Toyota Changes Course

By Chris Haak

06.20.2007

The Wall Street Journal reported this morning that Toyota is putting the brakes on its factory-building activities in the US, once the new plant for Highlander crossovers in Tupelo, Mississippi is finished in 2010. Toyota has already scaled back its operational plans for the Tupelo plant, reducing initial production capacity from 200,000 to 150,000 vehicles and delaying its opening date from 2009 to 2010.

It seems that the company is concerned about several factors – increased US labor and material costs, a geographically “scattered” North American manufacturing base, and the quality problems that have uncharacteristically confronted Toyota for the past few years. Also, the company is in the unfamiliar position of having excess production capacity in its North American plant infrastructure (it can build about 100,000 more Tundras per year than it’s on pace to sell this year).

Over the years, Toyota has built factories in the US for two main reasons: to build political support in as many communities/states as possible, and to provide a sort of “insurance policy” against potential protectionist policies and currency fluctuations. The strategy of putting all of its factory “eggs” into one basket, that is, factories in Japan, is potentially disastrous. Therefore, it makes a lot of sense to have the safety valve of factories in the United States. However, with the Japanese yen being inexpensive relative to the dollar, it’s currently more profitable for Toyota to import cars from Japan.

According to the article, the policy shift was driven by two of the company’s former presidents: Shoichiro Toyoda (1981-1992) and Hiroshi Okuda (1995-1999) who are still members of the company’s board. These men were concerned that Toyota has built too many plants in the US too quickly, and hadn’t fully considered the economics of the decisions.

The supply chain complexities come from a geographically diverse manufacturing base (Toyota has plants for engines, parts, or vehicles in eight states). Toyota’s four most recent U.S. assembly plant projects have only one production line each (the most efficient plants Toyota operates have two or more lines).

In contrast, most of Toyota’s factories in Japan are concentrated in Toyota City, which makes the supply chain much easier and less expensive to manage, and most of the company’s plants in Japan can build up to six different models each, instead of one or two built in the company’s North American plants.

It appears that Toyota has allowed themselves to become a little complacent over the years – almost to the point of making very expensive factory construction decisions on auto-pilot, when there may have been a better alternative. I congratulate them on identifying the problem before it’s too late, in marked contrast to what most of their domestic competition has done for the past two decades. If Toyota’s record profits of the past year or two are coming on the back of some potentially unsound business decisions like these, imagine what they can accomplish if they sharpen their focus and concentrate more on profitability and cost reductions than on political goodwill and making the “automatic” choice.

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Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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3 Comments

  1. Suddenly being No. 1 ain’t no fun.

  2. Good post – very infromative!

  3. I’m just reading this a week late, but I don’t agree with the conclusions of your article.

    I take issue with this statement: . “If Toyota’s record profits of the past year or two are coming on the back of some potentially unsound business decisions like these, imagine what they can accomplish if they sharpen their focus and concentrate more on profitability and cost reductions than on political goodwill and making the “automatic” choice.”

    Toyota’s profits in the last several years are the culmination of years of efforts. However, mistakes like the spread out supply chain (which is why I think “just in time” production is a bad idea in a country as large as the US) will also culminate in some other misfortune for Toyota. We may not see the effects of it for some time to come.

    Or, they may continue to use PR efforts to bury their mistakes like so many other companies have. It seems to me that since the Toyoda Loom Co. Ltd. started copying that 1936 Chevrolet, they have continued to copy GM in other aspects.

    In all fairness, while they are at least concerned with what this might do to their “image”, sharpening focus and etc., will still not absolve them from sins like overcapacity and poor planning. Consider again the example of Toyota following GM.

    What this means, is that like Nissan (Isuzu and Subaru could be added here), they have wandered into that first trap of arrogance, overcapacity.

    Time will tell how all of this plays out. But I’m guessing the party is over for Japanese transplants in the USA. The real action has been in Mexico for over 20 years. One wonders about the quality of decision making at these companies…

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