Guangzhou Toyota: to build or not to build 2nd plant?

Shanghai, July 3 (Gasgoo.com) The project of Guangzhou Toyota's second plant has approved by China's Ministry of Commerce and the construction of the facility, with a designed capacity of 380,000 units, is expected to kick off later this year, according to cheshi.com.cn.

Yuan Zhongrong, deputy general manager of Guangzhou Toyota, recently said that the second plant construction is now underway and will be completed in May 2009. He added that the new facility will manufacture the Toyota brand models (such as the FJ Cruiser and Highlander SUVs) now sold in China as imported Toyota vehicles via Guangzhou Toyota's sales network.

The second plant project of Guangzhou Toyota seems to be being built smoothly now, but in fact some factors have emerged to hamper its construction progress.

1. The market share of SUVs is dwindling and the future market demand will continue to go down.

One of the main reasons for Guangzhou Toyota to launch the second facility is to make the SUV models not in the company's current product lineup. But the latest industry statistics show that SUV sales in China only hit 35,210 units in May this year, down 7.5% over the previous month. The SUV sales and market share in China have been decreasing month by month.

On the other hand, the soaring fuel prices have dampened consumers' enthusiasm for buying SUVs, and the oil prices in China will continue to rise. Meanwhile, the Chinese government started on July 1 to increase the consumption taxes on fuel-guzzler vehicles: by 10% on 3.0L-4.0L vehicles and by 20% on 4.0L-plus vehicles. This will also a big challenge to China's SUV market.

If the SUV models to be built by Guangzhou Toyota's new facility have to face such problems in the future market, the construction of the plant will be hard to start or accelerate.

2. The sluggish sales of Camry leave enough capacity in the first plant.
   
The second factory is intended to ease the capacity pressure of the first plant and make new Toyota models and part of the Camry cars. But the current market performance of Guangzhou Toyota vehicles means that its first factory can provide enough production capacity.

The launch of Guangzhou Honda's Accord and Dongfeng Nissan's new Teana has dented the sales of Camry, one of the best-selling models of Guangzhou Toyota. The price of Camry has reduced. The joint venture carmaker will increase the price of its another model Yaris, to make up the low profits of the high-costs Camry.

If the first facility can make enough Camry and Yaris cars for the Chinese market, the construction of the second plant will not be so urgent.

3. The costs of local production in China are rising while the import costs are falling.  
    
Recently the prices of raw materials such as iron ore and plastic needed for making the auto parts have been surging, in addition to the skyrocketing oil price. Shanghai-based Baosteel, the largest Chinese steel-maker, said that the iron ore has hit 65% of the raw material costs for its steel-making, and sources from Baosteel indicate that its steel price will correspondently rise, including the auto-use steel slates.

Currently, steel makes up 70% of the auto components in China's car-making, and therefore the rising steel price is sure to push up the auto-making costs. As a result, this will raise the vehicle price or reduce the profits of carmakers.

Guangzhou Toyota aims to build in the new factory the Japanese carmaker's brand models that are now sold in China as imported Toyota cars, believing that the local production of these Toyota cars will reduce their manufacturing costs. But now the costs of local production are also rising in China, and meanwhile the Chinese currency yuan is appreciating steadily, which can reduce the costs of auto imports.

The rising local production costs and the falling import costs will also combine to pose the question to Guangzhou Toyota: to build or not to build the second facility?