Toyota's emerging market secret: Elbow grease in the Ohira, Japan Toyota factory By Bertel Schmitt, contributor

FORTUNE -- Today, I saw a new, and so far the finest specimen of Japan's new export products: A car factory. Recall the press about a new Toyota factory in the Miyagi Prefecture with a U-shaped assembly line where the assembly time is cut down to a third? Not only did they get it wrong. They missed the best part of the story: Budget car factories, ready for export.

Ohira is a little village near Sendai. Sendai is a town two Shinkansen hours north of Tokyo. The area is famous for its beef tongue, not the hottest export item. Ohira was known for exactly nothing until Toyota decided in 2007 to relocate their factory from Sagamihara, in the outskirts of Tokyo, up into the woods of Ohira.


A year later, the whole region went into shock: One of the many consequences of the 2008 financial crisis was that the Ohira plant was put on hold. In late 2009, matters looked a little better, and the plans for the plant were revived. Earth was moved in Ohira. The highway received a new exit. Families in Sagamihara scheduled their move north. Today was the grand opening.

The opening of a car factory is a rare occasion in Japan, a land that is more known for its factory closings. The strong yen put a crimp into the formerly flourishing car export business. As a matter of fact, the Ohira plant is Toyota's first new Japanese plant in 18 years. Ever since Toyota opened their Iwate plant in 1992, Toyota built many plants elsewhere in the world, but none in Japan. Actually, Toyota had made a lot of noises lately that they might close more factories if the yen stays strong.This was a historically important moment, and having been invited, Frau Schmitto-san and I ventured north.

This morning, idyllic Ohira was mobbed by members of the media, politicos and half of Toyota's sprawling board. Toyota's President Akio Toyoda was excused due to health reasons, TMC Chairman Fujio Cho came as a stand-in.*

Everybody is talking about low cost cars, and how important they are, especially in emerging markets. What's the secret sauce for low cost cars? Low wages? Wrong, I learn today. The secret is low cost factories.

"60 percent of the cost of the car is the investment into the plant. 20 percent is the parts that go in the car," says Toyota's photogenic Executive Vice President Atsushi Niimi. He does not say what the remaining 20 percent are, presumably labor, something he does not want to mention in front of local leaders who want jobs, jobs, jobs.

And indeed, Toyota's first new Japanese plant in 18 years is a modern marvel of savings.

The relative lack of robots is the most striking item for someone who learned the trade back in the 80s around Volkswagen's dimly lit and fully automated Halle 54: Sure, there is a gang of stout welding robots that weld heavy pieces together. Otherwise: Less automation than in some Chinese factories. Since the turn of the millennium, Toyota has been slowly backing away from heavy automation. The labor saved by robots was wasted by fixing and most of all by reprogramming robots. Ohira is the current culmination of this trend.

For the first time in 30 years, I see people welding by hand. Someone is even putting a rotary sander to a primed body before it enters the paint station. If Ferdi Piech would see that in Wolfsburg, he would stop the line and fire the factory manager. Why less automation? More flexibility, lower investments. The cars no longer dangle from the ceiling while parts are attached from below. They roll on a simple raised platform. This reduces the ceiling height of the factory. Advantage: 50 percent of the investment saved, says Toyota. A side effect of the non-dangling is that people can work on a stationary object, instead on one that dangles.

There also is no more marriage or wedding station where the upper part of the body mates with the undercarriage, a process that always elicited raunchy jokes when I had to attend (not for public consumption) factory tours at VW in the really olden days.

Where the car moves along the floor, factories usually have below ground pits that house the motors, chains and gears that keep the line moving. Not in Ohira. Here, the cars move on maybe a foot high conveyor system that is simply bolted into the concrete flooring. Advantage: Cheaper to build, cheaper to tear down and rebuild somewhere else. The line can be lengthened or shortened at will. The assembly line doesn't "grow roots" as they say in Toyota-speak.

Usually, cars move along an assembly line in a vertical line, as if they already are sitting in a slow moving traffic jam. Not in Ohira. Here, the cars move sideways. Think of a parking lot down at the mall. Now move the parking lot to the right. Advantage: With the cars moving sideways instead of straight ahead, the line can be 35 percent shorter. The factory can be smaller. The expenses are lower.

