Toyota provides shot in arm for Japan's quake-hit Tohoku
* Carmaker committed to helping region rebuild
* Popular Aqua hybrid raises hopes for area jobs
* Strong yen, global rivals cloud outlook however
* Aqua plant part of plan to widen production base
KANEGASAKI, Japan, March 9 (Reuters) - At this 19-year-old Toyota factory in Kanegasaki, 500 km (300 miles) north of Tokyo, one shiny Aqua hybrid car rolls off the assembly line every 75 seconds, 17 hours a day.
With 120,000 orders to fill from just the first month of sales since late December -- equivalent to 10 months' worth of targeted sales in Japan -- the frantic pace will only quicken in the coming months.
Toyota Motor Corp's long-held plan of setting up a manufacturing base in Japan's northeast coincides with the region's efforts to rebuild itself up after being ravaged by the magnitude-9.0 earthquake, tsunami and ensuing nuclear crisis last March.
The popularity of the Aqua and the business it could provide for ancillary parts makers could be a badly needed shot in the arm for the northeast, or Tohoku, territory.
On top of the cost of rebuilding the devastated eastern coast, the frigid Tohoku region is home to an ailing electronics sector that has long been its cash cow. The strong yen and stiff global competition have caused huge losses on companies like TDK Corp and Renesas Electronics Corp, cranking up the pressure to close factories or shift work overseas, clouding the outlook for suppliers down the food chain.
"If we lose our main source of income, it would be devastating for the local economy," said Keiji Sakuma, a director at the Tohoku Bureau of Economy, Trade and Industry. "In that sense, the auto industry could be our ray of hope."
Tohoku has attracted a long string of investments from Toyota, Japan's top automaker, in the last few years.
To diffuse the risk of a massive earthquake hitting its core manufacturing hub in central Japan, Toyota is on its way to establishing Tohoku as a third domestic production base, joining a second one on the southern island of Kyushu.
In 2010, majority-owned subsidiary Prime Earth EV Energy built a factory in Miyagi prefecture to supply batteries for Toyota's hybrids and plug-ins. Barely a month before the March 11 disasters, another subsidiary, Central Motor, opened a new assembly plant nearby to replace an ageing facility near Tokyo.
Later this year, parts unit Toyota Motor Tohoku will open an engine factory, also in Miyagi, which accounted for more than half of the 16,000 deaths from the disasters last year.
The Tohoku region will be in charge of developing and producing as many as 500,000 compact cars for Toyota a year. To maximise efficiency, Toyota will, in July, merge Central Motor, Toyota Motor Tohoku, and Kanto Auto Works, which operates the Aqua plant in Iwate prefecture, into a single company called Toyota Motor East Japan.
"Thankfully, the Aqua has garnered tremendous support from customers," Kanto Auto Works president Tetsuo Hattori told reporters on Friday. "We hope that this car, produced here in Iwate, will serve as a bright spot for the recovery of Tohoku," he said ahead of a rare factory tour that was briefly interrupted by a moment of silence to mark one year since the disasters.
FILLING THE HOLE
With Toyota's business growing in Tohoku, the region's government expects an estimated 1,200 companies could get new or more work from the auto industry.
Today, Tohoku's contribution to Japan's transport machinery sector is just 2.2 percent, compared with the 6 percent it contributes to the country's gross domestic product and the 12-13 percent that electronic devices provide.
"But once all the parts start moving in the auto sector, this (2.2 percent) figure should rise precipitously and that would spread to the electronic devices segment too," said the economy bureau's Sakuma.
Kanto Auto Works said its Iwate factory alone had hired an additional 200 contract workers to ramp up Aqua production to 30,000 a month for February and March, bringing total employment to around 2,500.
Tohoku is also home to an engine factory of Nissan Motor Co . Japan's No.2 automaker has said it would spend 3 billion yen ($37 million) to reinforce the plant, about 60 km from Fukushima's crippled nuclear power plant, to guard against future earthquakes.
TOUGH WORK AHEAD
While Toyota could prove a godsend for Tohoku, it won't be smooth-sailing for the automaker. With the dollar trading around 81 yen, Toyota is struggling to make money on exports. Its huge global operations are cushioning the blow, but the disproportionate exposure to Japan has made a profit laggard out of Toyota.
Toyota has committed to building 3 million of its 7.5 million vehicles a year in Japan, triple the volumes for both Nissan and Honda Motor Co. That is capping Toyota's operating margin at an estimated 1.5 percent in the business year ending this month, far short of Nissan's forecast of 5.4 percent and Hyundai Motor Co's 10 percent last year.
"When Toyota crafted this plan for Tohoku, the dollar was probably worth 120 yen, making Japan a low-cost country," Goldman Sachs auto analyst Kota Yuzawa said. "Now, Japan is a very high-cost country and Toyota's got to work much harder."
Kanto Auto's Hattori said even for his lean Iwate plant, 81 yen was tough for exports. The Iwate plant so far ships overseas one in every five Aquas it produces. The factory's total exports have halved to 30 percent from pre-financial crisis levels, he said.
Toyota's executive vice president, Shinichi Sasaki, who oversees purchasing, is counting on Tohoku's lower land prices and wages as well as government incentives for new business initiatives, to help it compete. Toyota hopes to double the amount of parts it buys in the region to 80 percent as soon as possible to lower delivery costs, he told reporters last week.
In Iwate, Toyota's ideas for saving money go beyond the factory floor. A few years ago, workers came up with the idea of employing goats to feed on the patches of green on site instead of using manpower and fuel to whack the weeds. During the winter, 1,500 tonnes of snow is stored to provide cool air during the summer rather than running the air-conditioning.
For the factory, the pressure will rise after the initial excitement for the Aqua - the world's cheapest and most fuel-efficient hybrid to date - runs its course.
The car's popularity in Japan is partly driven by government subsidies to replace older cars with hybrids and other fuel-sipping cars. That budget could run out in about half a year.
"The real test will come in October," Goldman Sachs' Yuzawa said. "At that point, when demand in Japan pulls back, we'll see how well the car does in the United States. And if these exchange rates stick, it's going to be painful."
The Aqua will go on sale as the Prius c in the United States in the coming months. It will also be sold in about 50 other countries, mostly in Asia.
Economic sense or not, auto executives say the car industry, as a rare remaining bright spot in corporate Japan, has an obligation to do its part for the country, particularly when the prospects appear so bleak after the triple disasters.
"If we upped and left, who would protect these jobs? Who will pay the taxes? Who will help with Japan's recovery?" Nissan's chief operating officer, Toshiyuki Shiga, who also heads Japan's auto industry lobby, told Reuters last week.
"We have no one to pass the baton to. If we as corporate citizens of Japan stopped caring, this country would be in a dire state."
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