Wednesday, June 20, 2007

Toyota Changes Course

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 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 diverse 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 at its North American plants (it can build about 100,000 more Tundras per year than it's on pace to 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 protectionist policies and currency fluctuations that would make putting all of its factory "eggs" into one basket potentially disastrous. However, with the Japanese yen being inexpensive relative to the dollar, it's 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 that come from a geographically diverse manufacturing base (Toyota has plants for engines, parts, or vehicles in eight states). Toyota's four most recent 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.

My take: It appears that Toyota has allowed themselves to become a little complacent over the years...almost 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, like most of their domestic competition did for the past two decades. If Toyota's record profits of the past year or two are coming on the back of some fundamentally unsound 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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