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Toyota Takes the Knife to U.S. Labor Costs


Last summer, when Toyota (TM) temporarily shuttered three U.S. plants as part of a move to build more fuel-efficient vehicles and fewer large trucks, it won plaudits for not laying off employees. Instead, workers undertook extra training sessions, helped out at other plants, or even became involved in projects in the local community. Now, though, with the U.S. market showing few signs of recovery—Toyota's sales slumped 32% in January—and losses mounting, the Japanese automaker has no choice but to cut labor costs in the U.S. While no layoffs are planned, Toyota is offering buyouts to some of its 30,000 American employees, slashing bonuses, and cutting executive pay.

According to a statement issued late on Feb. 12, Toyota will offer voluntary exit programs and work-sharing schemes at selected plants. Worker bonuses will be reduced and there will be no wage increases "for the foreseeable future." Executives will have their pay cut and see their bonuses disappear. There will be additional nonproduction days in April, too. "We've taken responsible, step-by-step actions to address this issue in recent months, and we hope the new measures will help us adjust while protecting jobs," Jim Wiseman, vice-president for external affairs at Toyota Motor Engineering & Manufacturing North America, said in the statement.

Toyota says it is unsure how many workers will take up the offer of the buyouts and that it doesn't have a target in mind. Workers that sign up for the voluntary plan will get 10 weeks' salary, plus two weeks' salary for every year worked, and $20,000. The offer will be made to 18,000 U.S. Toyota workers, but unionized plants, such as New United Motor Manufacturing, a joint venture with GM (GM) in California, will not be affected.

Reduced Hours

Under the "work-sharing" scheme, affected workers will now work and be paid for 72 hours, rather than the usual 80, over a two-week period. A Toyota spokesman said the reduced hours will be in force for an unspecified period of time. He added that discussions were under way or planned to extend the work-sharing scheme to unionized workers, depending on the union involved.

While unwelcome, the moves are not unexpected. On Feb. 6, Toyota said it will lose $3.9 billion for the year through March, marking its first net loss since 1950.

Executive Vice-President Mitsuo Kinoshita told reporters that the poor results were largely due to the strong Japanese yen and plunging sales in the U.S.—traditionally where Toyota earns its biggest chunk of profits—and Europe. Kinoshita added that it was necessary to slash production to prevent a stockpile of unsold cars, but he said the company will try to avoid firing permanent staff. "We intend to make every possible effort to protect employees," he said.

In Japan, Toyota has already laid off temporary employees and is closing factories for an additional 11 days this month and next to cut production. On two of those days, workers are receiving 80% of their normal pay. Other days are taken from paid holiday allowances. Last fall the company formed an "Emergency Profit Improvement Committee," which it hopes will ferret out an extra $1.4 billion in savings this year—in addition to the $3.3 billion in new savings Toyota looks to make in normal years.

Extra Sweaters

No cost-cutting, it seems, is too small. Workers are being encouraged to take the stairs rather than elevators, to save electricity. The heat in factories has been turned down, so workers are now wearing extra sweaters to stay warm. And on Jan. 19, Lexus engineer Takayuki Katsuda and two colleagues drove from headquarters in Toyota City to Tokyo for the Japan launch of the Lexus RX sport-utility vehicle. Though the trip took four hours, vs. 90 minutes on the Shinkansen bullet train, they saved about $300 in train fares. "We're facing a once-in-a-hundred-years crisis," Akio Toyoda, a scion of the founding family who will become president in June, told reporters on Jan. 20.

Analysts say Toyota is aiming to avoid cutting permanent employees in large numbers, which is about more than presenting a good image and strengthening employee relations. Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo, says that despite grim headlines, Japanese automakers are wary of the cost of having to rehire and retrain new workers if the economic outlook improves. "Plant closures and huge layoffs aren't really happening," he says. "The Japanese manufacturers strongly believe that at some point in time the demand will come back."

Nissan (NSANY), for example, said on Feb. 9 that it would reduce its head count by an eye-catching 20,000 to 215,000, but, a bit like Toyota, its cuts will mainly be through trimming temporary workers and putting a freeze on new hires while it is planning work-sharing schemes. "Investors might be disappointed that no radical measures are being taken, but [huge job cuts] are no good for solving the problem they are facing today," adds Yoshida.

Of course, if stimulus packages in key auto markets, such as the U.S. and China, fail to reignite auto demand, that could change. Indeed, while Japanese automakers are in better financial shape than Detroit rivals, losses are already mounting. With Toyota, Nissan, Mazda (MZDAF), Mitsubishi Motors, and Subaru parent Fuji Heavy Industries all predicting full-year losses, only Honda Motor (HMC), Suzuki, and Toyota's minicar maker Daihatsu expect to make a profit this financial year. And analysts say Toyota's latest labor cost-cutting measures in the U.S., combined with previous plans, are unlikely to be enough to get it back in the black.

As long as the Japanese yen, currently hovering around an unpalatable 90 yen to the dollar, stays high and auto demand remains weak, most company watchers expect Toyota to post an even bigger loss in the financial year that ends in March 2010. Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo, reckons Toyota's net loss could swell to $11 billion. "I don't think Toyota's proposed labor cut in the U.S. would be sufficient for the company to restore its profitability, but it is better than doing nothing," he says. "In 2009 there will be no winners in the global auto industry."

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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