The Humbling of Toyota - A combination of high-speed global growth and ambitious cost cuts led to the quality lapses that have tarnished the once-mighty brand. How it all went wrong.

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Toyota Motor has always been fanatical about frugality, and for many years that was good for both the company and its customers. This is a Japanese carmaker that routinely turned down the heat at its employee dormitories during working hours and labeled photocopy machines with the cost per copy to discourage overuse. Its engineers collaborated with suppliers to extract cost-savings without compromising quality. Yet by the middle of the last decade Toyota’s virtue had become a vice.

So say current and former auto executives who are trying to grasp how Toyota, with its gold-plated reputation for engineering excellence, slipped up on such a scale, with 8 million cars recalled due to mechanical failures linked by U.S. regulators to 51 deaths. Before company officials knew that runaway acceleration was causing crashes, one of these executives says, a simple manufacturing process would sometimes ignite small fires in a component as a direct result of corner-cutting. It was just one early sign that the focus on cost reduction had gone too far.

Those production mishaps occurred in 2006, a year after company President Katsuaki Watanabe boasted about having squeezed more than $10 billion from global operating costs in the previous six years—this despite an impressive run of profit growth and global market share gains in the middle of the last decade. Then Toyota pushed even harder for more cuts. It asked suppliers to design parts for its Camry midsize sedan that were 10% cheaper and 10% lighter. The company’s top U.S. executive, Jim Press, warned his bosses in Japan that vehicle quality was slipping, according to a slide presentation U.S. Senate investigators unearthed in their sudden-acceleration probe. But his warning had no apparent effect.

The redesigned Camry brought out in 2006 had an embarrassing flaw in its headliner, the fabric and composite lining that covers the inside roof of the car. Under pressure to cut costs, the lead Camry supplier, Toyota-affiliated Toyota Boshoku, chose a carbon fiber material that hadn’t been approved by Toyota engineers, according to an executive who worked on the redesign. The headliner is made by compressing layers of materials together using a certain amount of heat to mold it. In this case, the carbon fiber required so much heat that the headliner would catch fire.

Toyota fixed that problem, but when a North American parts supplier interested in working with the automaker did a teardown of a 2007 Camry, its engineers were surprised by how much the traditional Toyota craftsmanship had been watered down by years of nips and tucks. The padding in the ceiling of the car, though compliant with safety regulations, had been thinned out to save money. A tray for sunglasses used a flimsier type of plastic than previous models. “It was a bare-bones car at that point,” says one executive who declined to be identified for fear of harming business ties with Toyota.

Toyota insists its focus on cost hasn’t hurt consumers. “It’s not true that by reducing cost you automatically reduce quality,” said Jim Wiseman, Toyota’s vice-president for North American corporate communications. “Every automaker has to stay competitive relative to price.”

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