Toyota to Spend $1.4 Billion on First Plants Since 2013

Toyota Motor Corp. will spend about $1.4 billion to build car factories in China and Mexico, ending a self-imposed freeze on new plants following the financial crisis.

Production of a to-be-named model will begin from 2017 in Guangzhou, China, the world’s largest automaker said on Wednesday. The new factory in Mexico’s state of Guanajuato will begin producing Corolla cars in 2019.

“An increase in production does not mean an undisciplined pursuit of more,” President Akio Toyoda, 58, said in a statement released in Tokyo. “These investments will be an important test of Toyota’s resolve and a measure of tangible improvement.”

Toyota is facing a production capacity crunch after Toyoda banned the building of new plants for at least three years. Expansion in the years leading up to the global financial crisis led the company to report an annual loss for 2009, its first in 59 years. While Toyota is now poised to report a second-straight record annual profit, Volkswagen AG is challenging its No. 1 global sales position.

“It is sorely needed in North America,” Jim Lentz, chief executive officer of Toyota’s operation in the region, said in a phone interview. “There’s a little bit of capacity on some of the assembly lines, but we are reaching that peak.”

Toyota’s American depositary receipts rose 0.3 percent to $139.08 at the close in New York. They have gained 11 percent this year.

Investment Spending

Toyota will spend about 52.5 billion yen ($439 million) to augment annual production in China by about 100,000 vehicles, without adding employees, the company said. It will restructure two assembly lines at an existing plant shared with joint-venture partner Guangzhou Automobile Group Co. and build a third line at a new, adjacent facility.

In Mexico, the company will invest about $1 billion in its first car factory in the country. The plant will have the capacity to assemble about 200,000 Corolla compact cars a year. Toyota said it will hire about 2,000 workers for the site.

Toyota already builds the Corolla in the U.S. and Canada. One of its plants in Cambridge, Ontario, will shift to making higher-priced, mid-size vehicles once the Mexico factory starts operations. The Toyota City, Japan-based company didn’t specify what new models the Canadian plant will make.

“Toyota is desperate for capacity in the region and very constrained right now,” Jeff Schuster, a North American production analyst for LMC Automotive, said by phone before the company distributed its statement.

Canada Options

One option for Toyota’s Cambridge North plant could be to start making crossover models, Schuster said. Demand in those segments is surging, with U.S. sales of Toyota’s RAV4 climbing 23 percent in 2014. Deliveries rose 26 percent in 2015’s first three months from a year earlier.

The RAV4 uses the same platform as the Corolla being built in Cambridge now. Auto-parts makers are already in the area to supply an existing RAV4 plant in nearby Woodstock, Ontario.

Toyota will save on logistics costs when it can centralize mid-size vehicle production at its plants in Ontario, Indiana and Kentucky, move compact-car output toward the south and build trucks in Texas and Baja, Mexico, Lentz said.

“We really now have three distinct areas for building different-size cars in North America,” he said.

Although a recent weakening of the yen has boosted the value of Toyota models exported from Japan, making more vehicles in North America provides a hedge for the company if Japan’s currency strengthens. It also would reduce the risk to Toyota if another natural disaster like Japan’s 2011 earthquake and tsunami were to disrupt domestic production.

Tight Capacity

Toyota’s North American plants are poised to build more vehicles than they were designed to produce for a third straight year, according to LMC Automotive estimates. By comparison, the company used just 59 percent of production capacity in the region in 2009, the researcher said.

In China, Toyota crossed the 1 million annual sales mark for the first time in 2014, helped by demand for Corolla and Levin compact cars. It still missed an internal target for 1.1 million vehicle deliveries in the world’s largest auto market.

Volkswagen has been gaining ground on Toyota largely on the strength of its China business. The German automaker sold almost 3.7 million vehicles in the country last year and has projected it will have enough capacity to build 4 million cars annually in China by 2018.

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