operations in U.

S
The expectations of Toyota under NAFTA were colored by both the automotive rules in the NAFTA and by Toyota's goals within the market. The rules applying to the automotive goods part of NAFTA, are summarized by Hufbauer and Schott, and should be read by those unfamiliar to the subject. They can be divided into three categories. Tariff/non-tariff barriers, Rules of origin and US CAFE rules. Tariff and non-tariff barriers con be divided as: Vehicle tariffs, parts tariffs, domestic content requirements, trade balancing requirements, import quotas and used part quotas, and mention the specific quotas on each case. Rules of origin can be divided into 2 parts: qualification for duty-free treatment, and new methods for calculating regional content. These are the percentages of "American" parts in a car for it's manufacturer to benefit under the NAFTA rules. The US CAFE rules are also included in the treatment and are basically the pollution controls imposed by the US government on each manufacturers' production (Hufbauer and Schott, 1993, pg. 122 123). The automobile sector was, as almost every manufacturing sector under NAFTA, expected to experience a further division of the production between the three countries. The rapidity in which this sector and it's efficient multinational corporations normally adapt to the changing economic environment was, however, slowed by the special arrangements which were negotiated in this sector. Automotive products are the largest component of bilateral manufacturing trade between the three countries, and the automotive section of the NAFTA was one of the latest to fall in place (annex 300-A). As well, in analyzing Toyota's expectation of the impact of NAFTA on its business practices, it is helpful to recognize Toyota's goal in investing in the North American market. For Toyota, as well, as all Japanese Auto makers, the main reason for going abroad was not the need to lower costs, but to get access to the important American market.. As William Orme mentions in his book "Continental Shift": "Even if NAFTA was more open, Japanese investment might be slow in coming. Japanese manufacturers pointedly remind questioners why they crossed the ocean in the first place. It was politics that drew them to America, not economics" (Orme 1993, pg 193).

While the use of the word "politics" in the above quote may be contentious, the general point is not. Using John Dunning's nomenclature, the Automobile manufacurers were not efficiency seekers - they were market seekers. Opening plants in the US was an important step in the campaign to convince American customers to buy Toyotas. If they had not invested in the US it would have been easy for the Big Three to pursue their "buy American" campaign which argued that buying Japanese was throwing money out of the country. By heavily investing in the US market and employing numerous American workers, Toyota helped to neutralize arguments that the sale of a Japanese made cars necessarily meant job losses for American workers. Today a major part of the Japanese car brands are produced in the US (Hearald-Leader, 1997: Toyota building an empire in the USA). As stated above, This process of investment and integration began prior to the realization of the NAFTA. Additionally, Toyota and other Japanese firms used a joint-venture strategy which further has helped the Corporation to get rid of some of the status distinctions the big three have tried so hard to make in the United States (Transnational Corporations, pg. 47, Dec. 1993). Still, as market seekers Japanese auto makers such as Toyota had to see the Mexican market as a potential growth area. In 1993, Toyota had no business presence in NAFTA. At a Conference in 1993 for the Japan Automobile Manufacturers Association, Douglas Lamont of Kellogg University opined that given Toyota's move to joint venture relationships with GM and Volkswagen in the US, both of which had plant operations in Mexico, one or both could help Toyota gain a foothold in Mexico's "booming" automobile market.(Lamont p.1) As of 1998 this integration into the Mexican market has yet to occur. Part III of this report will analyze why. PART III The core of Japan's North American strategy is to move to a system of greater localised production thereby taking advantage of both vertical integration efficiencies and, where applicable, rule of origin requirements. In order to be declared a domestic automobile, and thereby take advantage of the North American Common Market, each Toyota must meet the 62.5 percent rule of origin for autos, light trucks, engines, and transmissions and the 60 percent rule of origin for other vehicles and parts. They are higher than the 50 percent legislated in the Canada-US FTA, although it is currently under an eight year period to meet the requirement (National Planning Asociation, 1994, pg. 28). Toyota has moved aggressively to fulfill

