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Friday, September 22, 2006

Toyota Shifting Strategy to Focus on Smaller Cars - Ramping up Camry, Prius Production

A couple of posts at Green Car Congress (GCC) over the past week indicate that Toyota may have gotten the message that a pro-active business strategy focused on fuel efficient vehicles is the best bet for automakers in the coming years.

The Asahi Shimbun reports (via GCC) that Toyota will shift its strategy for the North American market to fuel-efficient small and mid-size cars in response to high gasoline prices and a slowing US economy.

As a result, Toyota plans to operate its new Texas plant - which produces the full-size Tundra pickup - at less than full capacity initially, according to the report. Output in 2007 is planned to be about 150,000 units, down from the capacity of 200,000. Toyota had earlier planned 220,000 units of the Tundra in 2007, including overtime work, according to the article.

At the same time, Toyota will reportedly double production of the Camry to 200,000 units a year with production support from Subaru’s Indiana plant (Toyota took an 8.7% state in Subaru Indiana, a US subsidiary of Fuji Heavy Industries, last October). In addition to the Camry production at the Fuji Heavy subsidiary, Toyota’s second plant in Ontario, Canada is scheduled to be completed in 2008 and will produce Camry's for the North American market.

After US production of the Camry doubles in October 2007, Toyota plans to stop exporting the model to North America from Japan, according to the report. The Tsutsumi plant in Toyota, Aichi Prefecture, which makes the Camry for the North American market, will instead increase production of the Prius gas-electric hybrid for export to North America.

GCC also relays a report today from Nihon Keizai Shimbun. According to the report, Toyota plans to increase the production of the Prius in Japan by 50% to about 300,000 vehicles in 2007.

Toyota currently manufactures the hybrid almost completely in Japan and exports the vehicles to 40 countries and regions. The company already plans to increase annual output by 15% to about 200,000 vehicles in 2006, but demand for the Prius continues to exceed production.

Toyota intends to increase Prius production while curbing investment by reorganizing production lines. Production of models other than the Prius are to be moved to other sites from two plants in Aichi Prefecture that currently roll out the hybrid vehicles.

Toyota has set a sales target of 1 million hybrids annually by the early 2010s. The company plans a combination of increasing output of the Prius and offering more hybrid versions of other models.

Earlier this week, Toyota announced it is targeting global sales of 9.8 million vehicles in 2008, up from 8.13 million in 2005, by selling more cars in China and the rest of Asia as well as by tapping emerging markets.

The plan positions Asia as the region with the sharpest growth and calls for tripling Chinese sales from the 2005 figure to 600,000 vehicles by building up dealer and service networks for such models as the Corolla and Camry. Toyota also manufactures the Prius in China.

The company will push for increased market share in the BRIC countries (i.e., Brazil, Russia, India and China) with the introduction of a new low-priced small car around 2010.

Other automakers, particularly Detroit's Big Three, should be taking their queues from Toyota's smaller vehicles-focused strategy for the coming years. As a recent study concluded (see recent post), smaller, more fuel efficient cars are the Big Three's best bet at avoiding as much as $3.6 billion in lost profits assuming $3.10/gallon gas prices in Model Year 2010.

The study concluded that at $3.10 a gallon, domestic automakers could increase profits by $2 billion collectively, with an annual profit increase of $1.4 billion at Ford, $500 million at GM and $100 million at DaimlerChrysler, by shifting their business strategy away from the gas-guzzling SUVs and light trucks that have been the Big Three's traditional profit earners, to an array of smaller and more fuel efficient vehicles. Even at $2 per gallon, the Big Three could increase profits by $1.3 billion, the report concluded.

According to the study, Japanese automakers stand to lose money in the coming years given higher gas prices and the resulting decrease in overall sales volume. However, as Toyota surely recognizes, these losses will be considerably smaller if Japanese automakers also refocus their efforts on fuel efficient vehicles, a market segment in which they already have a clear advantage.

As an American, I honestly hope that the Big Three make smart and forward thinking strategy decisions in the coming months as to what they will focus on in the next few years. Automakers have very little time in which to decide what products they plan to roll out a few model years from now, and the wrong decision at this point could cripple any one of the auto giants. Needless to say, the downsizing and layoffs that would follow $3.6 billion in lost profits would have detrimental and widespread effects on the U.S. economy. In this day and age, we need all the manufacturing jobs in the U.S. we can get, no one wants to see the U.S. lose more and more jobs in the auto industry.

It's time to wake up and smell the gas prices, Detroit. What are you going to bet on? SUVs, or Hybrids?

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