Toyota City's Motor Sputters

The hometown of Toyota, the world's biggest automaker, suffers from overreliance on a single industry

Toyota City, Japan - This corner of Aichi prefecture has long been Japan's answer to Detroit. It was in Aichi that Kiichiro Toyoda tore apart an imported Chevrolet to see how it was built, then created what he called the Model A1. In 1938 Toyoda opened a car factory in an Aichi town called Koromo, then in 1959 the town took the name of the corporate citizen that would grow into a global powerhouse. More recently, Toyota City has prospered even as Motor City has deteriorated. By 2008, Toyota had dethroned General Motors (GM) as the world's biggest carmaker, confirming Toyota City—not its sister city Detroit—as the true center of the auto world.

Yet for Toyota City, life at the top isn't going as well as many might have hoped. As the global economy wobbles, Toyota City is suffering from what locals have dubbed Toyota Shokku . Toyota Motor (TM) expects to finish $3.5 billion in the red for the financial year that ended Mar. 31, its first loss since 1950. Although Toyota City isn't nearly as bedraggled as Detroit, some 70% of its 422,000 residents rely on the auto industry for their livelihoods, so when Toyota suffers, its hometown suffers too.

Almost overnight, Toyota City has turned from a symbol of Japan's manufacturing muscle into a hard-luck tale of excessive reliance on a single company and industry. Sidewalks are empty as retail sales have dropped by 20% over the past year, and on a recent afternoon staff outnumbered shoppers at the Matsuzakaya department store. The local government, long accustomed to fat tax revenues from Toyota and its affiliates, last year saw corporate tax receipts fall by 96%. "Things are very tough," says Fabio Sadaki Nakanishi, owner of the Foxmart supermarket in an area called Homi-danchi, home to many Japanese-Brazilians who have been laid off as work has dried up.

And the pain is spreading throughout Aichi prefecture. More than half of Toyota's Japanese production is in Aichi, whose economy could shrink by more than 10% this year if the carmaker's sales don't recover. Although few full-time workers have lost their jobs, Toyota has shed about 6,000 contract employees in the past year, and some are saying the company could be forced to cut Japanese production permanently. "Maybe it's even time to...take the hard step of shuttering some plants in Japan," says Chris Richter, an analyst at brokerage CLSA in Tokyo. Toyota declined to comment on the prospect of plant closings.

For many in Toyota City, the automaker's new boss provides a ray of hope. Akio Toyoda, grandson of Kiichiro Toyoda, is slated to succeed Katsuaki Watanabe as president in June. Locals are convinced that Toyoda, a true car buff, wouldn't close plants in the area. "Toyota is a global company, but its spirit is local," says Kenji Nishino, chief of a local shopkeepers' group. "They take good care of employees so it is unimaginable [that Toyota would shut plants]."

Not everyone is so optimistic. Toyota's losses could swell to $11 billion in the year ending next March if the yen stays strong, CLSA predicts. And workers at some of the 12 Toyota plants in and around Toyota City are the company's best paid; a typical 30-year-old factory hand here earns a base salary of roughly $3,000 a month, 22% more than similar workers at Toyota's Kyushu subsidiary in western Japan. Toyota watchers say two older plants that build vehicles primarily for the Japanese market are likely candidates for closure—and that Toyoda may be the only person who could get away with taking such a step. "If the current situation continues, Toyota will have no choice but to...shut down a factory," says Seiji Teramoto, the author of a recent company history and longtime Toyota reporter for the regional Chunichi Shimbun daily. "Only Akio Toyoda, as a founding-family member, can do it."

Factory shutdowns would spell bad news for the 1,500-plus companies that make components for Toyota and its suppliers. At parts maker Denso, one worker grumbles that overtime cuts and furloughs have cost some employees $1,000 a month out of pocket. And he says there's no shortage of empty seats in the staff canteen since the company laid off hundreds of contract workers. "The mood has become somber," he says, noting that the local train station is busier than ever between 5 p.m. and 6 p.m. as workers no longer toil late or go for a drink after their shift.

The local branch of Hello Work, Japan's unemployment bureau, may be the busiest storefront in town. While job-seekers queue inside, Hideo Saito crouches on the sidewalk, smoking. The 43-year-old spent eight years at Sango, a maker of mufflers and exhaust pipes, but was always considered temporary because he was hired via employment agencies. Laid off in January, he was left homeless because his temp agency also provided a dormitory for workers. Now, Saito is more cautious: He has turned down part-time work in hopes of landing a full-time job with more security. "I don't want to go through this again," Saito says.

The city's grandees are fighting back. The chamber of commerce—headed by Toyota President Watanabe's elder brother—has launched a campaign to encourage people to buy Toyotas. "In Toyota City, Let's Drive a Toyota!" posters urge passersby. A few even believe some good can come from the Toyota Shokku. In nearby Nagoya, mayoral candidate Masahiko Hosokawa says the crisis creates an opportunity for the region to wean itself from its reliance on Toyota. "We have to change the character of the economy," Hosokawa says. One step in that direction: Mitsubishi Heavy Industries is planning to build a new regional jet airliner in Aichi. But given the bounty Toyota has provided for the area over the decades, the challenges ahead will still be daunting. "The mountain was very high," Hosokawa says, "but the valley is very deep."

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