Toyota to cut global capacity by up to 10%

Toyota, now the world’s largest automaker, has said it would halt production at a plant in Aichi prefecture in Japan, reducing total output by a massive 220,000 cars.  This should be seen as a recognition of the over-capacity tat exists in the auto sector despite other recent upbeat news.

Toyota raised its parent-only production target for 2009 by 150,000 units to 5.95 million on Aug. 20 in response to various government stimulus programs and a reduction in inventory. The last press release from Aug. 21 on Toyota’s US website touts Toyota’s addition of capacity at its site in Huntsville to produce an additional 216,000 vehicles, with production scheduled for 2011.  From these two announcements, one would assume that production is slated to ramp up.

Yet, we now understand that the company is looking to actually reduce overall capacity in order to return to profitability.  In fact, some experts believe Toyota’s capacity cuts could eventually reduce capacity by 700,000 cars or 7% of annual production.  Reuters is talking about a cut of 1 million units of capacity or 10% of annual production.

The problem is that Toyota, which produced 8.2 million vehicles in 2008, has a capacity of about 10 million units worldwide.  And when your 2009 target is for 5.95 million vehicles that necessarily means you have a huge amount of excess capacity.

To my mind, these announcements speak to the vast difference between the meaningful uptick in demand today, the much larger demand of just a few years ago, and the capacity built for even more demand that was expected. 

Yes, the economy is picking up globally, but while 5.95 million units is more than 5.8 million, it is nowhere close to 10 million.