The paint spray line of a car factory usually is a highly complex system that is built in place. Very expensive parts and experts have to be flown in. Not in Ohira. For Ohira, Toyota developed a modular paint spray line. The modules can be built somewhere else and are assembled at the plant in a much shorter time. Advantage: Cost savings. However, you don't build a modular paint spray line factory somewhere unless you intend to build a lot of paint spray lines. Usually, cars get three coats of paint, usually water-based, and usually each coat is dried with heat. Not in Ohira. Here, the third coat is applied onto the still wet second coat and both are dried together. Advantage: Huge energy savings, faster paint time. Lower expenses.

Of course, the new Ohira plant is green, or "harmonious" as they say here. A choice of words that should sit well in harmony-addicted China. Its carbon footprint is a third lower than originally planned, its VOC emissions are reduced by a third. Oddly enough, a car factory produces a lot of wastewater. Ohira has a water treatment plant that emits water safe for Japanese Koi fish, a fickle breed that goes belly-up if there is just a bit of pollution in the water. In Wolfsburg, they use rugged German carp, and sometimes they look a bit worse for wear.

The plant is a secretive plant. "No photo! No sketch!" warns a handout. Photo-ops are limited to two stations. One at the welding robots. One where people work on the car. Equal time.

I walk down the line with Roger Schreffler of Ward's Auto, an old warhorse for whom car factories are what race-cars and fast women are to Jack Baruth. Like Jack, Roger has seen them all. I ask Schreffler what the most striking aspect of this plant could be, and he answers without hesitation: "The low investment. They must have saved huge amounts of money. Even the equipment is from lower cost suppliers."

All the numbers add up perfectly, except these: It's a small plant. Pocket sized as car plants go. 900 employees. Only 250 units a day, we hear during the plant tour. But once everything is ramped up, 1,900 people will be able to make 120,000 units here. A compact car factory in the true sense of the words.*

Toyota's plant in Kentucky makes 2,000 units a day. In Ohira, the area where cars awaiting shipment are parked holds maybe 1,000 cars. Bloomington's Mall of America has 20,000 spaces. But Ohira has a few hundred feet of intentionally rough road to detect any rattles or squeaks before the car is shipped. Hope-inspiring: On the other side of the fence is an empty space that could double the size of the plant. But this is where suppliers usually pitch their tents. Just in time manufacturing.

Toyota's declared policy is to build new plants close to their markets. What does Ohira build? A car for America. Only one car for now. The sedan version of the Yaris. Not the Vitz, which is the Yaris Japanese spec. And not the Belta, which is the JDM sedan version of the Vitz. Up in the woods, they build a Yaris for export to America. In April, they may add a Corolla Axio.

Will the Yaris be trucked the 20 miles to Sendai port (which received improvements to its docks because of Toyota) and shipped to America, asks a member of the local press. Oh no, says Niimi. "The cars will be shipped from Sendai to Nagoya, and then they go on the boat with the other 5000 to 6000 cars. This plant doesn't have enough volume." Then why build the plant? Will the plant make hybrids? Evasive answers. Plugins? Evasive answers. Will Ohira get an engine factory? Evasive answers.

When asked whether the small plant could be a pilot for new plants in emerging markets, Niimi adroitly sidesteps the question, but answers it between the lines: "This plant will play a huge role in strengthening our worldwide network."

Suddenly, it all makes sense.* This plant is the perfect export item to emerging markets. Low cost. Can be built anywhere, even into an existing building if necessary. No pits, no overhead rigging. Special equipment (such as the paint booth) can be brought in as modules from Japan. No heavy investment into automation. If people are cheaper than robots in Ohira, guess how much cheaper they are in China, India, Indonesia. Can expand and contract. Doesn't grow roots. Can be uprooted if necessary and taken elsewhere. 250 units a day, ideal size for a start in some other backwoods. If Toyota can develop a car for developing markets,why not make a factory to go with it?

Back at the train station, we are surprised by a fresh copy of the Kahoku Shinpo, Sendai's hometown paper. It belies the popular wisdom that the web will kill media printed on dead forests. Not in Japan: Half an hour after the festivities in Ohira come to an end, the paper is at the stands, with the big news from the small village as the top story. No mention of any export plans. Let's not disturb the festive mood.

This article reprinted with permission from The Truth About Cars.

*Editor's note: An earlier version of the story said that Chinese military officials were at the factory event, based on their style of uniform. In fact, the officials were Japanese. The observations and conclusions drawn have been edited for accuracy. To top of page

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