As Prepared For: Dr. Honorary Chairman of Motor Corporation Woodrow Wilson Center Washington, DC September 12, 2007 ______"Toyota in the US: Learning From Our Past As We Prepare For The Future"

1. Introduction Thank you for the introduction. I am Shoichiro Toyoda, Honorary Chairman of Toyota Motor Corporation. Let me first say that I am very grateful to President and Director Lee Hamilton, and everyone else at the Woodrow Wilson Center, for granting me it’s Corporate Citizen Award in a Tokyo ceremony attended by Mr. David Metzner, Vice Chairman of the Center, last April. I believe that Ms. Sadako Ogata, who was awarded the Public Service Award, and I are the first Japanese to receive such prestigious awards from the Center.

But today, I would like to express my appreciation for the opportunity to speak in the prestigious Woodrow Wilson Center.

Taking advantage of this valuable opportunity, I would like to talk about the progress of Toyota Motor Corporation and its relationship with American society.

I joined Toyota in 1952. At that time, Toyota made only 14,000 vehicles in a year. Last year, in 2006, Toyota made 9,020,000 vehicles. If you ask what enabled the company to achieve this huge leap forward, I think it was the result of Toyota's commitment to adding value to society by MAKING THINGS and gaining the confidence of customers.

2. Approach to MAKING THINGS When I try to look back and reflect on our approach to MAKING THINGS, I think it has four key elements.

The first one is what we call "GENCHI GENBUTSU." Toyota Motor Corporation has been in operation for 70 years, since 1937. Its founder was my father, Kiichiro Toyoda. His dream was "to make cars in Japan, made entirely by Japanese ingenuity and labor." Unfortunately, my father did not live to see his dream realized. But thanks to the efforts of the team that had worked with him, we were able to make his dream come true in 1955. That marked the debut of the Toyopet Crown. It was Toyota's first real passenger car.

The Crown got a warm welcome in Japan. In 1957, two years after its debut, we launched exports to the United States. The problem was that the Crown was just not built for driving in America, where cars run over 60 miles per hour for hour after hour.

In 1957, I took two Crowns to drive in America as an experiment. I still remember the time I drove them on American highways. It turned out to be dangerous to enter a highway on an uphill slope. That was because the Crown had poor acceleration due to its heavy body and lack of power. So I was forced to find an entrance to the highway on a downhill slope.

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In those days, we didn't have any test course that would allow us to run cars for long periods without stopping. It was a bad situation. We had exported cars to America without performing enough driving tests. After reflecting on it, we decided to give up export for the time being.

It was a failure; but it taught us a valuable lesson. Through it we learned the importance of GENCHI GENBUTSU, which means going to the source in all our operations to find the facts to make correct decisions and build consensus to achieve our goal of “Customer First.” So in that sense, the first generation of our Crown model was fundamental to the development of Toyota's passenger cars.

By the way, opportunities for me to visit a plant by myself and to put GENCHI GENBUTSU into practice have recently decreased. Still, I visit our domestic plants once per month because I enjoy hearing a wide range of opinions from employees. In addition, I always visit local plants when I'm on overseas business trips.

The second key part of our approach is summed up in the slogan “Quality is built into each step in the production process. Each worker plays the leading role in this approach." Our failure in exporting the Crown to America taught us a good lesson. We then studied the teachings of Dr. W. E. Deming, one of the foremost experts on quality control in the United States. Starting in 1961, we undertook a company- wide effort to improve quality. As a result, we were able to win the Deming Award in 1965. This is a prize equivalent to the Malcolm Baldridge prize in the United States. In those days, many Japanese companies had just awakened to the need to boost quality, and they were in fierce competition to win this prize.

The Total Quality Control approach, or TQC, was not limited just to the manufacturing plants. It gradually penetrated the engineering and administrative divisions. It eventually evolved into Total Quality Management, or TQM. That is put into practice today in all of Toyota's business units throughout the world.

Expectations of stepping up quality further eventually resulted in the approach expressed in our slogan “Quality is built into products in each step of the production process. Each worker plays the leading role in this approach." The way to make better things is not by increasing the number of inspectors. Instead, it is by applying the fundamental approach of building up quality in the production process. Under this approach, each worker plays the leading role in carrying out his responsibilities without fail by ensuring that he or she does not send defective items to the next process further down the line.

