Toyota forced to find alternative uses for U.S. workers

by Alan Ohnsman

Bloomberg

Idled Toyota Motor Corp. assembly-line workers in San Antonio are spending two weeks cleaning city parks, removing graffiti, painting benches and fixing fences instead of building pickup trucks.

Japan’s largest automaker, which counts on the United States to absorb 29 percent of vehicle production, is fighting the first annual sales slump in 13 years.

With the credit crunch scaring buyers away from showrooms, the Toyota, Aichi Prefecture-based company suspended truck-assembly operations in Texas and Indiana and cut initial output plans for a new sport utility vehicle plant in Canada to half the original target.

Even the company that’s poised to pass General Motors Corp. as the world’s biggest automaker by production can’t escape “a market in which no one wants to buy cars,” said John Casesa, managing partner of Casesa Shapiro Group in New York, an industry consulting firm.

By shutting factories, idling workers and offering below- market financing, Toyota is following the example set by GM, Ford Motor Co. and Chrysler LLC.

“They are now in almost every segment, and like the Big 3, have a lot of plants to fill,” Casesa said.

Toyota’s operating profit may fall as much as 52 percent to ¥1.1 trillion for the year ending March 31 from ¥2.27 trillion in the previous year, according to analysts. That compares with Toyota’s goal of ¥1.6 trillion for this fiscal year.

Toyota, which employs 43,000 workers in North America, saw U.S. sales this year drop 10.4 percent through September, compared with 1.1 percent for Honda Motor Co., 3.4 percent at Nissan Motor Corp. and GM’s 18 percent.

On Oct. 2, a day after reporting the steepest sales drop in the country since 1987, Toyota announced zero-interest-rate loans on 11 models, including the Highlander SUV, the broadest offer the automaker ever made.

The loans come from Toyota Motor Credit Corp., based in Torrance, Calif., the only so-called captive automotive-finance unit rated AAA by Standard & Poor’s and Aaa by Moody’s Investors Service.

Detroit-based GMAC LLC, formerly GM’s own auto-loan unit, is rated B3 by Moody’s Investors Service, six levels below investment grade. The company is 49 percent owned by General Motors, which sold a majority stake to Cerberus Capital Management LP in 2006.

“We have a very long-term approach to things. We’re not looking at just a single quarter when we make decisions,” said Xavier Dominicis, a spokesman for the company’s U.S. sales unit in Torrance, Calif. Toyota had $24.4 billion in cash and short-term investments as of June 30, while GM had $20.7 billion.

“They are responding to the downturn in a way we’ve seen companies respond in the past, notably GM, and they can afford to do it,” said Efraim Levy, an S&P equity analyst in New York. “If the program were to persist, it could bring some degradation for the brand, but I don’t expect that to happen.”

Toyota said in July it would halt Tundra pickup production in San Antonio and Princeton, Ind., from late August until mid-November to trim rising inventory of the full-size truck that went on sale last year. The move was a first for the company. Production of large Sequoia SUVs in Indiana also was suspended for the same period.

The company in July cut the global sales target for 2008 to 9.5 million vehicles, 350,000 fewer than forecast. Profit for the year ending next March may fall 23 percent to ¥413 per share, according to the average estimate of 16 analysts surveyed by Bloomberg.

“Toyota has the history, management and, hopefully, the stamina to come through this,” said Wendy Trevisani, a Santa Fe, N.M.-based fund manager for Thornburg Investment Management Inc., which had 2.2 million of Toyota’s American depositary receipts as of June 30. “Their balance sheet is far superior to their U.S.-based counterparts.”

Workers in Texas and Indiana aren’t union members and haven’t been laid off. Toyota reassigned them to training programs and modifying assembly-line procedures to improve ergonomics, said Kelly Dillon, spokeswoman for the Princeton plant.

While 100 Princeton employees volunteered to take unpaid leave, 140 others were redeployed temporarily to the Georgetown, Ky., plant and a Subaru of Indiana Automotive Inc. factory in Lafayette that’s run by Fuji Heavy Industries Ltd., a Toyota affiliate.

Toyota also scaled back plans to make Highlander SUVs at a plant under construction in Mississippi, shifting the vehicle to Indiana. Instead, the Prius hybrid hatchback, now exported from Japan, will be built in Mississippi starting in 2010.

The rise in gasoline prices in the first half to $4.00 per 3.8 liters and the credit squeeze limiting auto loans served up a “double shotgun blast,” said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

“As model lines become more similar, Toyota looks more like one of the domestic manufacturers,” he said. “The downturn and changing market also means that over time they are going to look more and more alike, as GM, Ford and Chrysler cut back on trucks and boost car production.”

U.S.-based automakers have announced plans to eliminate more than 2 million units of North American production capacity, mostly to make pickups and SUVs, Cole said. At the same time, they are also scrambling to make more midsize and small cars to meet shifting consumer demand for fuel-efficient models.

New labor agreements for U.S. automakers that cut their costs for employee health care and other benefits also mean that by 2010, they’ll have pared production expenses by between $4,000 and $5,000 per car, eliminating some of the cost advantage Toyota and Honda have enjoyed, Cole said.