In April 2013, world’s number one carmaker Toyota announced a moratorium on building new plants. That moratorium is drawing to an end, in a Toyota-typical slow and watchful way. Toyota is building fewer new plants than its competitors, and it is building those fewer plants with far less money.
This afternoon, calls went out to the Tokyo automotive press corps to come to Toyota at 5 for a highly secretive “briefing,” topic unknown, keep your cameras at home, and your mouths shut until 10pm. “We’ll probably hear what the Nikkei has been writing for weeks now,” muttered a grumpy Automotive News correspondent Hans Greimel, and he was right as usual. As expected and reported everywhere. Toyota lifts its self-imposed stop on factory expansion with a brand-new plant in Mexico, and an expansion of its Chinese joint venture plant with Guangzhou Auto. Toyota doesn’t seem to be in a particular hurry to do so.
Scheduled to provide work for 2,000 new hires in 2019, Toyota’s new plant in Guanajuato, Mexico, is sized for 200,000 units, initially for the new Corolla. It will demand an investment of approximately one billion U.S. dollars. Toyota insiders think that when the Mexico plant opens, it will be the most cost efficient in the company’s arsenal.
In China, Toyota will modernize the existing two lines at its Guangzhou joint venture partner GAC, and it will then build a new third line adjacent to the first two. A total investment of around 400 million U.S. dollars should result in a capacity increase of around 100,000 units, “as needed after 2017.” The new line will build a yet to be announced car. Interestingly, the factory expansion will yield no new jobs. The people needed to run the third line will be freed by automating lines one and two.
The total increase of 300,000 units to Toyota’s capacity may sound timid, however, planners at Toyota point out that the new factories are of the new, highly flexible TNGA variety, where lines can be extended at short notice to adapt to an increase of demand. The plants also are cheaper to build. Toyota says it saved 40 percent over what they would have cost done the old way. At first look, the numbers on the back of my envelope don’t bear that out. 300,000 cars more per year at an invest of $1.4 billion is very close to the old industry rule of thumb of $5,000 sunk cost per annual car. But then again, planners at Toyota point out that at the new TNGA factories, lines can be extended at short notice to adapt to an increase of demand, and that at very low incremental cost.
Toyota does not seem to budget for a huge increase in demand anyway. Growth of global total industry volume has slowed to around 2 percent annually, mostly driven by China and the U.S. China appears to be slowing down a lot, the U.S. market is widely predicted to plateau. By expanding its worldwide capacity by only 3 percent when 2019 comes around, Toyota does not seem to believe in huge jumps of car demand. Should the market expand by more than the half percent annually Toyota seems to budget for, no problem at all: Tack a few more segments to those TNGA lines, and capacity grows accordingly.
What does this mean for Toyota’s ranking at the top of the world’s largest automakers? Up until a few days ago, the safest bet was that by the end of the year, Toyota will be displaced at the top by Volkswagen. Then, Volkswagen’s Chairman Ferdinand Piech started to squabble with Volkswagen CEO Martin Winterkorn, and fights at the helm often cause the ship to run out of the rudder. Until this is settled, all bets are off. If Toyota continues to be skittish about building factories, and if Piech continues to torment his erstwhile protégé, who knows, maybe GM will get to former #1 glory.
Meanwhile, Toyota seems to be betting that the dirty work will be done by the next global recession. It could wipe out GM for sure, and it could harm a very exposed Volkswagen. Lean Toyota, with a tight fist on investments, and with production engineering that can grow and shrink in tandem with global demand, could have the last laugh.