Looking at it in this way, I believe that we owe a great deal of thanks to America for our sense of the importance of quality and our acquisition of control methods. After all, it was our initial failure in the American market and the teachings of Dr. Deming who taught us these key lessons.

The third part of our approach is the importance of costs. Prices of things are determined by the market. In other words, manufacturers benefit from cost reduction efforts. This is why we emphasize this approach.

Let me cite one example. Before Kiichiro Toyoda established Toyota Motor Corporation in 1937, he worked on calculating detailed costs at the same time he was involved in trial manufacturing of cars.

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In those days, even if we look only at volume efficiency, there was a clear difference between European and American cars on the one hand and Japanese cars on the other. We would not have been able to compete if we had followed the methods of European and American automakers.

Kiichiro thought up a solution: "Providing the different production processes only with what items are needed, when they are needed, and in the amounts needed." That is the essence of "Just-In-Time Production." It marked a great shift from lot production to flow process production, in which parts inventories are never allowed to build up.

This approach was the starting point of our later manufacturing. After the war, we completed the Toyota Production System by working closely together with Group companies and business associates. The process was led by Taiichi Ono.

Later, when we launched offshore production, we applied the Toyota Production System at our local plants. We were somewhat worried whether our approach would be accepted and take root for the long term because of its differences with local labor practices. However, a research group led by Professor James P. Womack of the Massachusetts Institute of Technology praised the Toyota Production System as a lean manufacturing system. This assessment attracted much attention from many quarters. Nowadays, we have gained world citizenship in the area of MAKING THINGS.

We have worked on the Toyota Production System for a long time and gained confidence because it won excellent ratings even from an academic perspective. On top of that, we were amazed and impressed by the open-minded American society. Americans rationally analyzed our hard-to-understand manufacturing system and once they had assessed it as superior, they accepted it warmly.

The fourth part of our approach is developing human resources. It is people who make things. To make things, the first step is to develop the people who are doing the making. Based on our slogan: "Making things is developing people", we have consistently worked on our personnel training as a fundamental pillar of our management.

The technology and skills of making things are developed by extensive experience over a long period of time. In fact, you can only learn skills and techniques that you can call your own through GENCHI GENBUTSU. That means standing in the workplace, watching with your own eyes and thinking with your own brain, really touching things, getting your hands dirty with oil, and coming to grip with your own problems.

Anyone who keeps doggedly pursuing this down-to-earth approach, following each step without taking shortcuts, will naturally step up his sensitivity to safety, quality, efficiency, and costs and refine his senses too. And I think that it is linked directly to the competitive strengths of the company.

At Toyota, we have steadily moved ahead with the four approaches I've just outlined. I believe doing so has allowed us to establish our basic strengths as an automaker. Moreover, we've been working to help these approaches take root at our plants throughout the world.

3. Big leap into overseas markets. Taking on the challenge of the American market Next I'd like to say a little about our relationship with the American market.

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As I mentioned before, this year marks the 70th anniversary of the founding of Toyota. It also is the 50th anniversary of our entry into the American market, when we started exporting the Crown.

At present, many Americans favor Toyota cars. We should never forget that we have benefited from our good partners and friends in the United States at the turning points in our business.

It was in 1969 that we had our first encounter with Jim Moran, the first president of Southeast Toyota. Since then, he has been indispensable to the success of Toyota in America. Unfortunately, Jim died in April this year at the age of 88.

He began his career as a sales assistant at a service station in Chicago. His life was a true success story, in which he became Ford's biggest dealer in the United States. When his health deteriorated in the latter half of the 1960s, he closed down his business in Chicago and moved to Florida. There he encountered Toyota when he took a test ride on Interstate I-95 in a Corona Coupe. After only one test ride, he agreed to sell . Jim's experience and administrative ability were crucial factors in the success of sales of Toyota cars in America.

However, Jim contributed more than just sales. He kept on calling on Toyota to beef up its lineup with a luxury model. After listening to his advice, I decided to make the . I believe that you can gauge how accurate his advice was by the success of the Lexus in the United States. He told me that he had never encountered an automaker that listened to the opinions of dealers and distributors like Toyota. But that was only natural for us because we are most interested in learning what customers think.

Thanks to this approach to sales and the two oil crises, which led to an increase in demand for small cars in the United States, the Japanese car industry steadily stepped up its international competitive strengths. At the same time, trade disputes intensified from the latter half of the 1970s. There were many talks and negotiations between the Japanese and US governments and the industries. This was also the time of Voluntary Export Restraints on the export of complete vehicles to America. Afterwards came the time when we moved thoroughly into local production, much like today.