these requirements through large scale shifts to local production systems. By 1998, the US production facilities will be rolling out six different models, the latest T100 full size pickup truck joining the Camry, Corolla, Tacoma, Avalon and Sienna. Incidentally, the Camry was the best selling passenger car in the United States for 1997 (Kanter 1997). Most of the production in North America is done in the United States. The main production facility in the US, which is the largest manufacturing facility outside Japan, is in Georgetown, Kentucky. The plant produces about 400,000 Camrys, Avalons and Siennas (coming on board soon) annually. A Toyota/GM joint venture in California manufactures Corollas and Tacoma pickup trucks for Toyota and Chevy Prizms for GM. Another facility in California manufactures truck beds, sheet metal components and catalytic converters for Toyota's North American manufacturing facilities and for export to Japan and Canada. Bodine Aluminum in Missouri manufactures cylinder heads for US production and export. Toyota Industrial Equipment Manufacturing in Indiana produces forklifts for the US and for export. Also in Indiana, another Toyota firm, TMM(I), will manufacture T100s beginning in late 1998, with an annual capacity of 100,000 units. A West Virginia plant will produce 4 cylinder engines for North American built Corollas with a capacity of 300,000 engines annually. Besides all the manufacturing facilities in the US, there are a large number of support Toyota companies that deal with supplier sourcing, sales management, industrial equipment management, financial services for dealers and customers, motor insurance services, parts sourcing and logistics management. The Toyota Motor Corporate Services of North America, Inc., headquartered in New York, provides overall coordination for all North American affiliates. The Toyota Technical Center (TTC) in Michigan is the research and development branch of Toyota USA. The TTC conducts engineering design and development and works with North American suppliers to evaluate parts and materials and conducts powertrain evaluation and emissions certification. The Calty Design Research company in Newport Beach, California provides advanced design concepts for Toyota's product development operation. Of the approximately annual 15 million vehicle market of the US, Toyota holds about 8% and about 5.3% of the production share. The above descriptions reveal the vast extent of Toyota's operations in the United States, making it one of the most competitive and viable auto firms in the US and the world.

Despite the large scale production capacity in the United States, total Toyota vehicle imports to North American from Japan amount to about 500,000 vehicles every year. The exports from the United States amount to only about 100,000 vehicles a year, mainly to Taiwan and Japan. However, with increased local production, 1996 saw about nearly 1.2 million Toyotas sold in the US of which about 700,000 were North American made. However, although vehicle exports remain small from the US, more because of the increasing local demand, exports of parts is growing with $1.3 billion of supplies being exported to Japan. Under the NAFTA, Toyota has begun to treat Canada and the US as a single domestic economy for production. Toyota Canada Inc. (TCI) is the flagship organization for Toyota's operations in Canada. It is a 50/50 joint venture between Toyota Japan and Mitsui & Co. of Japan. Although Toyota Motor Manufacturing in Ontario represents only about 10% (100,000 vehicles annually) of the American production of Toyota vehicles, they fill a valuable niche in the North American auto market. The Cambridge Corolla was voted the best vehicle built in Canada by the Automobile Journalists Association of Canada, an award that they won for three consecutive years. In 1997, capacity was enhanced and will lead to Toyota Canada being a net exporter in 1998. TCI is headquartered in Ontario with regional offices in Calgary, Scarborough, Montreal and Halifax. Parts Distribution Centers exist in Ontario and Vancouver. Canadian Autoparts Toyota Inc (CAPTIN) produced aluminum allow wheels in British Columbia which has an annual capacity of over 700,000 wheels. CAPTIN supplies Toyota in Canada, USA and Japan. A unique contribution of TCI is the winter testing of Toyota cars and components. This testing has resulted in the adoption of comprehensive anti-rust protection, heavy duty batteries, starters, alternators and heaters. Hence, Toyota Canada plays a unique role in ensuring that Toyota vehicles remain robust and reliable in harsh winter conditions. Of the approximately 1.5 million vehicle market, Toyota holds roughly 10% of market and production share. Overall, relative to the size of the Canadian market, TCI has filled an important niche by providing quality vehicles to the Canadian customer. As stated above, Toyota does not yet have operations or manufacturing plants in Mexico, and very few of its supplies come from Mexican located companies. There are several reasons for this. First, Mexico's market will not become completely liberalized/integrated within NAFTA until 2003. Until that time Mexico may still discriminate against Toyota as a foreign supplier. Secondly,

