Why Toyota is doubling down on N. America

DALLAS — While negotiators in Washington prepare to redraw the rules of the North American trading bloc, Toyota is doubling down on the continent in a way that seeks to balance both the politics and economics of auto manufacturing.

It's not without risks.

Toyota's plan to invest $800 million in a new U.S. plant shared with Mazda, without abandoning its partly built factory in Mexico or its expansion plans in Canada, achieves a few things:

It gets Toyota on the good side of President Donald Trump, who months ago blasted the automaker over its Mexico plans.

It launches a bidding war among states in a process that could spread Toyota's political clout. It does nothing to alienate Mexico, which was left hanging earlier this year when Ford scratched plans for a car factory.

It helps accelerate Toyota's push to rebalance its product mix and production capacity toward light trucks.

The reconfiguration doesn't affect the expansion of RAV4 production in Canada, which has become a hub for hot-selling crossovers from Toyota and Lexus.

But Toyota is forging ahead in all three NAFTA countries at a time when other automakers are sounding more cautious, curtailing production and seeking efficiencies in preparation for both a plateauing U.S. market and an expensive era of investments in technology.

Over time, Toyota's optimism could be tempered by the prospect of overcapacity with a Mexican and U.S. plant coming online within a year of each other.

For now, though, it's undercapacity that haunts Toyota, and that's what the plant reconfiguration will seek to address, principally for the segment-leading Tacoma midsize pickup. Toyota has tried to squeeze more units out of its pickup plants in Texas and Baja California, Mexico, but still can't meet consumer demand. That has left the door open to resurgent competition from General Motors, Honda and ultimately Ford and Jeep.

"Toyota has been capacity-constrained for a number of years now with the Tacoma," said Joe Langley, analyst for North American production forecasting at IHS Markit. "They want to secure the long-term position of that vehicle in the segment."

Under existing expansion plans, Toyota will have additional capacity of 60,000 Tacomas out of its Baja plant by early 2018. Its second Mexican plant — now dedicated to Tacoma instead of Corolla — will begin producing two years later. Toyota still has its main truck plant in San Antonio, where it builds midsize and full-size pickups.

"To build the Tacoma in three factories, when you put that together, it's more than the market will require," said Langley. He thinks some of that capacity could go eventually to a new or revised body-on-frame SUV in light of the success of the discontinued FJ Cruiser.

The new North American strategy will cut capacity for the compact Corolla, which is likely to see a sales decline as consumers move away from cars. The Corolla will be made at the new $1.6 billion U.S. plant Toyota will share with Mazda. Each will get 150,000 units of capacity, and tiny Mazda would regain its U.S. production foothold.

As the companies scout for a site, Toyota, once vilified as a threat to domestic auto manufacturing, can expect warm welcomes from U.S. cities and states vying for the plant and its 4,000 jobs.

Southern and Midwest states where Toyota already has plants and supply networks are likely candidates. They include Alabama, Kentucky, West Virginia and Indiana. Texas has also thrown its hat in the ring.

But picking a state where Toyota doesn't have operations, such as Arkansas or Georgia, would also generate political goodwill.

Foster Finley, managing director at AlixPartners, said he expects aggressive incentive packages to be offered to the joint venture given the impact that an auto plant can have on a state's economy.

"Some of them have said, 'We've been way too conservative, we've lost opportunities and we'll get more aggressive the next time,'" he said. "So, it's very, very difficult to handicap."