Above all, it was a time when a number of important encounters took place. These were encounters with people who helped Toyota's drive to succeed. One of these people was James Hodgson, a former Secretary of Labor who became ambassador to Japan. In early 1980s, when a trade dispute between Japan and the United States came to the boiling point, Toyota keenly understood the need to make cars in the United States. However, the question was whether manufacturing in the United States would be possible by the same methods used in Japan. We weren't sure what to do. The path we took was different from that taken by Honda and . They set up greenfield plants.

We set up a joint venture with General Motors to launch manufacturing in an idle plant in California. This approach raised questions, as Toyota’s production process was different from traditional U.S. manufacturing. It was James Hodgson, the former Secretary of Labor, who gave wide-ranging advice to me during talks with U.S. labor representatives. He did more than just advise me about American labor-management relations.

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He also introduced me to William Usery, the former Secretary of Labor under President Ford, who proved to be instrumental in helping Toyota reach an agreement with organized labor in September 1983. New United Motor Manufacturing or NUMMI in short, launched manufacturing in 1984. Based on this experience, we launched Toyota Motor Manufacturing, USA in Kentucky, two years later. It was our first greenfield plant in the United States.

Then while local production was growing, we focused closely on the American parts supply industry. Our goals were to enhance cooperation with it and develop a relationship of mutual trust.

In 1992 we set up an organization in Kentucky called the Toyota Supplier Support Center. We worked jointly with the parts manufacturers to improve the production workplace by seconding experts on the Toyota Production System to them.

For example, GST AutoLeather makes leather for car seats. Toyota engineers worked with GST to enhance the production workplace. The results were big cuts in production lead-times, reductions of inventory, and gains in quality.

Of course, these results testify to the strong motivation and effort that GST put into making improvements. But these initiatives also led to building a strong relationship based on mutual trust between GST and Toyota.

As you know, trade friction over cars increased in the mid-1990s between Japan and the United States. At that time, Dr. Sean Traynor was CEO of GST. He had a high regard for the sincerity of Toyota's attitude, and I warmly remember the support he gave us.

Nowadays, Toyota is regarded by parts manufacturers as the most trustworthy and reliable automaker, according to a wide range of surveys. I believe this is one of our great strengths.

Localization and economic contributions Since then, Toyota has continued to move progressively ahead with the localization of manufacturing. In the spring of this year, we announced that we would set up our eighth North American assembly plant in Mississippi. This plant will be completed in 2010, and then our vehicle production capacity in North America is expected to reach 2.2 million units.

In terms of job creation, Toyota had 35,000 Americans employed at its business units in the United States as of the end of 2006. That number rises to 390,000 people if you include indirect employment and the overall impact of dealers and suppliers. So from the 1990s to today, this is the path Toyota has followed to come to be the automaker that has most expanded both manufacturing and employment in the United States. We have a program called: "Making vehicles where the market is." Under it, we intend to continue to contribute to the American economy.

4. Contributions to American society: Going well beyond just economic contributions Following this path, we now produce cars at 52 sites in 27 countries and regions, and we sell vehicles in more than 160 countries. But our contributions go beyond just job creation and economic aspects. We are good corporate citizens, and we keenly sense the importance of putting down deep local roots.

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To us, being a "good corporate citizen" means more than contributing to local economic growth through our business activities. It means undertaking a wide range of activities as a corporate citizen, such as social contributions and encouraging mutual understanding among people through international exchange. For example, TMMK was established in 1986 in Kentucky. Its establishment meant more than creating about 7,000 jobs and introducing automobile manufacturing to a region that is well known for its thoroughbred horses. We put down roots as a key member of the community. For instance, we provided support to the state universities and assistance to the scholarship program, as well as support to the Special Olympics for disabled athletes and to NGOs.

It is this way with all of our business units in the United States. They all contribute to their local communities on the individual level and on the organizational level. And at the same time, they make countrywide social contributions in cooperation with the Toyota USA Foundation founded in 1987.

One example of our support to organizations is our contributions to the National Center for Family Literacy in Kentucky. This Center was founded by Ms. Sharon Darling in 1989. There are many cases of illiterate children with illiterate parents who therefore cannot get an adequate education. Because of this, the children may remain mired in poverty. This organization tries to stop this negative cycle by teaching English to the entire family unit. It's an approach that is regarded as effective in increasing literacy.

