Been There, Done That, Bought the Politicians: Toyota Falls Out of Love With US Production

Yesterday’s Wall Street Journal reported that Toyota executives have put the brakes on their American manufacturing plans. This rapid retrenchment comes against a backdrop of seemingly relentless growth in Toyota's U.S. market share. Sales of the Kentucky-built Camry are so high that Toyota is paying Subaru to build the model in Indiana. Thanks to generous incentives, the Texas-built Toyota Tundra pickup truck is keeping pace with the company’s ambitious targets. And just a few days ago, Toyota passed Chevy to become America’s top-selling automotive brand. So what’s up with the slow down?

First up: union troubles. Earlier this year, employees at the aforementioned Kentucky production plant unearthed a ToMoCo memo outlining plans to reduce wages and benefits in accordance with local compensation. The United Auto Workers (UAW) smelled blood. The union held “town hall” meetings and set up a “worker’s rights board” to “hear personal stories of Toyota workers and recommend appropriate remedies when necessary.”

In theory, the numbers favor the UAW. At Toyota’s Tundra plant in San Antonio, unskilled workers earn about $15 per hour, increasing to about $21 per hour after three years. Workers at Toyota’s new Tupelo, Mississippi plant will start at around $12 per hour, increasing to some $20 per hour after three years. If you include benefits (not an apples to apples comparison but there you go), the average Big 2.8 worker earns roughly $73 per hour.

In practice, Toyota pays bonuses to achieve parity with industry norms. And yet, as the leaked memo revealed, the wages they are a changin’. Toyota will now cap new hires’ salaries at 50 percent above the average local wage. That may seem generous, but Toyota understands the seductive power of union-inspired greed aspirations. And they know that a UAW stronghold in Georgetown would put them on a slippery slope to widespread unionization.

Toyota is also extremely concerned about its declining product quality. The company’s rep rests on the bedrock of reliability, which has been shaken by massive product recalls. The world’s largest automaker has more faith in its Japanese factories’ abilities to right that wrong than its American equivalents’.

This belief is NOT an ethnocentric condemnation of America’s autoworkers. It reflects the importance of experience and geography.

For largely political reasons, ToMoCo has spread its production facilities right across the North American landscape: Alabama, California, Indiana, Kentucky, Ontario, Mississippi, Missouri, Texas, Tijuana, Victoria and West Virginia. Back in Japan, the automaker clusters its factories in and around Toyota City (twinned with Detroit ‘natch).

While Toyota Motor North American Inc. has done a bang-up job mastering its long supply lines, it’s an expensive business prone to “complications” and “misunderstandings.” In contrast, Toyota’s Japanese centralization and the company’s longstanding relationships with its key domestic suppliers give the manufacturing mothership a distinct edge in quality and flexibility. At the risk of stoking xenophobic flames, an American-made Lexus flagship or Prius still seems… unlikely.

And then there’s the yen. Currency manipulation or no, the yen’s recent weakening against the U.S. dollar has made the economics of importation that much sweeter for the Japanese automaker.

Union agitation, quality woes and a yen for profit– it’s no wonder Toyota’s pumped-up the volume on its North American imports, from 762k vehicles in ’04, to 1.27m in ’06. Nor should it be any major surprise that Toyota has already started scaling back American production capacity.

Toyota’s Highlander-producing factory was scheduled to open in Tupelo in ‘09 with an annual production capacity of 200K units. The new plan: throw the switch in ‘10 with a 150K annual capacity. By the same token, southern states can put down their tax abatements; Toyota won’t be building any more new plants in the U.S. for the foreseeable future.

What if U.S. demand for Toyota vehicles outstrips their American production capacity? In the short term, ToMoCo could add additional shifts or assembly lines to existing plants, staffed by temporary workers. Or they could farm-out the work to friendly transplants or, gulp, domestic manufacturers. Or just call home for reinforcements.

In the longer term, Toyota has plenty of plants in countries with much lower production costs than the U.S. It wouldn’t be hard for them to import Chinese- or Indian-built Camrys for less than it costs to build America’s most popular car in America. Even with the 25 percent tariff on imported trucks (a.k.a. the “chicken tax”), building Tundras or Tacomas in Thailand, China or India would still be a price competitive proposition.

In the broader sense, Toyota’s American plants have already served their purpose. They’ve ingratiated the Japanese automaker to the American car buyer and insulated the company from a political backlash, should The Big 2.8 go Tango Uniform. And if these same domestics move the lion’s share of their automotive production overseas, what’s to stop Toyota from following suit?