Oct. 21 (Bloomberg) -- On a hot Los Angeles night in July, girls in halter tops and boys in T-shirts crowded into the Conga Room, a Wilshire Boulevard nightclub owned by singer-actress Jennifer Lopez. They'd been attracted by a waiver of the normal $20 admission fee and by the presence of popular hip-hop disc jockeys named Craze and Icy Ice.

The crowd stayed on to dance to the throbbing music -- and hear a pitch for Scion, Toyota Motor Corp.'s new line of cars aimed at young people. Two Scions were parked out front, and magazines and CDs extolling the line's virtues were available free of charge at the bar.

Such a splashy marketing effort would have been unthinkable for the company, based in Toyota City, Japan, not long ago. Now it's just one of many skills that Toyota, already the world's most profitable automaker, has acquired as it seeks to become the biggest in terms of sales over the next 10 years.

``Toyota's strength is continuous improvement, little by little,'' says Senior Managing Director Yoshimi Inaba, 58, who directed the Scion rollout. ``Over time, the accumulation of these evolutionary changes could be revolutionary.''

Toyota has evolved from a small manufacturer of weaving looms to the leader in automotive quality and productivity. In the U.S., Toyota spends $3,500 less per vehicle than its Detroit competitors on labor, components and health and pension payments, says Sean McAlinden, an analyst at the Center for Automotive Research in Ann Arbor, Michigan.

1 - In Terms of Innovation

``In terms of innovation, I'd put Toyota at No. 1,'' says William Friess, who helps manage $9.5 billion, including 987,300 Toyota shares, at Thornburg Investment Management Inc. in Santa Fe, New Mexico.

The company has experienced some manufacturing snags in its newer U.S. plants, particularly at its Georgetown, Kentucky, complex. Even so, Toyota customers reported an industry-leading 101 complaints per 100 new vehicles in 2004, 18 fewer than the average in the U.S., according to J.D. Power & Associates.

``We set our targets where we expect Toyota to be, and we measure our progress every week and every month,'' says Eric Ridenour, head of product development at DaimlerChrysler AG's Chrysler division.

Competing with Toyota is a blessing, says Carlos Ghosn, chief executive officer of Nissan Motor Co. ``It keeps you awake and stretched and willing to do your best,'' Ghosn says.

2 - Up 29 Percent

Toyota's net income was 287 billion yen ($2.7 billion) during the April-June quarter, up 29 percent from a year earlier, as sales rose 10 percent to 4.5 trillion yen.

The company earned twice as much as General Motors Corp., even though the Detroit-based automaker sold 31 percent more vehicles. Standard & Poor's gives Toyota its best rating, AAA -- three rungs higher than the Japanese government -- partly because of its 3.3 trillion-yen reserve of cash and marketable securities.

Toyota shares had risen 7.9 percent this year as of Oct. 20, to 4,080 yen from 3,630 yen. General Motors' shares had fallen 29.1 percent over the same period, and Ford Motor Co. shares had fallen 19.4 percent.

At $136.1 billion, Toyota's market value exceeds the values of Renault SA, Volkswagen AG, DaimlerChrysler, Ford and General Motors combined. Fumiko Roberts, who manages $1.8 billion at Schroder Investment Management Ltd. in London, expects the shares to rise to 5,000 yen in two years, as annual net income increases by 15 percent to 1.33 trillion yen.

3 - Competitiveness to Increase

``We expect Toyota's competitiveness to increase,'' Roberts says.

Two years ago, Toyota President Fujio Cho, 67, set out to boost annual output by 50 percent over the next 10 years, to 9 million vehicles.

He expects Toyota to pass General Motors and become the world's biggest automaker by then, with 15 percent of global sales, up from 12.1 percent now, according to executives familiar with his plans.

To succeed, Toyota will have to build two-thirds of its vehicles outside of Japan in the next ten years, up from one- third in 2002.

The company will also have to master new hybrid engine technologies. At the Detroit auto show in January, Toyota plans to preview a sports car with gasoline and electric motors that is projected to accelerate from zero to 60 miles per hour in four seconds, faster than a Chevrolet Corvette with a gasoline engine.

