further behind) no doubt found grimly amusing. But as Toyota pushes further into the post-platform era, its margins – and profits – could see real growth in coming years.

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