Recently, Japanese auto major Toyota Motor (TM) said it would possibly close its New United Motor Manufacturing Inc. (NUMMI) plant in Fremont, California. Higher manufacturing cost in California, shortage of parts suppliers in the area (only 11% of NUMMI’s parts suppliers are within 400 miles of the plant) and unionization (the only plant of Toyota organized by UAW in the U.S.) led the company to seek a possible closure.
The NUMMI was started as a General Motors (GMGMQ) plant in 1962 but closed down in 1982 due to operational inefficiency. However, it was reopened two years later as a 50/50 joint venture between General Motors and Toyota. It was a remarkable joint venture in America’s as well as Toyota’s history.
Americans learnt of the famous Japanese ‘lean manufacturing system’ (focused on just-in-time delivery) through NUMMI and Toyota took its first step in the U.S. using GM’s supply lines. NUMMI produces Corolla and Tacoma for Toyota and Pontiac Vibe (Toyota’s version of the Vibe) for GM.
GM decided to pull out of NUMMI after declaring bankruptcy last month as it will discontinue the Pontiac brand. Last week, the ‘New GM’ emerged after the company completed its bankruptcy filing. The company will dump its NUMMI assets in ‘Old GM’ for liquidation. However, it will continue producing its Pontiac Vibe until August as the current UAW contract with NUMMI expires on August 31.
According to the East Bay Economic Development Alliance, the NUMMI closure would cost 5,400 direct jobs and 30,000 indirect jobs.
With the slump in industry sales, NUMMI has seen severe production cuts over the past six months. The assembly line manufacturing the Vibe and the Corolla has witnessed a 25% decline in production to 76,000 vehicles, while the Tacoma has seen an 83% fall in production.
Toyota has also been affected financially by the economic crisis. The company posted its first annual loss (437 billion yen or $4.4 billion) since 1950 for the fiscal year ended March 2009. Further, management has recently projected net loss to worsen to 550 billion yen ($5.5 billion) for the fiscal year ending March 2010.
Toyota has 12 manufacturing facilities in the U.S. Presently, six of them are operating under capacity and one Mississippi plant has been idled. The NUMMI closure seems likely as wages are higher at the plant (due to unionization) compared to others including plants in Canada and Mexico, which producing Corolla and Tacoma, respectively.
We reserve our opinion on Toyota as a Hold with a target price of $75.00.
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