``Most people don't look to the auto industry for lessons on how to innovate,'' says Philip Evans, a senior vice president at Boston Consulting Group Inc. ``Toyota is changing that.''

4 - A Rough One

Even so, the road to becoming global sales leader may be a rough one for Toyota, says Nigel Griffiths, an analyst at Global Insight Inc., a market research firm in London. He says he expects Toyota's market share to remain flat for the rest of the decade, even though it's making greater inroads in European markets.

``It's hard to see them gaining unless a big competitor disappears,'' Griffiths says. Jim Press, Toyota's chief operating officer for U.S. sales, acknowledges that boosting market share may be tough. ``Every increment of sales comes at a higher price,'' Press says.

Detroit automakers point to styling as a weakness for Toyota. ``Can you name one product they sell that's a gotta-have product?`` asks Jim Padilla, chief operating officer at Ford.

Nor can Toyota investors expect the same returns they have enjoyed in the past, says Chris Richter, an analyst at Merrill Lynch & Co. in Tokyo.

5 - Most Good News

He says Toyota shares now reflect most of the good news that's coming. For the next year, investors are better off with Fuji Heavy Industries Ltd., Suzuki Motor Corp. and Nissan, he says.

Toyota faces other challenges as well: Japan is now in the 13th year of an economic slump, and the government expects its population to decline by 16 percent to 106 million by 2050.

The company is also being pushed by the strengthening yen, which reduces profits from overseas sales. Toyota's operating profit during the April-June quarter dropped 15 percent, or 70 billion yen, because of the strengthening yen and other currency shifts.

The stronger yen helped cut Toyota's net income in the July- September quarter by four percent, to about 302 billion yen, says Michael Bruynesteyn, a Prudential Equity Group analyst. Toyota was scheduled to announce quarterly results on November 1.

6 - Acquire New Skills

Jeff Liker, an engineering professor at the University of Michigan in Ann Arbor, says the company can meet its lofty goals only if it continues to acquire new skills -- without abandoning the core corporate principles it has employed since 1960, when it built 154,770 cars and trucks, or 3.5 percent of General Motors' output.

``When Toyota has a problem, it can always go back to its roots,'' Liker says.

Those roots lie 150 miles southwest of Tokyo in Aichi prefecture, in an area known for mono zukuri, or making things. Sakichi Toyoda, patriarch of the company's founding family, advanced mono zukuri in 1902 when he started building steam- powered looms for weaving industrial fabrics. His looms shut themselves off when a piece of fabric broke.

That, in turn, enabled his workers to monitor several looms at once. By 1926, the loom was one of the few Japanese products of high-enough quality to flourish in the export market.

``By the time I started going to school, Toyoda looms were as famous as Mikimoto pearls and Suzuki violins,'' wrote Eiji Toyoda, who became Toyota's president in 1967.

7 - Factories Intact

Toyota survived World War II with most of its factories intact. The company's biggest crisis came during a slump in 1950, when a group of bankers forced the elimination of 1,600 jobs and the tearful resignation of chairman Kiichiro Toyoda, Sakichi Toyoda's son.

Toyota has been leery of bankers ever since and, as a corollary, has resisted the mergers and acquisitions they often promote, says Richard Koo, chief economist at Nomura Research Institute Ltd. in Tokyo. ``Toyota put every bit of its energy into building better cars,'' says Koo.

In the spring of 1950, the U.S. Army sent Eiji Toyoda, Kiichiro's cousin, to Dearborn, Michigan, to study Ford. The army needed Toyota to build trucks for the Korean war, and he wired home that he could improve on what he saw.

Ford used factory equipment that ran at high speeds and was hard to switch from one kind of car to another, says James Womack, president of the Lean Enterprise Institute in Brookline, Massachusetts. Unused parts piled up while machines were being retooled.

8 - Assembly Line Halted

Back in Aichi, Toyota was perfecting just-in-time delivery of parts. A breakdown at one machine shut down the whole factory. Taiichi Ohno, Toyota's manufacturing director, told subordinates to ask ``Why?'' five times whenever the assembly line was halted. He didn't just want to get the machines running; he wanted to prevent them from breaking down again.

