Toyota (TM) Cuts: A Warning For The Industry

Toyota (TM) plans to cut its global capacity to manufacture vehicles by as much as one million units per year. It now has the ability to build 10 million autos, but will only make 6.7 million during 2009.

Toyota’s move should increase the efficiency of existing plants, but it raises the question of whether other global car companies have too many plants in operation.

While the capacity question might be put to large Asian and European firms such as VW and Honda (HMC), it is particularly acute for the three American companies. Sales at Chrysler are still down more than 45% this year. GM’s are off about a third. Ford (F) is faring better, but its sales are still running behind 2008.

The “cash for clunkers” program has given the domestic car firms a temporary but artificial bump in sales. These same operations now have to face the last third of a year, a period in which they will roll-out new models. Sales could move quickly back to their first half 2009 levels which means that manufacturing capacity remains too high. Plant closures and more layoffs may be the only means that The Big Three have to keep any improvement in margins that have come from the government’s stimulus program.

It is not clear that the auto industry will ever get back to the level where 16 million cars and light trucks are sold in America as they were four years ago. Car owners in the US may keep their vehicles longer to save money, a by-product, in part, of the higher quality of most new vehicles produced by the large global manufacturers.

Toyota has become the largest car company in the world for a reason. It is usually well ahead of its rivals in making critical strategic decisions. Its move in cutting capacity could put it ahead of its competition again.

Douglas A. McIntyre