Toyota's triangle strategy to ease Tacoma, Tundra shortages

TIJUANA, Mexico — Toyota de Mexico President Mike Bafan got a call at 5:30 a.m. from corporate headquarters last summer informing him that the Corolla factory his unit was building in central Mexico would have a much different purpose.

Instead of making compact cars, the plant in Guanajuato would shift to the Tacoma pickup that's also assembled in San Antonio and here in Baja California, where Bafan has his office.

Bafan was immediately on board. He saw even greater potential for Guanajuato as a truck plant.

"They said, 'How is this going to change your whole plan now? Construction has already begun,' " Bafan recalled in an interview last month. "I said, 'Zilch.' The way we've designed that plant, I can just keep building, and when I'm ready to bring in the equipment, it'll be body-on-frame."

Bafan: “We can do anything.”

The product shift caused Toyota to cut its Guanajuato investment by 30 percent to $700 million and its annual capacity by half to 100,000 vehicles, but that's still enough to be a critical relief valve for the automaker's pickup operations, which have been stretched to the limit for years.

The Guanajuato plant, scheduled to open in about a year and a half, is the final piece in a three-plant, two-country "truck triangle" that will boost production of the segment-leading Tacoma and full-size Tundra while paving the way for new products, Toyota executives said.

"The concept of the triangle is one that allows us, in a very quick and efficient way, to utilize basically exactly the same supply base and have the flexibility and agility to produce what our customers need from at least three different locations," Bafan said.

Relief valve

Beyond cost savings from supplier optimization, improved logistics and economies of scale, the added capacity will take pressure off workers in San Antonio who have been putting in heavy overtime for the last five years and doing Saturday shifts for three years.

"The alternative work shift was never designed to be a long-term schedule," said Kevin Voelkel, senior vice president for Toyota Motor Manufacturing Texas, which has been making about 260,000 Tacomas and Tundras per year in a plant designed for 200,000.

By the end of 2018, Voelkel said, the plant expects to halt the weekend shifts "to give our team members some work-life balance."

Bafan said the Baja plant, which has more than doubled capacity over the last four years and runs around the clock during the week, also could drop one of its two Saturday shifts.

A Tacoma works its way through the Baja plant. U.S. sales of the truck were up 23 percent in the first half of 2018.

Until the new plant comes online, Toyota needs every pickup it can make. U.S. sales of the Tacoma in the first half of 2018 were up 23 percent to just over 116,000. Tundra sales were up 4 percent to nearly 56,000.

The addition of Guanajuato also increases Toyota's flexibility by creating capacity for a future SUV, which Mexican media outlets have suggested will be the next-generation 4Runner or a specialty vehicle.

Bafan wouldn't confirm any future products but said a modern manufacturing plant such as Guanajuato should be able to make nearly anything that Toyota executives ask for.

"I want to see the look on their face when they say, 'Mike, we've decided to go from truck to car,' or 'We've come up with this thingamajig. Can you do it down there?' I want to say, 'Yes, we can do it.' We can do anything."

Bafan sees Mexico as a logical base of operations for expanding Tacoma sales locally and perhaps into South America, thanks to Mexico's broad portfolio of global trade agreements. Toyota's sales generally have been rising in Latin America for years.

Tariff threat

But much of Toyota's careful planning is endangered by U.S. President Donald Trump's attack on the North American Free Trade Agreement specifically, and the current world trade order in general, analysts say.

The Trump administration is investigating whether to charge tariffs on all imported autos and auto parts of up to 25 percent in the name of national security, paralleling recent tariffs on steel and aluminum.

Drastic moves by Trump, which could come before midterm elections in November, remain a wild card for all global automakers, but having a half-built plant in Mexico could be especially problematic for Toyota.

Toyota originally announced the Guanajuato plant in 2015 at a cost of about $1 billion.

Previously, the automaker's manufacturing footprint in Mexico had been limited to the Baja plant, which started as a pickup-bed supplier in 2004. Toyota rivals such as General Motors and Nissan Motor Co. have a long history south of the border, and even newcomers such as Honda Motor Co. and Kia Motors Corp. now have more capacity in Mexico than Toyota.