Ohno's just-in-time deliveries required collaboration with suppliers, whose parts make up two-thirds of a car's cost. Ohno encouraged collaboration by asking suppliers to help design Toyota's new products and by sending consultants to help in their factories.

These efforts created a common language for problem solving, says Jeff Dyer, a Brigham Young University business professor. ``What you have today is networks of firms competing with other networks,'' Dyer says.

``If Toyota wants you to build something, they will know what it costs and they will want you to make money,'' says J.T. Battenberg, CEO of Troy, Michigan-based auto parts maker Delphi Corp. ``That's quite different than saying, `I'll put this part on the Internet, and 15 companies will bid, and I'll pick the lowest bidder.'''

9 - Popular Subcompact

Toyota emerged as the biggest automaker in Japan in 1955 and began looking overseas. The company's Toyopet Crown, a popular subcompact in Japan, was too small for U.S. highways when it arrived in 1957, and Toyota pulled it off the U.S. market.

The company returned in 1959, first with subcompact cars and then compact pickups and a Land Cruiser sport utility vehicle. After a global oil embargo caused shortages in 1973, Toyota ran ads saying ``small car specialists for 40 years.''

The company passed Volkswagen to become the biggest seller of imported cars in the U.S. in 1975.

That's when Kurt Ritter, who later became general manager of Chevrolet, visited a Toyota dealership in Jonesboro, Arkansas. Bud Green, the dealer, wanted to show Ritter that Toyota was building cars that were more than just cheap.

10 - Better-Built Car

Green told Ritter to sit in a Celica, which impressed him as a better-built car than the Chevrolet Vega he was driving. Chevrolet discontinued the Vega two years later, after complaints about carburetor fires and cracked engine blocks.

``It was a sobering moment,'' says Ritter, who resigned from Chevrolet in 2003 to become a Toyota marketing consultant.

In 1981, General Motors' customers reported 740 complaints per 100 vehicles compared with 105 for Toyota, according to Ford. Oil shortages had forced General Motors to build front-wheel- drive cars with structural strength embedded in their metal bodies, not a frame underneath.

Detroit had no experience building such cars. To make matters worse, mistakes such as faulty Vega engines couldn't be detected until cars rolled off the assembly line because Detroit's designers and manufacturing engineers operated independently, says Vincent Barabba, a retired general manager of corporate strategy at General Motors.

``As good as Toyota is, it really was the beneficiary of our mistakes,'' Barabba says.

11 - Backseat Passengers

In 1983, Toyota introduced the Camry, which had more space for backseat passengers than most cars except the biggest Cadillacs and Lincolns, even though it was classified as a compact car. Toyota emphasized Camry's family appeal with its ``Oh, what a feeling!'' ad campaign. The ads showed a cross section of Americans, including Jerry West and Bob McAdoo of the National Basketball Association's Los Angeles Lakers, leaping skyward and smiling.

``Toyota was this threatening overseas company, and these ads took the edge off that,'' Ritter says. ``They made Toyota likeable.''

Toyota deepened its U.S. roots in 1984, when it opened a joint venture factory with General Motors in Fremont, California. The company has expanded its presence in the U.S. to the point where it could build 1.66 million vehicles annually in the six North American factories it's using or has announced.

Toyota has also expanded its North American lineup to include Lexus luxury cars, six sport utilities and -- in two years -- a pickup big enough to compete with the Ford F-150.

12 - Global Profits

This North American lineup delivers two-thirds of Toyota's global profits, and it has also made dealers rich. On average, Toyota dealers in the U.S. sell 121 vehicles per month compared with 62 for Ford dealers, according to Art Spinella, president of CNW Marketing Research in Bandon, Oregon.

Gross profit averages 6.61 percent for Toyota dealers compared with 3.17 percent for Ford dealers.

``The baggage Detroit has faced with health and pension costs, organized labor and quality has redirected them from offense to defense,'' says Roger Penske, a former race car driver and president of United Auto Group Inc., the third-largest vehicle retailer in the U.S. ``For Toyota in the last decade, it's been all offense,'' Penske says.