At present, the activities of the National Center for Family Literacy stretch across the United States. Our company believes in the goals and activities of this organization and has supported it since soon after it was established.

We have already been in the United States for fifty years, and our American business units have, so to speak, been immigrants that have become naturalized citizens. We intend to be assimilated as members of American society and to carry out our responsibilities as corporate citizens.

Contributions toward sustainable mobility Now I would like to touch briefly on some issues related to Toyota and the car industry.

With the advance of globalization, world vehicle ownership rose from 570 million units in 1990 to 890 million in 2005. That is an increase of more than 300 million units in only 15 years. The penetration rate of automobiles in the United States is one vehicle per 1.2 persons. But looking globally, the penetration rate is still only one vehicle per 7.2 persons. Increasing motorization is expected in the future, especially in the BRICs, that is Brazil, Russia, India and China. Since the car industry is global, I believe that it is very much a growth industry.

However, new players are joining the market economy and playing important roles in the world economy. These include BRICs and other countries with populations of a billion or more as well as developing nations. But there are emerging concerns about potential steep rises in the prices of resources and energy and even the future depletion of resources. In addition, there are emerging constraints on sustainable growth, such as increasingly severe environmental problems, food problems, and poverty issues.

It is our job to take over and bear the burden of the worldwide negative legacy left by the 20th century.

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One of my friends, Dr. Rajendra Pachauri of India, is a former adviser to the United Nations Development Program (UNDP) and Chairman of the UN's Intergovernmental Panel on Climate Change (IPCC). The IPCC's Fourth Assessment Report had shocking news. A rise in the mean temperature of the earth has been observed from the middle of the 20th century. And there is an extremely high likelihood that most of this rise is attributable to increases in greenhouse gases (CO2 and so on) caused by human activities. In fact, analyses reveal an increase of 20% in just the past ten years. The Assessment Report of 2001 used the much weaker term "possibility." So the most recent Assessment Report uses a much stronger and serious term.

Moreover, the Assessment Report says that from 2030, the success of efforts to stabilize CO2 at lower levels will depend on how much CO2 emissions are reduced over the next 20 to 30 years by the energy supply, transportation, and construction sectors. In other words, we will need initiatives leading to revolutionary technological breakthroughs. And we'll need to make big changes to our lifestyles and patterns of action.

Then there is the problem of increases in CO2. The transportation sector is responsible for more than 20% of such emissions. And it is a fact that 80% of the transportation sector's emissions are caused by automobiles. I believe that the automobile industry will have significant social responsibilities imposed on it in the future. The responsibilities will be to achieve "sustainable mobility" in a vehicle-based society that enables harmonious coexistence between people and the earth, by addressing environmental and energy problems.

Furthermore, in terms of CO2 emission from automobiles, there is a concept called “Well-to- Wheel”. It is a combination of “Well-to-Tank,” which means the CO2 emitted while sourcing and producing fuel, and “Tank-to-Wheel,” which means CO2 emitted while driving. We have to develop environmental technologies that cover not only fuel efficiency of the vehicle but also consider many other aspects, such as fuel production.

This is why we are conducting R&D in a wide range of environmental engineering areas. Of course, we intend to continue developing hybrid systems as our core environmental technology.

Speaking of hybrid vehicles, our Prius first appeared in the market back in 1997. But actually, our development of hybrid vehicles goes back more than 30 years. After 1970, when the Muskie Act took effect, emission regulations were also tightened in Japan. One of the countermeasures on which research started was a gas turbine hybrid vehicle. It was shown as an experimental vehicle at the Tokyo Motor Show of 1975. We can say that this development project, launched more than 30 years ago, was the foundation of today's Toyota hybrid vehicles. Thanks in part to your concern, the number of hybrid vehicles sold worldwide topped 1 million in May of this year. And almost 60% of them were sold in the United States. Our goal is to increase the number of models and reach sales of 1 million units annually as soon as possible. Perhaps in the second decade of the century.

I am often asked: "What is the ultimate eco-car?" But I think it is very difficult to narrow it down to one thing. Perhaps future fuels will be ethanol, natural gas, hydrogen, and electricity. Which fuel can be supplied in large quantities at low prices may differ in many ways, depending on the country or region.