as presented above, the American market is very important for Toyota. In 1996 sales in this market amounted to more than 24 % of total Toyota production. Likewise the quality and reliability also mentioned above is of utmost importance to the Toyota image. As a result, Toyota has a vested interest in keeping the US as the focus of its production. Closing US plants in favor of Mexican plants could alienate the Toyota brand name from its target customer base resulting in lower sales and possible friction from American trade and investment regulators. This would not be the first time that Japan has chosen its broader interest at the expense of more immediate achievements. Because of the US's large trade deficit with Japan, the Japanese government tried to diminish the problem by imposing voluntary restraints on exports to the US (VRE's). As a further attempt to soften tension with the US government, Toyota and Nissan "agreed" to buy $3.3 billion of American made auto parts annually (Hufbauer and Schott, 1992). These defensive moves illustrate the importance of the US market to Toyota. This also helps to explain Toyota's anchoring of their production to the US. Of the 7 Japanese auto plants in the US, 3 of them belong to Toyota. Further, The big three are powerful in Mexico as well as in the US, and with NAFTA, they ensured their Japanese competitors would not use Mexico as a ready-made export platform.. As Hufbauer mentions, Canada sought to retain its own panopoly of safeguards (even some that were redundant under FTA and NAFTA terms), and Mexico wanted to continue liberalizing its own automotive sector, but at in a way and at a pace the local auto parts firms would be protected (Hufbauer and Schott, 1992, pg. 209-210). NAFTA's rules of origin will make it possible for Toyota to sell in Mexico after the 10-year transition period. So, assuming Toyota wanted to produce in Mexico and export to the US and Canada, it would be forced to source largely from Mexican suppliers, which is more difficult than importing parts and assembling them in Mexico. At the end of this analysis, a move to Mexico turns out to be only slightly advantageous economically. According to Jon R. Johnson of Goodman & Goodman the only cost advantage Mexico possesses is labour (In Globeman & Walker 1992, pg. 122). However, this input amounts on average, only to 10 -15% of a car's total cost (National Planning Association, 1994 pg. 20). The issue of labour cost is important in relation with Toyota, as the Japanese producers in the US have managed to keep labour costs considerably lower than their

American counterparts. Because of union contracts the American producers pay around $40 per hour, whereas the Japanese producers only pay around $20 per hour. In this perspective the cost is relatively not as important for Toyota as for their American competitors (Orme, 1993 pg. 102). Besides, they have a huge supply chain already installed and proven to be working in the United States.. This is not to say that expansion into Mexico is unlikely in the medium to long term. In his analysis of the impact of NAFTA on the North American automotive trade, Johnson mentions that the opening of the markets will, in time, lead to a further specialization between the assemblers. However, the auto parts industry in the short run will continue to face inefficiencies caused by the protection it has been subject to in the past (In Globeman & Walker 1992, pg. 121). This is another issue that might be decisive for Toyota not moving to Mexico, due to the focus the Company has had on quality and just in time production.. The process of getting subcontractors involved in the Toyota strategy and organization must not be underestimated. Toyota's image as one of the worlds leading producers of quality cars, and the reliability the company has achieved with just-in-time production and through the above mentioned strategy makes it difficult for Toyota to invest in another market without having these subcontractors in place. It might be expected that Toyota would wait until producers have matured and are able to satisfactorily fulfill its requirements. Conclusion Toyota's entrance into the North American market predated the NAFTA and was largely an attempt to circumvent US restrictions on foreign auto imports. While Toyota may eventually move further to take advantage of opportunities to develop economies of scale and scope presented by the NAFTA it sees a deepening integration in the US and Canada as more important than a broadening of its operations into Mexico in the short to medium term.