Toyota's profits and long-term planning allow the company to develop targeted marketing campaigns for young people or Hispanics or pickup buyers, Ritter says.

13 - Oscillating Colors

At Longo Toyota in El Monte, California, half the people who buy Scions use the Internet to customize their cars before showing up. They can select from dozens of options, including stainless-steel mufflers, heavy-duty shocks and radios illuminated in 10 oscillating colors.

Longo, the world's largest Toyota dealership, stores these optional parts in-house, so it can deliver customized cars in two days. ``It's like the fashion business,'' says Verone Pangilinan, 28, Longo's Scion sales manager.

Scion prices start at $13,280 for four-door hatchbacks. On average, customers buy $1,500 in options. With ads that say ``Beat up on beige'' and ``Embrace the self,'' Scion sold 10,376 cars in September.

Three-quarters of its customers are new to Toyota, says Brian Bolain, Scion's national sales manager. Their average age is 35 -- 12 years younger than the typical Toyota buyer.

New products and targeted marketing mean the number of Americans who intend to buy a Toyota vehicle in the next year is 1.7 percentage points higher than the brand's 10.4 percent share of current sales, according to Doug Scott, a marketing analyst at NOP World in Southfield, Michigan.

14 - Current Sales

The comparable number is 1.9 percentage points less than current sales for Chevrolet and 0.7 percentage point less for Ford, Scott says.

Bland styling is rooted in Toyota's decision making, says Takahiro Fujimoto, an economics professor at Tokyo University. ``When they can measure something, they can improve it, but enthusiasm and brand identity are hard to measure,'' he says.

Toyota is responding by delegating more design, engineering and marketing authority to its national sales companies and by setting up design centers in Japan, the U.S. and France. Toyota's Yaris Verso, designed in Nice, France, was rated the most popular compact in the U.K. in the September issue of Consumer Association's Which? magazine.

The company has encountered growing pains. In 2004, its Camry plant in Georgetown, Kentucky, ranked 15th in J.D. Power's quality survey, with 100 complaints per 100 cars compared with 74 for industry-leading Cadillac in Lansing, Michigan. In 2001, Georgetown ranked second.

15 - So Much Energy

Gary Convis, president of Toyota's Kentucky operations, says the diversion of native Japanese production specialists to factories overseas contributed to the decline. He also cites the size of the Georgetown plant, which has more than 7,000 workers. ``You only have so much energy,'' Convis says.

Toyota responded in part with what its 2003 annual report calls ``a production reform project on a breathtaking scale.'' In 2000, automakers spent an average of $1,650 to make an engine, according to the Center for Automotive Research. Convis says Toyota plans to cut that figure by 40 percent, or $660, over three years on engine lines in Huntsville, Alabama, and Georgetown.

The company is looking for similar cost cuts globally, he says. ``The improvement in Toyota's factories is scary,'' says Ron Harbour, president of Harbour Consulting, a research firm in Troy. ``It means they'll do more vehicles, more frequently, at a lower cost.''

16 - Share More Parts

Toyota's first step was to design engines that would be simpler to build and would share more parts, says Liker of the University of Michigan. Next, the company designed forge and die- cast machines, cutting tools, clamps and software that are flexible enough to make parts for multiple engine families.

In Georgetown, the company also makes sure parts for each vehicle are delivered to assembly lines at specific times. Rather than stack up boxes of sun visors or seat belts, the company loads such parts onto small shelves inside each car.

Simplified factories are no substitute, Convis says, for Toyota's core strength: daily improvements that workers make in quality and costs. In Princeton, Indiana, maintenance team leader Dennis Weiler is learning new skills through jishukens, or task forces aimed at solving a particular manufacturing problem.

The Princeton plant makes 1,600 pickups, minivans and SUVs a day. In January, the plant lost 326 minutes of production time because cartridges that provide different colors of paint to its robotic sprayers kept popping out of place.

17 - Excess Material

Weiler, 47, spent five months working on the flaw with Toyota people in Japan, the U.S. and Canada and at supplier ABB Group. He trimmed excess material off the tips of the cartridges. He loosened screws that held cartridges together so they wouldn't twist out of shape. He redesigned a Teflon ring inside the robotic sprayer so it would rest against the cartridges in a more precise way.

