Toyota Motor Corp. is bolstering operations in the disaster-ravaged Tohoku region to disperse risks from the long-predicted Tokai earthquake and reduce production costs.
Toyota said July 19 it will assemble small hybrid cars at Kanto Auto Works Ltd. in Kanegasaki, Iwate Prefecture, and build a 2 billion yen ($25 million) plant at Toyota Motor Tohoku Corp. in Taiwa, Miyagi Prefecture, to produce engines for the hybrids.
The Tohoku region will be positioned as the third axis of Toyota's operations along with the Chubu region, where it is headquartered, and Kyushu, where it manufactures luxury models, such as the Lexus line.
President Akio Toyoda said increasing its presence in the Tohoku region will help support post-quake reconstruction.
"We believe that the first steps we are making will lead to a brighter, smiling future for Tohoku," Toyoda told a news conference in Sendai on July 19.
Toyota also hopes to lower the risk of a massive Tokai earthquake paralyzing its operations.
The earthquake is expected to devastate Aichi Prefecture, where Toyota operates most of its major domestic plants and three engine factories.
"The effect on production will be far worse than the fallout from the Great East Japan Earthquake," a top Toyota executive said.
Toyota and other automakers were forced to suspend domestic production in the wake of the March 11 disaster, which damaged many parts suppliers.
In a meeting with Miyagi Governor Yoshihiro Murai and Iwate Governor Takuya Tasso on July 19, Toyoda referred to the potential Tokai earthquake, hinting at the need to disperse risks.
Executive Vice President Atsushi Niimi said Toyota plans to raise its parts procurement ratio in the Tohoku region to close to 80 percent to cut distribution costs and make production less vulnerable to the earthquake.
The company plans to call on its parts suppliers, concentrated in the Chubu region, to set up in the Tohoku region as well.
Low labor costs were a key factor behind Toyota's decision to assemble small cars, which carry low profit margins, in the Tohoku region.
In 2010, a family of two or more and headed by a salaried worker had an average monthly income of 490,000 yen ($6,200) in the Tohoku region, compared with 530,000 yen in the Tokai region.
Toyoda said enhancing operations in the Tohoku region will help Toyota maintain domestic production of 3 million vehicles.
In fiscal 2011, Toyota plans to build 3.03 million vehicles in Japan, out of a global output of 7.39 million.
Still, the company's domestic production capacity of 3.6 million units will remain underutilized.
The yen's appreciation against the dollar hits Toyota harder than rivals because its export ratio is higher than other automakers.
If the yen remains strong and exports fall, Toyota will likely be forced to make further adjustments, such as retiring aging production facilities in the Chubu region.
Rivals are streamlining domestic operations ahead of Toyota.
Nissan Motor Co. has increased production in Kyushu, where labor costs are low. It plans to spin off its Kyushu factory by October to reduce costs further.
Honda Motor Co. last summer scrapped plans to build a new minicar plant in Yokkaichi, Mie Prefecture.
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