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Therefore, I think there will not be one single format for the ultimate eco-car. We must assume a wide range of possibilities. Maybe its power train will include an internal combustion engine, maybe a Fuel Cell, maybe a motor, or maybe a combination of these. But whatever its power train, the vehicle will definitely be able to accelerate and decelerate. Therefore, I think that the technological focus will remain on hybrid systems. Hybrid systems can recover the energy wasted when a vehicle slows down and accommodates all power trains.

In addition, we're cultivating a wide range of technological developments leading toward improvements in fuel efficiency and diversification in energy sources. These include steps to accommodate plug-in hybrid, clean diesel and bio-fuels, as well as fuel-cell vehicles. We're also working on facilitating transportation flows by applying IT and ITS -Intelligent Transport System- technologies and improving public education in ECO-DRIVING, through what we call the "three pillars" of people, vehicles, and the transportation environment.

5. Lastly: The importance of the relationship between Japan and the United States Lastly, I would like to state that both the United States and Japan are irreplaceable foundations of Toyota's business. This is why I fervently hope for an even closer relationship between our two countries and better understanding. I think that we can say that the Japan- U.S. relationship basically remains sound. After all, it is bolstered by the personal friendships between President Bush and Former Prime Minister Koizumi and current Prime Minister Abe. However, I have some concern that interest in Japan may be fading as the eye-catching economic growth of China and India attracts more and more attention.

In retrospect, the Japan-U.S. relationship has long been based on two foundations: economic ties centered on business activities as well as a political relationship involving security considerations. However, it will be vital to deepen our mutual understanding through wide- ranging exchanges of capable people, in order to ensure the long-term maturation of our relationship. Up to now, the Japan-U.S. relationship has overemphasized economic aspects. I think that right now we have a wonderful opportunity for a re-emphasis centered on down-to- earth exchanges of human resources. Let me take this opportunity to present two examples of meaningful exchanges between Japan and the U.S.

The first example is the training programs run by the Maureen and Mike Mansfield Foundation. I'm happy to say that I am on the foundation's governing board. Under one of the foundation's programs, seven or eight U.S. government officials are selected as Mansfield Fellows. In the first year of the two-year fellowship, the officials get full-time training in the Japanese language and Japanese studies. In their second year, they are placed for one year full-time in a Japanese government office or the office of a member of the Diet. During this time, they have the opportunity to create a wide range of person-to-person networks. These talented young people have the right stuff. In the future, they may be at the frontlines of American policy-making and legislation. And I hope that they will further enhance mutual understanding between the policy-makers of our two countries.

In addition, I believe it is vital to increase opportunities for US-Japan exchange opportunities for members of Congress and their staff.

My second example is located both in Japan and the United States. It is the John Manjiro- Whitfield Commemorative Center for International Exchange. This organization promotes

9 exchange at the grass-roots level. Back in the middle of the 19th century, a 14-year-old Japanese fisherman by the name of Manjiro was rescued at sea by William Henry Whitfield, who was the captain of an American whaler. He took Manjiro to America, where he received an education in American schools. Later, John Manjiro returned to Japan, where he played a big role in introducing American technology and culture.

The descendants of Manjiro and Captain Whitfield have been carrying on their friendly exchange ever since, as exemplified by the Center.

The goal of this organization is to encourage exchange at the grass-roots level, with the friendship between John Manjiro, the captain, and their families symbolizing the friendship between Japan and America.

Since 1991, the organization has helped more than 1,000 people of both countries to visit one another's country every year to participate in the "Japan- America Grassroots Summit." More than 25,000 people have already taken part in it, and it is planned and operated entirely by volunteers. Program participants get first-hand, cross-cultural experience and knowledge, including contact with a host family and the local community. After they return home, I hear that most continue to keep their interest in each other's countries and culture.

I am convinced that such exchanges at the citizen-to-citizen level will create fertile ground leading to much stronger mutual trust between Japan and the United States. Such exchanges allow people to get acquainted with one-another's cultures and to identify how they differ and what they share in their culture and values.

Speaking about the exchange of human resources, I'm encouraged and grateful that the Woodrow Wilson Center is launching its Japan Initiative, which will broaden its programs and scholarships related to the Japan-U.S. relationship. Under this initiative, researchers on Japan and the U.S. will work together in friendly competition. They will thus enhance their understanding of our two countries and the Japan-U.S. relationship. And I hope that will reinforce our relationship over the long term.

Thank you for your kind attention.

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