MEXICO CITY -- Toyota's plans for new facilities in Mexico and China underscore the company's efforts to build a foundation for stable growth by pursuing both scale and profitability.
As the automaker competes against such global rivals as General Motors and Volkswagen, both of which have sales comparable to Toyota, the Japanese company will strive for high efficiency as it expands its sales and production networks.
With the new facilities, Toyota seeks to strengthen its presence in two key markets. China is the world's largest market for autos, with new-car sales rising 7% to 23.49 million units last year. The U.S. is the second largest market, with sales increasing 6% in 2014 to 16.52 million. Toyota will ship vehicles built at the Mexican plant to the U.S. by taking advantage of a tariff exemption under the North American Free Trade Agreement.
"We don't want this to be taken as simple expansion of scale," a top Toyota executive said. As the company contemplated the new plants, internal discussions focused on minimizing costs per vehicle, according to the official.
Toyota has traditionally been thorough in studying costs. But in the early 2000s -- when the company sharply increased output, by as much as 700,000 units per year -- its grip on costs loosened, as resources were poured into establishing overseas sites, among other efforts. Many facilities had excess capacity as "wisdom-less automation grew rampant," says Mitsuru Kawai, a senior managing officer.
As a result, in the wake of the Lehman shock, Toyota bled an operating loss for the first time in about 70 years in fiscal 2008 due to a demand free-fall.
The company suspended new factory construction in 2013, raising productivity of existing facilities with an aim to keep them profitable even if production falls to half the planned level.
It has also taken a new approach to design, simplifying installation procedures by using parts modules and standardizing parts across different models under the Toyota New Global Architecture initiative.
Thanks to such efforts, Toyota's per vehicle profitability is far greater than that of GM or Volkswagen. Toyota makes more than 200,000 yen ($1,658) in net profit per vehicle sold. When compared in yen terms, the figure is six times GM's profit and 50% or so higher than Volkswagen's. The Japanese company will bring such cost efficiency to its new plants.
With the two facilities expected to boost production capacity by only 300,000 units a year, some observers argue Toyota needs to go further to compete with Volkswagen. But a Toyota official disputed the idea, attributing the relatively modest expansion to the company's culture of not firing employees easily.
Expanding scale while achieving stable growth and avoiding risks will be a challenge for all three giant global automakers.