Feb. 21 (Bloomberg) -- Foundry workers at a Toyota Motor Corp. plant in Troy, Missouri, laughed out loud back in 2003 when Toyota Executive Vice President Kosuke Shiramizu traveled from Japan and gave them a new assignment: Cut in half the cost of building V-6 engines for the company's Camry sedan by 2005.

``We were thinking they were either crazy or didn't really mean it,'' says Robert Lloyd, 51, who, as president of Toyota's Bodine Aluminum Inc. unit, would be expected to deliver on Shiramizu's goal.

Shiramizu, however, had a secret weapon. Back in Japan, 300 engineers were working on a new technology for pouring molten aluminum into molds to create parts for engines. The new equipment, part of a larger Toyota cost-cutting program called Simple Slim, allows Toyota to use smaller and cheaper molds.

The new engine technology is now in use not only at Bodine, which Toyota bought in 1990, but also at foundries in Japan and China. Partly as a result, the cost of building an engine for the redesigned Camry that was scheduled to go on sale in March will be about $1,000, half the cost of an engine for the previous generation of Camrys, says Gary Convis, executive vice president for North American manufacturing.

``It's amazing how Toyota can cut costs even further,'' says Atsushi Osa, whose $4.1 billion fund at Sumitomo Mitsui Asset Management Co. in Tokyo includes automotive shares. ``This definitely gives them a competitive edge over their rivals.''

Bad News for Ford

Toyota's latest cost-cutting push is one more piece of bad news for executives at Ford Motor Co. and General Motors Corp. Around the world, Toyota is going from strength to strength, increasing sales and profits, streamlining production and ringing up healthy returns for investors. The company's Tokyo-listed stock rose 54 percent to an all-time high of 6,420 yen for the year ended Feb. 17.

Together with Honda Motor Co. and Nissan Motor Co., Toyota has pushed GM and Ford to the wall. The three Japanese automakers captured a combined 28.2 percent of U.S. sales in 2005, an increase of 2 percentage points. Ford and GM captured a combined 44.8 percent of sales, a 2.3 percentage point decline.

Last year, the American auto giants became the biggest companies ever to have their debt downgraded to junk status by Standard & Poor's. And now they have to contend with innovations like Simple Slim.

``Toyota is already one of the most-efficient producers,'' says Dan Luria, an analyst at the Michigan Manufacturing Technology Center in Plymouth, Michigan. ``If they can improve this much, that spells big trouble for everybody else.''

Profit Margins

The cost-cutting program launched by Shiramizu, 65, who is now chairman of Toyota's Daihatsu Motor Co. unit, has only fueled the company's momentum. The Toyota City, Japan-based manufacturer had an operating profit of 482 billion yen ($4.1 billion) in the October-December quarter on 5.3 trillion yen in sales.

That's an operating profit margin of 9 percent, down slightly from a 9.1 percent rise in the same period a year earlier. Tatsuo Yoshida, a Merrill Lynch & Co. analyst in Tokyo, expects Toyota to earn an operating profit of 1.93 trillion yen in the 12 months ending on March 31, a 15.4 percent increase from the prior year, as sales increase 19 percent to 22 trillion yen.

``The auto industry has typically not been one of high margins,'' says Wendy Trevisani, who helps manage 3.2 million Toyota shares for Thornburg Investment Management in Santa Fe, New Mexico. ``Toyota has been able to buck the trend by being innovative and focusing on costs.''

Automotive profits for the American giants, meanwhile, are elusive. Dearborn, Michigan-based Ford earned an operating profit of $84 million in the October-December quarter, or 0.2 percent, on $41 billion in sales, while GM lost $1.6 billion, or minus 3.8 percent, on $42.3 billion in sales, according to Merrill Lynch estimates.

Passing General Motors

Saving money in production will help move Toyota toward a grander goal: to become the world's biggest car company. In 2001, management set a target to increase output 50 percent during the next decade. Toyota is well on its way toward meeting the goal: It expects to sell 8.85 million vehicles worldwide in 2006, up from 5.9 million in 2001. That could be enough to pass General Motors -- which ranked as the world's largest automaker in 2005, with sales of 9.17 million -- if GM's sales decline. In November, GM announced plans to close five North American assembly plants by 2008.

Investors are jumping on board. Fumiko Roberts, who helps manage 1.7 million Toyota shares at Schroder Investment Management Ltd. in London, expects Toyota shares to rise another 13 percent to 7,000 yen by 2008. ``I didn't realize Toyota was cutting costs that much,'' Roberts says. ``If they can do it, it's obviously very, very good news.''