In May, he lost 15 minutes of production to cartridges' popping out. ``Looking back over the jishuken, I can think of lots of contributions I made personally,'' Weiler says. ``That's the Toyota philosophy -- that the individual can make a difference.''

Weiler got advice from a native Japanese production specialist assigned to the paint shop. Weiler is expected to run future jishukens himself and train other Americans to run them, both in Indiana and at a new truck factory being built in Texas.

Back in Japan, Toyota still commands a 46 percent share of car and truck sales. No other automaker has maintained such dominance in its home market, Global Insight's Griffiths says.

18 - Top Priority

For Toyota President Cho, maintaining this edge is a top priority. When Honda Motor Co. introduced its Stream compact minivan in 2000, Toyota responded 14 months later with a competitor called Wish that was identical -- right down to its 4.55-meter (14 feet, 11 inches) length, its 1.69-meter width and its 2-liter engine.

Cho says he also wants the company to nurture its Japanese roots. He's pledged that Toyota's domestic manufacturing capacity, at 3.8 million vehicles this year, will never drop below 3 million.

Toyota Chairman Hiroshi Okuda, 71, who advises Japanese Prime Minister Junichiro Koizumi on economic policy, is a high- profile advocate for Koizumi's effort to dismantle government regulations that shelter Japan's banks, stores, hospitals and farms from competition.

19 - Bureacratic Regulation

``The overall view in Japan is that industries which never had bureaucratic regulation are the ones doing best,'' says Koji Endo, an analyst at Credit Suisse First Boston Japan Inc. ``People look at Toyota and say, 'This is exactly what other industries should be doing.'''

Two years ago, in response to a record number of requests, Toyota set up a consulting group to advise outside companies. The group has helped 40 companies, including Canon Inc., Central Japan International Airport Co., NEC Corp., Sony Corp. and Japan Post.

At a post office in Koshigaya, Toyota consultants eliminated large wooden crates used to hold unsorted mail. Instead, they used small boxes that could hold no more than 15 minutes of mail. If the boxes started piling up, postal workers could quickly identify bottlenecks. That, in turn, helped reduce manpower requirements 20 percent.

20 - Doubled Market Share

During the past four years, Toyota has almost doubled its market share to 5.1 percent in Europe, where it was blocked in the 1990s by voluntary import restraints. During the fiscal year ended in March, Toyota earned an operating profit of 72.5 billion yen in Europe.

That's a sharp contrast with General Motors, which bought its first European auto company in 1925 and lost $3 billion in Europe in the past three years.

Toyota is succeeding in Europe partly because of what the company calls ``lean investment.'' In 1998, it announced plans to open a 610 million euro ($767.6 million) car factory in Valenciennes, France.

This price, including cement footings in a nearby field in case a second plant is needed, is 40 percent lower than the cost of prior Toyota factories, says Senior Vice President Didier Leroy. When the plant opened in 2001, it was the first overseas factory to use Toyota's ``global body line.''

With this approach, cars are held together during initial welding with a handful of clamps that reach down through the roof rather than by metal frames that form a shell around the outside. The changes have cut costs in half.

21 - Three Shifts

Leroy has run Valenciennes on three shifts since May. Toyota had never before run an assembly plant 21 hours a day because of limited opportunities for overtime work and maintenance.

Leroy tries to solve this with a policy of zero breakdowns. He runs formal audits to make sure workers do their jobs the same way every time.

``In Japan, when you ask somebody to work in a certain way, they will strictly follow what you say,'' Leroy says. ``In Europe, this is not automatic.''

Toyota's innovations don't end in Europe. In August, Senior Managing Director Akio Toyoda, 48 -- whose father, Shoichiro, 79, retired as the company's president in 1992 and now serves as honorary chairman -- announced cost-cutting plans for emerging markets.

Rather than export from Japan or build factories in each country, Toyota wants regional manufacturing operations that can ship anywhere in the world.

