THE SUN shone on the Côte d’Azur last Monday and on the roof terrace of ED2 a group of Japanese and Europeans nibbled canapés and sipped mineral water. In the distance sparkled the Mediterranean.

This cool location, with panoramic windows and ranch-style rafters, is a world away from the grey offices of Toyota City in Nagoya, Japan, but ED2 (or Europe Design Development) is where an international team of designers come up with ideas for future generations of Toyota and Lexus cars, the idea being they will be stimulated by the scenery, free from the pressures of Toyota HQ.

Already by far the richest motor company, Toyota will overtake General Motors later this year as the largest car and lorry maker.

The gathering last week was to review a concept model that will appear at the Frankfurt Motor Show in 10 days. The details are secret but suffice to say it is a new type of car for Toyota and incorporates features that are striking and fashionable – the exact opposite of most of the 9.3m production cars it will sell this year. This figure will rise to 10.4m by 2009, the company said last week.

ED2 illustrates the paradox that is Toyota. Along with its equally glamorous companion studios in California and metropolitan Tokyo, it produces some of the brightest and most admired show cars. Yet most of the products that have put Toyota on top of the world in its 70th year are well made and reliable but lack aspi-rational appeal.

Toyota didn’t get where it is today by following whims or taking chances. It is, above all, a conservative company. Its fortunes were earned and are still based on hard work and absolute dedication to consistent processes.

The Toyota Production System, which applies lean manufacturing and depends on precisely controlled just-in-time delivery, continuous improvement and building quality, is the world standard for manufacturing, imitated throughout the motor industry and applied in many others – Boeing, for example, uses it to build aircraft.

Two other protocols, the Toyota Business System and PDA (Plan, Do, Action) rule other aspects of the business and provide a framework for consensual management. “Above all, it is the business culture that makes this company so successful,” said Miguel Fonseca, managing director of Toyota GB.

Toyota makes vehicles in 26 countries, including Britain, where Toyota Motor Manufacturing was set up in 1992. Fonseca thinks it should be described as a global company rather than a multinational. It is true the Japanese are the creators of the true “world car” that has eluded Ford and General Motors. Its Corolla can claim to be the best-selling model of all – more than 11.5m have been made in nine generations over 40 years.

Toyota’s approach has no room for showmen and big egos; its bosses are not media stars. The company president, Kat-suaki Watanabe, 74, has said repeatedly that becoming the world’s largest car company is not a target in itself: “We don’t look at volume as an indicator of reaching the top. Rather, we aspire to be No 1 in a qualitative sense, as a result of offering product value and profitability.”

There is a certain discomfort about Toyota overtaking Detroit’s big three, especially when America has been such a large contributor to its success. Toyota sells 2.7m vehicles a year in North America and is now building its eighth factory there. The Camry saloon is the best-selling passenger car and Toyota has even ventured deep into the American heartland with the Tundra, a large, V8-engined pickup truck made in Texas.

The discomfort comes because it does not have the legacy costs and overgenerous union agreements that have pulled down the indigenous manufacturers. It is estimated that at General Motors healthcare costs for staff and pensioners mean that its actual labour costs are $25 (£12.40) an hour more than Toyota’s and that the Japanese company makes an average of $3,800 more profit per vehicle sold.

Toyota, which started manufacturing in America only in 1988, is not unionised and has few pensioners.

The group has grown organically in the past five years. Generally it avoids takeovers and joint ventures. When former chairman Hiroshi Okuda, who launched its growth strategy in the 1990s, was asked if he would be interested in acquiring BMW if it became available, he said: “Why would we want to do that? If we want to have a BMW we build it ourselves.”

Toyota has indeed spent hundreds of millions developing Lexus as a rival to BMW and Mercedes. It has succeeded in America, where Lexus is the No 1 premium car, but progress in Europe has been slow: after 15 years it has only just exceeded 50,000 cars a year, regarded as the critical mass for a premium brand.