Suppliers

Suppliers are contributing to, and benefiting from, Toyota's growth. Shares in Kariya, Japan-based Aisin Seiki Co., which makes parts for engines and transmissions using die-cast aluminum, rose 86 percent in the year ended on Feb. 3, to 4,650 yen. Shares of Kariya-based Denso Corp., which makes fuel injectors for Toyota's diesel engines, rose 62 percent in the year ended Feb. 17, to 4,330 yen.

Amid this success, Toyota executives continue to push for new savings in the face of sharp increases in the cost of raw materials such as aluminum, and as new competitors like Korea's Hyundai Motor Co. drive down prices, manufacturing chief Convis says. Toyota sold 431,703 Camrys in the U.S. in 2005, making it the country's best- selling car for the fourth year in a row. Reducing manufacturing outlays on such high-volume models, Convis says, is the only way to stay on top.

Plant's Efforts

Bodine Aluminum is an important part of that effort. Bodine uses dies to cast aluminum engine blocks, which make up the lower two-thirds of an engine, and cylinder heads, the top third, and then delivers them to Toyota factories such as the one in Georgetown, Kentucky, for assembly into complete engines.

Bodine's Lloyd says that since 2003, his factories in Jackson, Tennessee, and Troy have cut the cost of building the blocks and cylinder heads by a combined $99.44 per engine. Bodine achieved these savings even though the cost of high-grade aluminum traded on the London Metal Exchange jumped to a 17-year high of $1.194 a pound on Feb. 3, nearly double the price in 2001.

The first step was simply to use less aluminum. The new Camry engine, which Toyota claims will accelerate the car 40 percent faster than the 3.3-liter engine in the prior model, has an aluminum block that weighs 55 pounds (25 kilograms) -- a 27 percent reduction.

Saving Aluminum

Toyota also redesigned the cylinder head so that it requires fewer honeycomb-like passageways for fuel and air, Lloyd says. That means the company needs to lay fewer ``cores,'' or clusters of sand, inside the molten aluminum during casting to leave space for the passageways.

At the Troy foundry, 40 miles (64 kilometers) northwest of St. Louis, Toyota still makes cylinder heads in casters as tall as three-story buildings, with a furnace in the basement below to prepare the molten metal. Partly because of the new, simplified cylinder head design, the big casters are being replaced with new, 12-foot-tall (3.7-meter-tall) machines that come complete with a furnace, Troy plant manager Charles Thompson says.

Instead of having its casters arranged in long rows, with automated lifting devices for moving unfinished cylinder heads around the factory, the new machinery now arranges them in U-shaped cells, Thompson says.

Each cell will be a minifactory with everything needed to keep the caster operating, including sand core fabricators, machining centers and test equipment. With all of these processes located near each other, the foundry will reduce its inventory of unfinished cylinder heads, which are expensive to store and make defects harder to spot, Thompson says.

Reduced Pressure

The machinery for making engine blocks is also being replaced. The old, 31-foot-tall casters used to fabricate the blocks at Troy are being shut down and replaced with new, 19-foot-tall machines at a $164 million factory that opened in November in Jackson.

The new casters use 40 percent less pressure to inject molten aluminum into molds. That gives air inside the molds a chance to escape rather than being blasted back into the aluminum in the form of bubbles that weaken the walls of the block.

The reduced injection speed means Toyota can make a V-6 engine block in a mold held together with 2,250 tons of force instead of the 3,500 tons previously needed, which saves time and money. The die now weighs 5 tons rather than 29. The new casters can build four-, six- and eight-cylinder engines using dies that can be changed in 60 minutes, one-sixth the time needed previously.

Goal: A Showcase

The manager of the Jackson plant, Dan Robbins, wants it to be a showcase. Robbins, 58, one of Toyota's most-experienced U.S. executives, joined the company's first U.S. manufacturing site, a truck bed factory in Long Beach, California, in 1981.

He spent a decade teaching Toyota's manufacturing methods to the company's suppliers and then managed an aluminum wheel foundry in Delta, British Columbia. He transferred to Jackson, 87 miles northeast of Memphis, two years ago.

``For the first 23 years of my career, I was changing behavior,'' Robbins says. ``This is a chance to create behavior, and it's very gratifying.''

Robbins's job as a sensei, or teacher, is to maximize efficiency. Among other things, he and his staff look for wasted effort in the way foundry workers use their hands, feet and eyes as they move from engine block to engine block.

