Facing an Auto Slump, Japan Lifts Capacity

In the midst of a dramatic earnings slump, Toyota (TM), Nissan (NSANY), and Honda (HMC) are ramping up production fast. Not in the U.S., their most profitable market, but back in Japan, where domestic auto sales just hit a 25-year low.

Every major Japanese automaker is building plants at home or adding capacity to existing ones. A Toyota subsidiary is constructing a 120,000-car plant in Miyagi, north of Tokyo. It's Toyota's first such plant in Japan since 1993. Nissan, which not so long ago was slashing production in the country, is expanding capacity by 22% at its Kyushu factory. Honda is spending $1.5 billion on a new factory and engine plant in Saitama, just outside Tokyo. "The time has come for our Japan operations to once again take the initiative," Honda President Takeo Fukui told reporters on May 21.

Why all the outlays? After all, Japan's carmakers have long had a policy of opening plants in overseas markets to avoid import duties and to hedge against currency gyrations. Japan remains an expensive place to make cars, with wages 10 times higher than in China. A shrinking population is causing labor shortages. The yen's recent 15% surge against the dollar makes Japan-made cars even pricier. Throw in contracting domestic sales, and the moves seem to defy business logic.

STILL A GOOD DEAL

One explanation is the flexibility that the investment brings. Japan's high-tech plants excel at switching production from one model to another. That's especially useful when auto demand is sinking or flat in mature markets but surging in the Middle East, Russia, China, and India. Nissan's Kyushu plant, for example, exports to 160 markets and produces eight different models on a single production line.

Anxiety over quality is another factor in the increase of production back home. In recent years, Toyota has had to issue numerous recalls, while Nissan's Canton (Miss.) plant became notorious for its defects during a production speedup. Executives are loath to admit that one plant is better than another, but Japanese makers' domestic factories score higher on quality than equivalent plants overseas.

Japanese engineers and workers, while more expensive than their counterparts in developing markets, are still a good deal. One reason is that Japan's wage levels, after barely rising in a decade, are not as high as they once were relative to other developed countries. According to consultant AlixPartners, Japanese industrial workers in 2006 made around $22 an hour, just two-thirds the level in Germany. Moreover, it's still rare in Japan for workers to switch from one automaker to another, so a well-trained, seasoned workforce is a given. "It's not so expensive in Japan, and when you consider the quality, motivation, and diligence with which people work, the value-for-money is unbeatable," says Markus Schdlich, president of Karmann Japan. In December, Karmann, a German company that makes convertibles under contract for Audi, Mercedes (DAI), and Nissan, will begin production at a factory in Japan.

The notion of mother plants, which test new technologies that later filter out to plants worldwide, remains strong. Fukui predicts Honda's Saitama plant will set an example for its plants globally. Labor productivity is expected to be 20% higher than in existing plants, thanks to greater automation and advances in welding and painting. Honda aims to cut the amount of energy used to produce each car by more than 30%. Honda and its Japanese rivals are not abandoning their plan to make cars around the world. But they are strengthening Japan's role as the essential benchmark.

Are Pension Funds Fueling High Oil?

How Japan Helped Ease the Rice Crisis

Kicking the Tires at Ford Motor