Back home in Japan, Toyota has helped to sustain local industry by supporting its weaker players. Daihatsu, which makes mini-cars, and truck manufacturer Hino became part of the Toyota group some years ago and, more recently, it stepped in to buy a stake in Fuji Heavy Industries, the maker of Subaru cars, and diesel specialist Isuzu after General Motors discarded its minority stakes in these companies. It is using the Subaru plant in Indiana to increase American production of Camrys.

Toyota isn’t an innovative company although its extensive – and secretive – research-and-development department usually has the technology ready when someone else has demonstrated the potential of a market.

This has led to allegations of copying, which Toyota vehemently denies. To this day, Mercedes engineers point to the similarities between the retractable hard-top they pioneered with the 1996 SLK sports car and the one that appeared three years later on the Lexus SC430.

The exception was the Prius, the petrol-electric hybrid that has become a symbol of environ-mental awareness and has done more for Toyota’s image in America and Europe than the millions of Corollas and Camrys.

Toyota is not the only maker of hybrid cars, but the original, awkward-looking Prius, introduced in Japan in 1997, was the first to be mass-produced. The breakthrough came six years later, with the second-generation Prius, the timing of which was perfect – either by brilliant planning or just plain luck.

Designers in Japan had created G21, a swoopy concept car for the 21st century. When Okuda, the chairman, reviewed it, he insisted it be fitted with the improved hybrid powertrain and put into production. Its unique and futuris-tic appearance ensured the new Prius was visible evidence of its drivers’ green commitment. Technically sophisticated and easy to use, it was elected Car of the Year on both sides of the Atlantic. Toyota’s then-president, Fujio Cho, confidently predicted that by 2010 Toyota would make 1m hybrids a year and have a petrol-electric version for each model.

The thinking now is that the hybrids will be concentrated ina Prius sub-brand but Cho’s promise has held good for three out of four Lexus models, including the flagship LS600h saloon, which combines a 5-litre V8 petrol engine with an electric motor to give the performance of a V12 combined with fuel consumption of 30mpg and carbon-dioxide emissions of 219g/km.

The LS600h is the most expensive model Toyota has ever offered – starting at £81,400 – but it has been snapped up by captains of industry who want to be seen to be green but still want a chauffeur-driven limousine.

European manufacturers fought a rearguard action against the hybrids, maintaining that their latest diesel engines could provide comparable fuel economy and emissions. Toyota had the perfect counterpoint – its D4D D-Cat engine, available in the Auris, Avensis, Corolla Verso, Rav-4 and Lexus IS, which it claims is the world’s cleanest production diesel engine.

However, diesel cars have never caught on in America, while petrol-electric hybrids are acceptable everywhere, even though the cost of the technology means they generate only a modest profit.

So Toyota leads the way with hybrids, but in some other areas it is still catching up. Renault and others have shown the way to an ultra low-cost car that is intended for emerging markets but can also be sold in western countries. Toyota said it was working on such a car but is not yet ready to launch it.

These days the talk in the car industry is of the opportunities in the so-called Bric nations – Brazil, Russia, India and China. Toyota is weak in these territories, but it is now gathering speed with new investments in Russia and China.

Although it has an enviable reputation for quality and reliability, winning umpteen customer-satisfaction awards all over the world, critics say that, in Toyota’s rush to expand, slips are beginning to show. In America last year 500,000 Toyotas were recalled for rectification of faulty components.

Toyota provides cars for every-man but some of its executives worry that regular models lack appeal for younger buyers. The enormously expensive Formula One racing programme, which hasn’t achieved a single win in 100 Grands Prix, is an attempt to brighten up its image. So is ED2, and the other design studios in fashion hot-spots.

Making dull cars was one of the reasons for the decline of General Motors. President Watanabe is anxious to avoid the complacency that he knows can come from being on top of the world. A senior executive tells a story that suggests this is not going to happen at Toyota. At the end of the last financial year, after Toyota had announced a huge $14 billion profit (and Ford, General Motors and Chrys-ler had lost more or less the same amount between them), a debriefing was called. There was no more than a quick acknow-ledgement of the record results – certainly no champagne – and the meeting immediately started to analyse areas of weakness and how to make further increases in efficiency and performance.

Serious business, Toyota.

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