All three of Japan's largest automakers are pushing to locate production of cars meant for the U.S. market in North America, primarily in Mexico and the United States. Toyota, Honda and Nissan are all recovering from supply chain disruptions caused by last year's tsunami in Japan and floods in Thailand, and localizing production for the U.S. market provides a natural hedge against supply chain disruptions. Moreover, the continued high value of the Japanese yen against the dollar means that it is now more expensive for Japanese car companies to ship cars overseas to the U.S. than it is to build them locally.
Nissan, Toyota, Honda and Mazda have all ramped up North American production in the past year, according to Guggenheim Partners Analyst Matthew Stover, and the increase "would have been done by adding shifts and line speed, which means hiring more workers."
Expansion of North American manufacturing capacity by Japan's automakers has been driven by the need to hedge against the Japanese currency and the potential for natural disasters as well as by the strengthening U.S. automotive market. The seasonally adjusted annual rate (SAAR) of car sales is expected to top 14 million in 2012, a substantial improvement over recession sales levels of around 12 million.
The Japanese automakers have been careful not to make specific promises to the market about how much they will expand North American manufacturing capacity, according to Manning & Napier Senior Research Analyst Walter Stuckow, but their intention to continue doing so is clear, if for no other reason than that the profit margins are better for vehicles made in the U.S. and Mexico than those made in Japan.
Several recent announcements highlighted the increased focus of Japan's carmakers on localized production in North America. Toyota recently sent a directive to North American suppliers telling them to plan for three years of record production, according to Auto News. Similarly, Honda is hoping to goose its North American manufacturing to export 200,000 vehicles out of the continent by next year, up from 55,000 in 2011, according to The Wall Street Journal.
Toyota, for its part, has already added 1,500 manufacturing jobs since February and has made a cumulative investment of $745 million in factories in Indiana, West Virginia, Kentucky, Alabama and Canada. Most recently, Toyota invested $100 million in expansion of Lexus RX production in Canada, a move which exemplifies the approach being taken by Japanese carmakers in North America.
"This Lexus production increase, and the several announcements before it, reflects our growing optimism for an improving North American market and our intent to localize more production," Executive Vice President of Toyota Motor Engineering and Manufacturing North America Steve St. Angelo said in July.
Honda, for its part, announced in July that it would hire an additional 300 employees at its plant in Greensburg, Ind., and invest an additional $40 million in the plant to boost capacity by an additional 50,000 vehicles. Honda is in the process of shifting Civic Hybrid production to the U.S. In 2011, Honda added a second shift at the Indiana plant, which created around 1,000 manufacturing jobs. Nissan, for its part, had increased U.S. production by 13.6 percent in June with a total of 53,275 units, while Japanese manufacturing only grew 2.5 percent to 99,800 units. Nissan announced a $2 billion factory project in Aguascalientes, Mexico, in 2011, which is expected to be operational in 2013 and employ 3,000 people.
It is not unusual for manufacturers to hire between 1,000 or 1,500 new workers when they add a factory shift, according to IHS Automotive Senior Manager for North American Vehicle Forecasts Mike Jackson. In the aftermath of the 2008-09 economic meltdown, automakers have been focused on improving efficiencies and shift structures rather than building new factories. Factories tend to be enormously expensive 30- to 50-year investments that can cost upward of a billion dollars, making new factory construction unlikely before the U.S. automotive market returns to prerecession levels above 15 million or 16 million SAAR.
"Historically there were relatively few facilities that operated on a third shift," Jackson said, but now the thinking among management goes, "'rather than invest a tremendous amount of capital in a new ... facility, let's look at adding a third shift.'"
Even modest growth in North American manufacturing, whether it be in the U.S., Mexico or Canada, has the effect of boosting employment in other sectors of the economy as well. "Employment cascades through the supply chain and also through the dealer side," Jackson said. As Japan's big car companies continue to grow North American manufacturing, parts suppliers and dealers will also have to increase their payrolls to meet demand. Nissan's massive project in Aguascalientes is expected to create 9,000 in peripheral industries like parts manufacturing.
Honda says its most recent production hike in Indiana will result in higher purchasing from more than 200 suppliers in the Midwest. There is still room for North American manufacturing growth for Japan's automakers. Honda said 85 percent of its vehicles in the U.S. market were sourced in North America, but it plans to grow that to more than 90 percent.
Honda is generally thought to be ahead of the curve in terms of North American production, meaning the potential upside for companies like Nissan and Toyota is greater. While Honda currently sources about 85 percent of cars meant for the U.S. market in North America, the average for Japan's carmakers is thought to be closer to 80 percent, according to Kelley Blue Book Senior Market Analyst Alec Gutierrez.
The goal for Japanese carmakers is to produce 100 percent of cars meant for the U.S. market in North America, a task which will be accomplished in the short term "through the use of additional shifts," according to Gutierrez. The biggest expansion will likely be in Mexico, where labor is cheapest; however, U.S. manufacturing is expected to grow faster than Canadian, where labor costs are the highest.
Toyota Motor Corporation (NYSE: TM) shares fell 43 cents to $81.06. Honda Motor Co. (NYSE: HMC) shares rose 3 cents to $32.09. Nissan Motor Co. (Tokyo: 7201) shares fell 0.26 percent to 771 yen ($9.84).