You only have to go back two years (the peak of the housing bubble) to a time where the world was Toyota’s oyster. Toyota’s many successes had finally reached a pinnacle in 2007. General Motors death by one thousand cuts was completed (more or less) thus codifying the Nipponese automaker’s many accomplishments into the title of number one car maker.

As the Detroit 3 scrambled to save themselves – Toyota’s then CEO Katsuaki Watanabe was busily plotting an empire. On the top of Mount Fuji, Watanabe proudly proclaimed Toyota’s “master planâ€� which included a goal of 15% global market share by 2010 – for perspective, General Motors had 16% global market share in 1999.

My what 24 months can do to humble a goliath? Now Toyota’s latest CEO Akio Toyoda, Watanabe committed seppuku over his hubris, says the largest automaker may be locked into a spiral of decline (akin to GM circa 1978-2008).

Toyoda, ancestor to founder Kiichiro Toyoda and for which the company is named, has legitimate reasons to worry.

“Can Akio Save Toyota?�

Since the beginning of the recession, Toyota’s overall sales have plunged. Toyota has performed worse than the industry average and thus global market share has actually declined from 13.1% in 2008, to 11.8% forecasted for 2009.

According to the Economists, European sales are at their lowest levels since 2005. Toyota isn’t doing great in China, India or Brazil either and these will be the most vital markets in the future – China is already the world’s largest car market.

In America, which accounts for 31% of Toyota’s global sales (the biggest share), sales have fallen -23.2% for the year. Interestingly, Toyota’s U.S. market share has remained stable at 16.7%, while Ford has increased its share to nearly 16%. Ford, VW, Hyundai and Honda have gained most of the market share lost by GM/ Chrysler.

In America, not only have sales suffered but the car maker’s reputation has also taken a ding. Toyota has suffered an embarrassing string of recalls over safety – the latest one involving the Corolla and Matrix.

Obviously the recall that’s getting all the attention is the 4.26 million Toyota and Lexus vehicles that were recalled over sudden acceleration claims. The recall concerns were brought to light when a California Highway Patrol officer and his family died at an intersection in a rental Lexus – unintended acceleration was the culprit.

Adding insult to injury, the IIHS announced that not one of its 2010 “Top Safety Picks� was a Toyota. This is after the institute added a tough new roof crush standard.

Toyota’s vaulted reliability standards have also been tarnished. Consumer Reports, every American consumer’s holy bible, said it would no longer recommend any new or redesigned Toyota-built model without reliability data. Before that, Toyotas would get a pass: Honda’s and Subaru’s still do. This change was due to the V6 Toyota Camry, 4WD V8 Tundra and AWD Lexus GS receiving worse than average reliability scores in 2007.

Toyota’s reliability scores have rebounded since then, 18 of the 48 top rate Consumer Reports vehicles are Toyotas – that’s the most any car marker received. Still, the Toyota Camry (the U.S. bestselling car) only has average reliability; the Honda Accord and Ford Fusion have better scores.

J.D Power’s most recent study of 3-year dependability showed that Lexus, the top rated since 1995, had lost the spot to Buick and Jaguar. Toyota was in fourth place.

All of this has hurt Toyota’s bottom line. According to the Economists, Toyota made its first net loss in nearly 60 years; about $4.3 billion was lost in FY 2008-2009. More startling is the fact that Toyota has been losing more money than GM (pre-bankruptcy) over the past financial year.

Toyoda expects further losses during FY 2009-2010, to the toll of some $5 billion forecasted – though that sounds like a conservative estimate.

Despite all the negative press about reliability and safety, the real thing that’s currently bleeding Toyota’s coffers is its production capacity. According to Global Insight, Toyota currently has global annual production capacity of about 10 million vehicles, but will only produce 6.68 million vehicles globally in 2009, down almost 28% from over 9 million units in 2008.

The yen is also another factor. According to Toyota’s Executive Vice President “the yen should be a little weaker” and that the current level of 90 yen per dollar is “painful.”

To correct the yen issue, Toyota has begun building more of its cars in the United States. Domestic production has increased to 61.9% of the makers total U.S. sales, up from 54.8% in 2008. Some new models built in the U.S. include the Venza and RAV4.

Also, in order to correct the errors that occurred during the expansionists’ era, Toyota will cut its ties with the NUMMI plant in California (the only car plant left in California) in March 2010.

Toyota will transfer production of the NUMMI Tacoma compact pickup to its factory in San Antonio, Texas in June 2010, while production of the Corolla and Matrix will move to its factory in Ontario, Canada and to Japan.

While Toyota will be closing some factories in markets where it is having trouble, it will also be investing in new green-sites in places such as India and Thailand – where Toyota remains relatively weak, but car growth is rampant.

By reducing unneeded production capacity, Toyota intends to raise the operation level at its plants above the break-even point of 70%, according to Global Insight.

The latest Consumer Reports findings prove that Toyota can turn around reliability around quickly. What remains to be seen if it can turn around its safety issues. Though, a class-action suit that accused Toyota of covering up evidence that it knew some of its vehicles were deadly in roll-overs, we’re talking Camry’s and Corolla’s, was just dismissed by a federal judge. Safety issues involving a falsified study involving Audi, crippled the brand in the US for decades – the same could very much happen to Toyota.

One bright spot in Toyota’s realm is its hybrids. The new Prius hybrid is topping the charts in Japan for the sixth straight month in a row. In America, some 127,907 Prius’s have been sold. That’s down from 151,025 in 2008, but makes it the 16^th bestselling vehicle in America. Building on the strengths of the Prius, Toyota will add a plug-in version in 2012.

Toyota’s U.S. car market share has remained stable as well (19.2%), and the automaker performed the best in the U.S. cash rebate program known as “Cash for Clunkers,� beating out GM and Ford.

The automaker is also receiving higher-than-expected orders for the Lexus HS250h, along with higher demand for its other fuel-efficient models across the world. Toyota still plans on offering a full hybrid lineup by 2020, and will double its hybrid lineup shortly after 2010.

Toyota’s future subcompact hybrid. Cheaper than Prius, arriving in 2011.

It has already been confirmed that the newly redesigned 2011 Toyota Sienna will be offered as a hybrid in a year’s time. Toyota will also unveil a new dedicated hybrid model at the 2010 Detroit Auto Show. This model will be much smaller than the Prius, and will be cheaper. Expect the new model to go on sale in 2011.

If Toyota can keep a lock on the hybrid market, expand its presence in India, China and Brazil, and mitigate the damage of the U.S. recalls the automaker should be able to hold onto its mantle as the world’s largest automaker for a few more years to come.

But with a resurgent Volkswagen (VW surpassed Toyota in global sales for the month of November, Toyota still has a healthy lead for 2009) and a rapidly growing Hyundai, any misstep by Toyota and these two new soaring dragons will surely eat the automaker’s lunch.

Filed under: Editorial