Every time maintenance or die construction workers leave their office or workplace, they're required to post a magnet with their photo attached on a bulletin board located alongside the plant's main aisle, so their bosses and teammates can see where they're going and how long they'll be gone.

`One of the Best'

Such attention to detail pays off. Since it opened in November, the Jackson foundry has reported defects in 0.7 percent of its engine blocks. That compares with 2 percent at Troy, which Lloyd says is competitive with Toyota's Japanese foundries that use the old casting methods.

Every week, Lloyd receives a report that compares the quality of his work with that of Toyota foundries in Australia, China, Japan and the U.K. ``We're one of the best,'' Lloyd says. ``Not every day and not in every part, but we're right in there.''

Bodine has come a long way since it was founded in St. Louis in 1912. It opened as a ``job shop,'' meaning it made thousands of castings at a time under contracts for a network of customers that included Caterpillar Inc. and Cummins Inc.

Founder's Granddaughter

Toyota paid $30 million for privately owned Bodine in 1990. ``They made us an offer we couldn't refuse,'' says Lloyd, who got into the business when he married Carol Bodine, a granddaughter of the company's founder, Jesse Bodine.

Lloyd, who has a bachelor's degree in economics from the University of Pennsylvania, says he feels like he's been swept along by Bodine's 15-year transformation into a world-class foundry. ``If Toyota hadn't come along, we'd be just another little job shop in St. Louis,'' he says. At Bodine today, maintaining top quality while cutting costs is what the bosses in Japan demand.

They also want higher production. Toyota plans to produce 1.83 million cars and trucks a year in North America by 2008, nearly double its production in 1998. Its assembly plants in Georgetown and elsewhere are on double shifts.

To keep up, Lloyd runs his Troy foundry on three shifts Monday through Friday and often on weekends. And with Simple Slim in full force, he has to make allowances for construction workers who swarm through his facilities, ripping out old machines and installing new ones.

``It's like a war in here every day,'' Lloyd says of the Troy plant.

Going Global

Much of Bodine's expansion will take place in Jackson, which now employs 54 workers but will have 220 by next year. In addition to Camry engine parts, Lloyd expects to make aluminum blocks for the 5.7-liter V-8 engine that Toyota will offer in the Tundra pickup to be built in San Antonio, Texas, starting next year. The Jackson foundry is also scheduled to start making housings and casings for transmissions next year. And Lloyd hopes his Simple Slim expertise will help him win contracts to produce parts for the electric motor that Toyota installs in hybrid cars.

Toyota is replicating Bodine-style cost cutting all over the world. ``As you become global, you need to simplify things as much as possible, because you're getting spread out, literally, from a core where you have really dedicated knowledge among a small number of people,'' says Convis, who is based at the Georgetown plant. ``In almost every facet of our manufacturing process, this kind of revolutionary thinking is going on.'' Convis says the company's paint, plastics, welding and warehouse operations are also being streamlined.

Fewer Clamps

Simplifying design so that engines for a variety of Toyota vehicles share more parts is one goal. Among the savings realized by the program, according to company officials: Toyota has reduced by 80 percent the number of clamps it needs to hold cylinder heads in place while they're being machined.

That's helped cut machining costs by 50 percent. At Georgetown, Convis has cut the length of the V-6 engine assembly line in half by delivering parts in kit boxes that move along the line with each engine.

Ford and GM are struggling to keep up. As part of its effort to lower costs, Ford will close seven North American assembly plants by 2012. Detroit-based GM is also shuttering outmoded plants; it spent $1.3 billion on such cutbacks in the fourth quarter alone. GM's overall goal is to cut fixed costs for global auto production to 25 percent of revenue by 2010 from about 34 percent in 2005.

Competitiveness Improving

Tom Stephens, GM's group vice president for engines and transmissions, declined to comment on Toyota's cost-cutting claims directly. He says, however, that comparisons of car assembly labor time from Troy, Michigan-based auto analyst Harbour Consulting Inc. show that GM is getting more competitive.

In 1995, the American company took 6.1 hours to assemble an engine in North America, or more than twice as long as Toyota, according to Harbour. In 2004, GM needed 3.8 hours, or 22 percent more time. ``We had a long, long way to go 10 years ago,'' Stephens says. ``Now, we're getting pretty close.''

If history is any guide, Stephens's optimism may be misplaced. For decades, U.S. automakers have failed to close the gap with the Japanese on quality and cost efficiency. For Toyota's competitors to win back lost market share, they will have to keep pace with innovations like Simple Slim.