Slumping Toyota Prepares to Slash Production

Aug. 26, 2009
World's largest automaker to make significant cuts to vehicle manufacturing throughout its global factory network.

Sometimes symbolism is every bit as powerful as substance. Consider the case of Akio Toyoda, the grandson of Toyota Motor's founder, who took over in June as the carmaker's president. On the surface, the move reinforced the company's return to its family roots.

In Japan, though, the cultural and political significance was profound. The local media referred to it as taisei hokan, referring to the country's Meiji Restoration in 1867, when Japan's emperor took back power from the shoguns who had been ruling the country.

Not even three full months have passed since Toyoda took charge of Toyota. But in that brief period, he has moved quickly, ordering dramatic restructuring, including having 40% of Toyota's top management retired or reassigned.

"Like everyone in the company, I am extremely frustrated" about the automaker's decline, Toyoda said at his first news conference as president. "So we must start again from the ground up."

The latest move suggests that Toyota will suspend production at one of two lines at its Takaoka plant in Toyota City, Aichi Prefecture, from the spring of 2010 until the second half of 2011, lowering its overall capacity by 220,000 vehicles, Toyota spokesman Paul Nolasco confirmed to the Associated Press.

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It marks the first long-term closure of a Japanese assembly line as car sales in the country fall to their lowest levels in more than 30 years.

Toyota has the capacity to produce over 10 million vehicles a year, but has seen its market plummet over the past year. Automotive sales in North America fell 34% between January and July this year, the company said, while in Japan it declined 23% and in Europe 27%.

"They were hit hard by this global automotive drought," says John Wolkonowicz, a senior auto analyst at IHS Global Insight, an economic research firm. "They have the money to absorb the hit, so there's no financial peril involved. Toyota is a company that likes to address issues head-on and thats what they're doing right now."

According to reports, Toyota plans to cut its global output to 6.68 million vehicles in 2009, a 28% cut from the 9.24 million it produced last year.

Furthermore, Toyota will shift some vehicle production to Japanese affiliates during the closure, while about 1,700 workers will be transferred to other Toyota factories -- a move which is unprecedented. Never has Toyota stopped production at one of its Japanese plants. In the past, the company has only slowed lines down or cut shifts and production days.

According to an estimate by market research group CSM Worldwide, Toyota is expected to produce about 7.2 million vehicles globally this year, down from 9.7 million in 2007.

"They may have had too much capacity, to some extent," says IHS Global Insight's Wolkonowicz. "It's going to take a while for the global auto market to return to what it was. They entered the downturn with a lot of cash on hand, but they also got as hit hard as anybody. So they need to take some capacity out, at least on a temporary basis."

As signs point to a recovery in the foreseeable future, Toyota still faces significant challenges that could preclude its return to profitability. Though the automaker enjoyed a pleasant shot in the arm with the "cash for clunkers" program, it will need a prolonged recovery of sales in the U.S. market. And last quarter's numbers don't suggest that's happening anytime soon. For the three months that ended in June, sales in North America slumped to 387,000 cars and trucks, compared with 729,000 for the same period a year ago. As a result, Toyota is left with significant overcapacity.

In the absence of a sudden mass explosion in auto sales, the company, under new chief Toyoda, will try to find its footing in the worst global auto market in generations.

"We're facing a once-in-100-years crisis, said Toyoda, at his first press conference. "[This company] has overcome many challenges during seven decades in business. Toyota will bounce back."

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