22 - Argentina, Indonesia

In his August announcement, Toyoda said the company would build 510,000 cars, minivans and pickups a year in Argentina, Indonesia, South Africa and Thailand and export them to 80 countries.

Toyota has been playing catch-up in China since 1984, when it rejected a government invitation to build one of the first foreign-owned factories; the company focused on the U.S. instead. Toyota opened four factories in China this year in an effort to triple its Chinese market share to 10 percent by 2010.

Along with Cho and Okuda, Shoichiro Toyoda forms a triumvirate that makes all major decisions, according to executives familiar with the company's plan. The trio is grooming Akio to be president after Okuda and Cho step down, perhaps as soon as next spring.

Shoichiro Toyoda owns 13.1 million Toyota Motor shares, and he also owns 663,200 shares of Denso Corp., the company's largest supplier, and sits on Denso's board.

Toyota Motor owns a 23.2 percent stake in Denso, which in turn owns a 9.1 percent stake in Toyota Industries Corp., a vehicle assembler that holds a 5.4 percent stake in Toyota Motor.

23 - White Leather Shoes

During a June press conference in Beijing, most Toyota executives wore dark suits; Akio Toyoda wore a light-gray suit and white leather shoes with no socks. Afterward, he said he doesn't know anything about succession.

``I will just have to tackle one project after another and do my best,'' he said.

Toyoda, who attended Keio University in Tokyo and Babson College in Wellesley, Massachusetts, joined the company in 1984. He's served as vice president of Toyota's joint venture factory with General Motors in California, and he's overseen Gazoo, a communications and shopping service that can be accessed while driving via an onboard computer.

He's done well enough to keep advancing, Tokyo University's Fujimoto says. ``Toyota doesn't need a Mr. Ghosn,'' says Fujimoto, referring to the CEO of Nissan who oversaw that company's recent turnaround. ``Toyota has a team.''

24 - Bubble Economy

In the early 1990s, worried that profits from Japan's bubble economy had made the company complacent, Eiji Toyoda ordered his engineers to study fuel efficiency and air quality requirements for the 21st century. The result was a compact car called the Prius that Toyota introduced in 1997.

``For the first time, Toyota stuck its neck out in a way that's creating new markets,'' says Graeme Maxton, managing director of London-based consulting firm Autopolis.

The Prius uses an electric motor to start out, with a four- cylinder gasoline engine taking over as the car gains speed. The gasoline engine and the brakes recharge the batteries. The Prius can go as far as 55 miles in city driving on a gallon of gas, more than double typical cars, and it emits 90 percent less exhaust than typical cars as well.

Its technology is recommended by the California Air Resources Board, which in September approved rules seeking to cut carbon dioxide pollution from vehicles by as much as 30 percent by 2016.

25 - Smog-Forming Emissions

``If automakers don't reduce smog-forming emissions, greenhouse gases and the need for petroleum, I believe we won't be in business,'' Cho said in a speech in Michigan in August.

Toyota spent up to $1 billion to bring the Prius to market, in addition to its annual $5 billion R&D budget, Liker says. To control the technology, Toyota did the main research in-house.

Toyota is already licensing some or all of its hybrid system to Ford and Nissan and is seeking more such arrangements, in part to recover its costs.

The second-generation Prius introduced last year still costs $21,390 in the U.S., even though it's now almost as big as a Camry. The second-generation Prius accelerates from zero to 60 mph in 10.5 seconds compared with 14.5 seconds for the first version, according to David Hermance, the chief hybrid engineer for Toyota in the U.S.

The batteries are 49 percent lighter, 64 percent smaller and 127 percent more powerful. With waiting lists for the Prius as long as eight months in the U.S. and production scheduled for China next year, Toyota in August increased Prius production by 50 percent, to 180,000 a year.

26 - Better Be Profitable

``The Prius had better be profitable now, or that would not be a good decision,'' Hermance says.

Toyota hopes to build as many as 2 million hybrids annually by 2010, Cho says. By that time, buying a hybrid will be as routine as selecting a manual or automatic transmission, with production occurring on existing assembly lines worldwide, Hermance says.