Eleven months ago, Toyota's North American CEO, Jim Lentz, announced that Corollas would be assembled by a joint venture with Mazda Motor Corp. in the U.S. — the companies have since picked Huntsville, Ala., as the site of a $1.6 billion plant — and Guanajuato would get the Tacoma.

The decision was greeted with skepticism in Mexico. Local media speculated that Toyota might kill the Guanajuato plant under withering criticism from Trump.

Ford Motor Co. canceled a nearby car plant in the early stages of construction just before Trump took office in January 2017 after he repeatedly attacked the automaker while campaigning. Ford said the about-face was part of a broader business decision.

A game of chicken

More recently, talks to renegotiate NAFTA have bogged down, and one of the biggest threats to the Mexican auto industry without the pact is the U.S. chicken tax on imported pickups and cargo vehicles. NAFTA protects Mexico and Canada from being charged the 25 percent tariff.

Thus, assembling pickups in Guanajuato has suddenly become a risky proposition for Toyota.

"There are only two options to make that vehicle viable there," said Bernard Swiecki, an analyst at the Center for Automotive Research in Ann Arbor, Mich. "Either the really aggressive tariffs don't come to pass, or if they do, they are not in place for all that long. Otherwise, you lose the business case behind that decision."

Swiecki said Toyota is not alone when it comes to exposure from Trump's trade threats.

GM builds about 400,000 full-size pickups in Silao, another city in the state of Guanajuato, and Chevrolet is still moving forward with plans to make its upcoming Blazer crossover at a plant in northern Mexico.

Across the board, the potential danger for the capital-intensive, risk-averse auto industry is "off the charts," Swiecki said, but automakers have little choice but to continue executing their long-term business plans.

"You cannot build a plant based on the business case a year or two down the road," he said in an interview. "Automakers expect plants to be part of their portfolio for decades going forward, which means it's going to outlive multiple administrations in the U.S. and in Mexico."

When it's up and running, the Guanajuato plant, shown in this rendering, creates capacity for a future Toyota SUV.

So far, Toyota has not backed off from its Mexican investments. It spent $150 million to expand capacity at the Baja plant last year, and Lentz told Automotive News in May that Toyota's commitment to the Guanajuato plant has never wavered.

Cross-border logistics

Construction in Guanajuato is about half complete, and the plant is on track to open in late 2019 or early 2020, Lentz said. The factory's linkage with its two sibling plants solves a problem that Toyota North America has struggled with for years: shortages of pickups, especially the Tacoma, when demand is strong, he added.

"We're never going to have the scale that Ford or Chevrolet has on full-size pickups," Lentz said. But with the Tacoma and Tundra combined, "we're going to move from the 350,000 range to about 500,000, which could be plus or minus based on overtime. I think that's probably a good number for us."

Bafan said Guanajuato makes a logical addition to the close relationship enjoyed by Baja and San Antonio. Baja gets stamped metal parts and seats from Texas, and a few local Mexican suppliers send smaller items to San Antonio.

Lentz: New plant given Tacoma

Toyota is still working out the supplier logistics for Guanajuato, but its location along a rail line to Texas means auto parts are expected to flow back and forth, Bafan said.

"The good thing is our suppliers are keeping up with us," said Bafan, who worked for 22 years at GM before joining Toyota in 2006. "We have roughly 240 suppliers, and we share at least 90 percent of those with San Antonio."

The Guanajuato plant will have a dozen suppliers on-site initially. Down the road, there could be cost savings from sourcing more parts from central Mexico for the triangle plants.

"If we see in terms of both cost and quality it is advantageous to use a new supplier for all of us, we'll do it," Bafan said. "But at this point, we are going with our main suppliers that supply us today."

Perhaps just as important to Toyota's manufacturing culture, the three plants will regularly exchange workers, share best practices and help one another during model updates.

"It's a two-hour triangle," Bafan said, referring to frequent flights linking the plants. "In two hours, I can be anywhere. I can be in Texas or Guanajuato or in Baja. When you're looking at leveraging each other's knowledge, it's a great opportunity."