Toyota’s New Plant Could Face a U.S. Production Glut
With Toyota’s decision to build cars in this country, all the major Japanese auto makers are now committed to U.S. auto production--a cause for celebration among politicians and others who for years have been urging the Japanese to open plants here.
But industry observers expressed concern Wednesday that a worrisome oversupply of domestic auto assembly capacity may soon develop as a result of all the new plants.
Tuesday’s announcement by Toyota that it had finally decided, after years of waffling, to build a plant at a not-yet-selected site in the United States to produce 200,000 cars a year beginning in 1988 means that six Japanese-affiliated assembly facilities, with a total production capacity of more than 1.3 million cars annually, will be in operation within three years.
Currently, only three Japanese-affiliated plants are operating, and none has yet reached peak production.
But despite the expected increase in U.S. production by the Japanese, most analysts predicted that imports from Japan, Korea and Europe will also continue to grow. At the same time, the U.S.-based auto makers, since the recovery started about two years ago, have been building new plants and reopening others that were idled during the recession, bringing them back to within reach of the production capacity levels that they enjoyed before the industry’s slump began in 1979.
Given those trends, analysts wonder whether the demand for new cars, which now appears to be weakening slightly, will be strong enough over the next few years to support the production of so many imported and U.S.-built cars. A shakeout could develop, perhaps forcing Detroit-based companies to close more of their small-car plants in the United States.
“I certainly think that there is a serious risk of an overcapacity problem, especially in small and compact cars, which is what these Japanese plants will produce,” said Michael Luckey of Merrill Lynch Economics in New York. “When you have such a large increase in small-car production, at a time when energy prices and the demand for small cars are both stable, you’ve got trouble. And, unfortunately, I think the small-car operations of the U.S.-based companies will be the victims.”
Toyota, which is expected to spend about $625 million on its U.S. plant, where it will build a version of its Camry compact model, was the last of the major Japanese firms to announce plans to produce cars on its own in the United States. This week’s announcement by the largest Japanese auto maker came more than 2 1/2 years after the first Japanese car made in this country, a Honda Accord, rolled off an Ohio assembly line in November, 1982.
Since Honda took that early gamble on U.S. production, Nissan has opened a plant in Tennessee to produce light trucks and subcompact Sentra models, and New United Motor Manufacturing, the joint venture between General Motors and Toyota, has begun production in Fremont, Calif., of the Japanese-designed Nova, a subcompact sold by GM’s Chevrolet division.
Mazda, meanwhile, has begun construction of an assembly plant in suburban Detroit that is scheduled to open in 1987, and Mitsubishi is looking for a Midwestern site for its planned joint venture with Chrysler, which is scheduled to begin producing subcompacts by 1988.
Toyota also said Tuesday that it has decided to build 50,000 cars a year at Fremont to be sold by its own U.S. dealers and will build a small, 50,000-unit assembly plant in Canada to supply its dealers in that country. (Honda is also planning a small Canadian facility.)
With all that extra production capacity, the Japanese share of the U.S. car market is sure to grow. John Hammond, automotive analyst with Data Resources in Lexington, Mass., predicted that, by 1988, Japanese imports will rise to 2.9 million units, up from this year’s 2.4 million (including utility vehicles) despite the planned U.S. production of Japanese cars. (The Japanese government in April extended restraints on exports of cars to the United States for a fifth year, and it is possible that they may be extended again.)
Hammond estimated that imports and “hybrid” cars--those built in the United States by foreign producers with a majority of imported parts--will account for 40% of the U.S. car market within three years.
HOW JAPANESE PLANTS WILL ADD TO U.S. CAR-MAKING CAPACITY
Annual capacity of domestic manufacturers in 1978 12.5 million cars Current annual capacity of domestic manufacturers* 10.0 million cars Total Japanese capacity expected by 1988 1.36 million cars Japanese plants operating or planned: Units per year Honda (Marysville, Ohio) 340,000 Nissan (Smyrna, Tenn.) 100,000 Mazda (Flat Rock, Mich.) 240,000 Toyota-GM joint venture (Fremont, Calif.) 250,000 Toyota (sites unselected) 250,000 Mitsubishi-Chrysler joint venture (site unselected) 180,000
*Includes Volkswagen of America May increase as Toyota adds production of its own models. Source: Data Resources