The company is also applying low-cost hybrid manufacturing methods to fuel cells, he says. Fuel cells have great potential as a nonpolluting power source because they create electricity by combining hydrogen and oxygen, with water vapor as a by-product.

Toyota's next step is to convince car buyers that hybrids deliver performance, not just efficiency. In February, the company will start selling a five-passenger hybrid SUV called the Lexus RX 400h.

The car uses a V-6 engine plus electric motors to accelerate from zero to 60 mph in 7.5 seconds, says Michael Bruynesteyn, the Prudential analyst.

27 - 1.2 Seconds Faster

That's 1.2 seconds faster than the gasoline-only RX 330 from which it's derived. The RX 400h will get 34 miles per gallon of gas compared with 23 mpg for its gasoline-only counterpart, which costs $3,000 less, Bruynesteyn says.

This performance may help Toyota achieve one of its most ambitious goals: making Lexus a fun-to-drive competitor to Bayerische Motoren Werke AG worldwide. ``We're going where BMW would like to go next and can't,'' U.S. sales COO Press says.

Lexus may install hybrid engines in, among other things, a premium roadster like the one being previewed in Detroit in January and a flagship sedan aimed at Rolls-Royce and Maybach.

``We have a V-8 hybrid that gives you V-12 power and V-6 fuel economy,'' says Dennis Clements, Lexus's general manager.

Lexus is already the top-selling luxury brand in the U.S., and it's scheduled to go on sale in Japan and China next year.

28 - Big Weakness

Its big weakness is in Europe, where Lexus sold 18,206 vehicles last year compared with 509,721 for BMW and where it lacks a V-8 diesel engine.

In European countries such as Belgium and Greece, diesels make up 90 percent of BMW sales, in part because of tax subsidies. Takis Athanasopoulos, executive vice president of Toyota Motor Europe, says he'll offer a premium diesel in two years, and he says he expects hybrids to challenge diesels in cities and also on high-speed, long-distance driving.

``Toyota is well positioned no matter which way the technology moves,'' says Duncan Austin, an economist at World Resources Institute, a Washington-based environmental group. Tom Purves, head of BMW in North America, says 60 percent of Lexus buyers in the U.S. are older than 55 compared with 33 percent for BMW.

He says lots of brands, including Volvo, hurt themselves by leaving existing customers to chase BMW. ``Hybrids don't have any charisma,'' Purves says. ``We are in the business of selling dreams.''

29 - Dangerous Hubris

Christian Takushi, whose funds at Swissca Portfolio Management AG in Zurich hold 586,800 Toyota shares, says talk of Lexus's challenging BMW suggests a hubris that could be dangerous. ``Toyota is getting a big head,'' says Takushi, who's purchasing Honda shares instead.

Others disagree. ``We expect Toyota to steadily grow and become the biggest automaker in the world,'' says Masayuki Kubota, who helps manage $8.5 billion at Daiwa SB Investment Ltd. in Tokyo.

Autopolis's Maxton predicts a fragmentation of the global auto industry over the next decade, with new exporters emerging from India and China and traditional mass marketers like Ford and General Motors breaking up. ``That would give Toyota a problem,'' Maxton says. ``They won't have a target to aim at.''

Tokyo University economist Fujimoto says the biggest risk for Toyota will be the temptation to focus on volume rather than profit if its 15 percent global market share target seems unattainable over the next ten years.

30 - Full-Size Pickup

Press insists that won't happen. He says the company could have introduced a full-size pickup in the U.S. years ago, instead of waiting until 2006, if it had been willing to copy others instead of developing a vehicle with unique characteristics -- including a gas/electric engine for maximum towing.

Toyota's patience doesn't mean the company won't have an impact on its industry's future shape. ``The weaker competitors will get weeded out,'' Press says.

Chrysler is learning how to make money as it gets smaller, he says. Ford will also have to learn that lesson to survive, he says.

Maxton says that Toyota is poised to pass General Motors in size and, when measured by long-term profit and growth, to emerge as one of the leading companies of any kind, anywhere in the world.

To contact the editor responsible for this story:
Ronald Henkoff at rhenkoff@bloomberg.net.
Last Updated: October 20, 2004 17:14 EDT