Toyota, GM End Long, Costly Marriage

When Toyota Motor (TM) and General Motors opened their joint venture in Fremont, Calif., 25 years ago, it was seen as a smart marriage. Toyota would learn the cultural nuance of managing American workers, get to know U.S. parts makers, and gain political favor by saving a doomed domestic plant. GM tried to show that it was getting in step with surging Japanese competition by learning Toyota's secrets to efficiency and quality. But now the marriage is breaking up, and Toyota is stuck with a problem child.

That California plant, called New United Motor Manufacturing Inc. (NUMMI), is Toyota's most expensive plant in North America. Since it won't be building the 40,000 or so Pontiac Vibes that Toyota made for GM every year, it will become underused as well. The plant also made 140,000 Toyota Tacoma pickups and a fair portion of the 351,000 Corollas that Toyota sold last year. After GM pulled out of the deal, Toyota said cryptically only that "the economic and business environment surrounding Toyota is also extremely severe, and so this decision by GM makes the situation even more difficult for Toyota. We will consider alternatives by taking into account various factors."

Privately, Toyota executives say they are in something of a bind. The company could wait and see if another partner buys GM's 50% stake in NUMMI in bankruptcy court, thus giving Toyota another car to build. Toyota could also buy GM's stake and put another Toyota vehicle on NUMMI's assembly line. Or, the company could close the plant down.

A Changed World

Certainly the fortunes of the two companies are much different now from when they created NUMMI back in 1984. GM is in bankruptcy and trying to prove that it learned enough from Toyota's manufacturing system that it no longer needs the partnership. Toyota, meanwhile, has grown from a small force in the American car market to its second-largest player. Toyota long since built up a massive manufacturing presence in the U.S. In fact, if the American car market doesn't rebound from today's sales pace—which would see 10 million vehicles sold this year—to a healthier 15 million or more, Toyota may have to cut capacity at some of those U.S. factories.

Unfortunately for the 4,700 workers at NUMMI, the plant's costs hurt its case for new models. A Toyota Corolla made there costs up to $500 more than a similar car made in Canada. The plant combines the higher wages of a United Auto Workers labor contract (brought to the venture courtesy of GM) with Toyota's cultural aversion to layoffs. Then there is higher cost of doing business in California. Since 2000, the Golden State has lost 456,000 manufacturing jobs thanks to rising costs. Corporate tax rates are double the national average, according to Jack Stewart, president of the California Manufacturers & Technology Assn.; electricity rates are one-third more.

"Even before GM pulled out, I'm sure Toyota has been contemplating the future of that plant," says Michael Robinet, vice-president of auto researcher CSM Worldwide.

Toyota and GM workers at NUMMI make $28 an hour, compared with $24 an hour at Toyota's older plants. Employees at newer plants in the South start out at even less. Toyota is also on the hook for pension and health-care costs for some of the factory's retirees and current workforce, which is older than the workers at many of Toyota's North American plants. Over the years, NUMMI's union workers have negotiated benefits that are closer to the UAW master contract that became so expensive for the Big Three.

Wrong Place

NUMMI also has long supply lines. Toyota brings in engines and transmissions from the middle of the U.S.; then the cars get shipped all over North America. Says Robinet: "There's a reason that most assembly plants are built east of the Mississippi."

Losing the Pontiac Vibe means the plant's passenger car line can't run anywhere near full tilt just making Corollas. That only adds to Toyota's overcapacity problem. NUMMI's Toyota Tacoma pickup line is already down to one shift. So are Toyota plants in San Antonio and Woodstock, Ont. The company hasn't put any machinery into its brand-new Prius hybrid factory in Mississippi because management doesn't know if car sales will rebound to levels that justified Toyota's plant-building binge of a couple of years ago.

The fate of NUMMI may be one of the first big decisions for Akio Toyoda, the founding-family scion and new CEO. He could ditch Mississippi and build other cars there. For example, building Priuses at NUMMI would put production near hybrid-friendly West Coast markets, Robinet says. But the new boss may have no choice but to shrink the workforce there or elsewhere, which Toyota hates to do. That puts a high-cost plant like NUMMI on edge.

    Before it's here, it's on the Bloomberg Terminal.