Despite sour economy, Toyo's moving forward with expansion plans, but cutbacks under way

Tire Business staff report

Osaka, Japan - The global economic crisis is throwing a wrench in Toyo Tire & Rubber Co. Ltd.'s plans for its 70th anniversary in 2015.

While the world's 11th largest tyre maker marches towards its goals of boosting production capacity to 50 million units annually, expanding the Nitto brand globally, moving into new markets worldwide, leveraging differentiation technologies and establishing a global supply system for its anti-vibration business, the company said the timetable for these and other objectives may no longer be achievable.

“The direction will remain the same, but the time line may be adjusted,” Toyo president and ceo Kenji Nakakura said, referring to Vision 15, the firm's long-term plan leading up to the anniversary milestone.

In an interview with Tire Business at the tire maker's headquarters in downtown Osaka, Mr. Nakakura stressed the severity of the economic crisis.

“I've been trying to tell our employees, trying to get them to realise that this is very serious,” he said.

So serious, in fact, that Toyo is reducing its work force of 9900 employees by 8 percent.

“In Japan, it's in the news right now about non-full-time employees being let go,” he said.

“We will probably have to do that as well, downsize the number of our non-full-time employees. That means that once their contracts have expired, we will not be extending their contracts.”

Cutbacks continue

About 500 contract workers in the company's tire and non-tire divisions will not have their contracts renewed in 2009, he said.This is in addition to 300 employees and contract workers who were let go in 2008, for a total reduction of 800 employees by the end of March 2009.

Mr. Nakakura said Toyo will undertake a review of its indirect departments-those not related to manufacturing or its sales subsidiaries. These include human resources, accounting, technical and legal. “There will be people who are working in those indirect departments who are not necessary and we will ask them to reallocate or switch to other departments,” he said.

Japanese manufacturers have done a good job of slimming direct departments, but “regarding their indirect departments, we believe that there is a lot of flab, a lot of inefficiencies,” Mr. Nakakura said. “I believe that when you look at Japanese companies compared to US companies or European companies, Japanese have a lot more to work on there.”

Cash flow will become “very important” for Toyo in 2009, Mr. Nakakura continued. The company will curtail capital investments, holding back the third-phase expansion of its tire plant in White, Georgia, and postponing plans to build a tire factory outside of Japan in Asia.

“As soon as the economy recovers, we would like to start on that project again,” Mr. Nakakura said of the Asian facility.

Toyo also will reduce inventory by nearly $40 million (Euro 30 million) over the next year. In addition, it will cut advertising and promotion costs, trim travel expenses and even change its sales efforts to be more focused on assisting customers' needs rather than entertaining and wining and dining, Mr. Nakakura said.

Grow Nitto brand

Toyo is taking these steps as it anticipates posting a financial loss for fiscal year 2009, which ends 31 March, following a profit of $53.7 million in fiscal 2008. Compounding the company's financial performance are the triple whammy of the recession, the falling value of the yen and a weak stock market in Japan.

Mr. Nakakura said he doesn't anticipate a quick turnaround to the downturn that is hammering tire companies worldwide. “A lot of different people have a lot of different thoughts about this, but we believe that regarding this recession, it's going to take about two years.”

Discussing the US tyre market-where Toyo sells both the Toyo and Nitto brands-Mr. Nakakura said consumers are holding onto their tyres for as long as possible and starting to move from buying expensive models to cheaper ones.

This trend, he said, likely will lead to a decline in the revenue the company's tire business generates. In response, Toyo will need to change its business operation “to one that can survive these kinds of low-profit days,” he said.

Toyo already has begun adjusting the mix of tyres it makes and sells.“Before, we've been concentrating on the higher profit-margin tyres, but now we will have to concentrate on the middle ones as well,” Mr. Nakakura said.

That means getting into the broadline tyre business more heavily, especially with the Nitto brand.

Nitto, which Toyo wants to grow in tandem with the Toyo brand and market as a “two-top brand system,” launched its first broadline tire last year in North America, the NT850 luxury touring tire, which is sold exclusively by American Tire Distributors Holdings Inc.

