By Chang-Ran Kim, Asia auto correspondent

TOKYO (Reuters) - General Motors CEO Rick Wagoner boasts about the number of markets where the U.S. automaker is number one. Toyota President Katsuaki Watanabe emphasises where his company trails.

Listening to the leaders of the world's biggest automakers, you might think Toyota was the one playing catch-up.

Yet, though GM begs to differ, Toyota has been ahead for the past two years. In 2007, the Japanese group sold about half a million more vehicles than GM, excluding cars from a Chinese company in which the American firm holds only a minority stake.

The gap may very well widen this year as Toyota seeks growth in emerging markets. So why does Toyota's 65-year-old chief sound so worried?

"I'm constantly trying to drive home the message that long-lasting success is elusive," Watanabe, a music lover and chorister, told Reuters recently. "Our corporate DNA is about always challenging ourselves to do better. The moment we let down our guard, the fall could come very fast."

Failure is not normally a word associated with an auto company that's in a league of its own. For years, Toyota has led the industry by nearly every corporate yardstick: profits, market value and cash reserves. Outselling GM, which held the No.1 spot for the previous 75 years, was largely a symbolic milestone.

But as Toyota began adding roughly half a million cars a year to its output and extended its reach, it has faced new problems. Vehicle recalls have hit record levels in recent years and Toyota has slipped in quality rankings.

That has not helped the company's share price, which has fallen by around 20 percent in the past six months due to fears of a slowdown in the key U.S. auto market, in line with its Japanese peers.

BIGGER, HARDER

The snags have yet to slow Toyota's sales. It expects to sell almost twice as many cars this year as it did a decade ago.

To keep up with soaring sales, Toyota has doubled its work force to 310,000 over the same period, and that's where Watanabe's quality headaches have come from.

A visit to a Toyota plant in Japan shows how difficult it is for Toyota to maintain its high standards as it moves production offshore to booming markets and engages new workers.

At the Tsutsumi factory, the home of Toyota's Prius hybrid car, elderly workers move components around at a speed that encapsulates Japan's unique work-centric culture.

The pace of work picks up across the factory floor every time overhead displays are updated with the day's vehicle quota, reflecting in real time new orders received at dealerships.

In Japan, death from overwork is not uncommon -- Toyota itself was blamed for one in a lawsuit last year -- but expecting that level of dedication elsewhere is far from realistic.

"With the population declining and ageing in Japan, Toyota has no choice but to expand its workforce abroad," said Tsuyoshi Mochimaru, auto analyst at Lehman Brothers. "This is a major challenge for management: it's not easy to translate the 'Toyota Way' outside of Japan."

Instilling a sense of urgency is also tough when new hires have never known a Toyota that wasn't a cash-generating machine.

Unlike Watanabe. He joined Toyota straight out of university in 1965 and has been with the company through some of its toughest years -- the U.S.-Japan trade rows of the 1980s and the crippling effects on Japanese exporters as the dollar fell to 79 yen in the mid-90s. Even with Toyota's recent quality problems, conveying to the rank and file the dangers of complacency is a tall order.

That's why, from the moment he took the helm in 2005, Watanabe has made it his mission to discourage employees from measuring Toyota against rivals but rather against a lofty goal: developing a dream car that "cleans the air, doesn't cause accidents, makes drivers healthier and can go around the world on one tank of fuel".

"We have a long way to go," he said.

CONSTANT CHALLENGE

It sounds like a corporate fantasy, but the culture of striving is ingrained in Toyota's origin, which can be traced back to the Great Kanto Earthquake of 1923. The quake levelled Tokyo and destroyed trains and streetcars, the city's primary means of transport in a country that was still an industrial backwater.

Sakichi Toyoda, an inventor of textile looms, lamented Japan's need to import Ford trucks to bus people around after the quake and instructed his son, Kiichiro, to build automobiles to serve the country.

Taking apart Chevys and Fords, Kiichiro and his small team knocked together their first passenger car, the Model AA, in 1936. A year later, Kiichiro spun off the automobile business from his father's loom company to establish Toyota Motor.

It was another crisis, the 1970s oil shocks, that propelled Toyota's fuel-efficient cars onto the global stage, as U.S. consumers sought an alternative to big home-grown cars.

James D. Power III, founder of leading research firm J.D. Power, has written that GM scoffed then at his warnings about losing touch with the customer. But Tatsuro Toyoda -- a son of Kiichiro's who later headed the company -- listened and learned.

Toyota is now the No.2 seller in the United States, the world's biggest car market, ahead of Ford and Chrysler and not far behind GM's Chevrolet.

SHAKY GROUND

Lately, though, Watanabe has been busy fixing the cracks in Toyota's vaunted reputation for quality.

In J.D. Power's closely watched survey on new-car quality last year, Toyota's luxury Lexus brand ceded its long-held top spot to Porsche, and Honda topped Toyota among mass-market brands. Toyota vehicle recalls have exceeded a million cars in the past few years.

To reverse the tide, Watanabe in 2006 assigned two executive vice presidents to oversee quality improvements, one specifically to work closely with suppliers to catch design defects early.

Toyota also set up a "customer first" committee that made quality checks more visible at the four stages of design, manufacturing, procurement and sales.

Watanabe, who chairs the committee, says the measures are bearing fruit and recall numbers are falling.

Toyota teaches staff at every step of their job, even down to the correct way to grasp a bolt, to try to ensure consistent quality. Foreign managers attend a Toyota Institute in Japan to be schooled in the "Toyota Way".

Watanabe also introduced a mentor system to encourage staff to be more inquisitive and suggest improvements, harking back to Toyota's tradition of getting to the root of problems through "kaizen", or continuous improvement.

"We need to go back to the basics, even if it takes more time and people, and even if labour costs go up," he said.