Mr. Nakakura sees Nitto as an agile, mobile brand “that goes where it needs to go.”

“Toyo is the player at the top and there is Nitto that comes out from behind and receives the ball,” he said, in describing how he sees the two brands working together.

However, it's not enough for Nitto, which made its mark as a high-performance and ultra-high-performance brand, to be in the UHP segment alone, particularly as the brand's sales channels become more stable. “We need to expand the broadline,” he said. “We need to have something more, otherwise we cannot sustain what we have.”

Nitto is sold primarily in the U.S., Canada, Mexico and Japan, but it will be expanded to cover the world, Mr. Nakakura said. That includes Central and South America and possibly Europe and the Middle East.

In some of these regions, the brand already is sold on a small scale through agents, “so we will not be starting from zero,” he said.

Outside of Japan, Nitto accounts for about 10 percent of Toyo's tire sales, a percentage the company wants to double.

In the U.S., Toyo will expand Nitto eastward into middle America, from its traditional emphasis on the West Coast. It also will reconfigure the automated Georgia plant, which was set up to produce SUV, ultra-high-performance and off-road light truck tires, to accommodate smaller, broadline sizes.

Focus on technology

Technology will play a key role in Toyo's broadline expansion, Mr. Nakakura said.

Traditionally, Toyo has been a follower of the Big 3 tire makers-Bridgestone Corp., Goodyear and Group Michelin.

But now, “we have to be able to provide tires that are of the same quality as the Big 3 or even better than the Big 3,” he said. “And we need to provide tires with performance that is as good, or better, than the Big 3. And we need to be able to do this at costs that are cheaper than the Big 3. That's the kind of business we need to engage in.”

To expand the company's broadline offerings, Toyo will employ a new manufacturing method that will “improve the uniformity of our tires,” Mr. Nakakura said.

Consumers of broadline tires are not just after good-handling tires, he said. “They demand ride comfort as well, and low noise. So that's where uniformity is the key.”

While Mr. Nakakura would not go into details about the new manufacturing method, he did say that Toyo has a top-secret design laboratory called the Production Technology Studio at its technology center in Japan.

This facility, located in its own building on the Itami campus, is so secretive that even Mr. Nakakura, the company's top executive and former chief of the firm's tire technical headquarters, can't get into it.

The work done at the studio is art, Mr. Nakakura said. These concepts aren't technologies yet, “so we try to develop such things at this studio.”

The studio differs from other tire companies' production development centers, according to Mr. Nakakura, where they evaluate tires, develop new compounds or come up with new tire constructions.

What Toyo is doing at its design studio is working on single elements in the manufacturing process and doing so in a continuous manner.

In the past, when Toyo was developing a new production system, “we would create the whole thing and when we created the whole thing, we tried to create as part of that the element technologies as well,” Mr. Nakakura said.

There would be times when a single element technology would be incomplete, which meant the entire system was incomplete and would have to be redone. This resulted in increased investment and a longer investment time period, he said.

“So what we do (now) is we take out just the element part and we develop the element part,” Mr. Nakakura said. And this is done continuously.

Toyo is placing an emphasis on such technology, “so we can differentiate ourselves from other competitors,” he said.

While Toyo's recent capital alliance with Bridgestone Corp. does not cover cooperation on technical issues, Mr. Nakakura said that could happen down the road.

For now, the two Japanese competitors will cooperate on advanced production methods and purchasing of raw materials and equipment.In addition, the two will share off-take agreements involving Toyo's plant in Georgia and Bridgestone's factories in Latin America. But that, too, likely will be delayed, as both companies have excess capacity as a result of the economic downturn, Mr. Nakakura said.

While Toyo is taking a breather on expanding its U.S. factory and constructing a new one in Asia, it has not taken its eye off of Europe. Already it sells 3.5 million tires there. “If this increases to 4 million or 5 million, we're going to need a plant,...so that's something we have to plan, as well,” Mr. Nakakura said.

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Press release from Tire Business (a Crain publication)