Toyota Unifying North American Operations at New Texas Home

Apr 29, 2014 9:39 am ET

(Updates with today’s ADR trading in fifth paragraph.)

April 29 (Bloomberg) -- Toyota Motor Corp. plans to consolidate U.S. sales, engineering and finance operations to suburban Dallas, sending 4,000 jobs from California, New York and Kentucky to a new North American headquarters.

The shift to Plano, Texas, affects about 2,000 people at Toyota’s U.S. sales headquarters in Torrance, California, 1,000 employees from its Kentucky engineering and manufacturing unit, and some staff from its holding company in New York, the carmaker said in a statement yesterday. About 1,000 people from its finance company will also go to Texas by 2017, Toyota said. Headquarters construction is projected to be complete in late 2016 or early 2017.

“Toyota’s announced move to Texas is a shock since the automaker has been part of the Southern California community for decades, but it indicates that money -– and tax incentives –- talks when it comes to headquarters locations,” said Jack Nerad, senior industry analyst for Kelley Blue Book. “The dollar savings from the relocation should be fairly easy to quantify, but what’s much harder to quantify is the cost in business disruption and ‘brain-drain’ such a move can cause.”

The relocation is a win for Texas Governor Rick Perry’s campaign to lure California companies and a blow to the Golden State, the biggest U.S. auto market and proponent of the strictest clean-air rules. Toyota’s Prius hybrid has been California’s top-selling model for the past two years and helped secure a leading 22 percent market share. Perry has made repeated visits to California to entice businesses to his state with promises of lower taxes and easier regulations.

Toyota’s American depositary receipts rose 0.3 percent to $107.41 at 9:35 a.m. in New York. Through yesterday’s close the ADRs had fallen 12 percent this year.

Texas Investment

The main goal of the shift to Texas is to boost efficiency, not cost savings, Jim Lentz, Toyota’s North American chief executive officer, said in a phone interview. Lentz only discussed the matter with Perry yesterday, when he also notified California, he said.

“This is probably the most significant change we’ve ever had” in North America, Lentz said in an interview yesterday. “In the next three years we are going to bring three separate entities to the same headquarters for the first time.”

While the sales, engineering and corporate units will initially remain as separate legal entities after the shift, “it may make sense over time to combine these three entities into one,” Lentz said. He didn’t provide a cost for the new facilities and relocation of workers. The latter will be the biggest expense of the relocation, he said.

Perry’s office yesterday said it expects Toyota to invest more than $300 million in the Plano headquarters, supported by $40 million from the Texas Enterprise Fund.

Relocation Offers

“Toyota understands that Texas’s employer-friendly combination of low taxes, fair courts, smart regulations and world-class workforce can help businesses of any size succeed and thrive,” Perry said in a statement. “We’re proud that both the Tundra and Tacoma bear the words ‘Made in Texas,’ and we’re excited our state will be the nexus for Toyota’s North American operations moving forward.”

While some California employees may not choose to relocate to Texas, “we’re going to encourage everyone to go,” Lentz said. “If they want to come, there’s a job for them.”

Toyota’s average revenue per vehicle is $33,287 in North America, where it earns a 3.3 percent operating margin, while in Japan, Toyota gets $29,223 per vehicle and a 10.5 percent operating margin, according to Kevin Tynan, auto analyst with Bloomberg Industries.

‘Extremely Disappointed’

The world’s largest carmaker, which is based in Toyota City, Japan, has more than 5,300 California employees, most at its Torrance campus near Los Angeles in sales, finance, marketing, engineering and product planning. Erlanger, which also manages Toyota’s North American factories, is near Cincinnati.

“Obviously, we are extremely disappointed by Toyota’s decision,” Kentucky Governor Steven Beshear, a Democrat, said in a statement. “We would have welcomed the opportunity to discuss options with Toyota, but we will now turn our attention to preparing for this transition.”

Toyota will keep its Georgetown manufacturing plant in Kentucky, supplier facilities, as well as some other units, according to a letter from the automaker’s executives to Beshear that was dated yesterday.

Georgetown Jobs

“We are continuing to add good jobs at the Georgetown plant,” according to the letter. The site is adding assembly of Lexus ES 350 sedans to output of Toyota Camry mid-size cars and other models.

Nissan Motor Co. also left California in 2006, relocating its North American headquarters in lower-cost Tennessee. In Nissan’s case, only 42 percent of employees initially chose to relocate.

In February, Occidental Petroleum Corp. said it was splitting its operations, keeping a portion in California and setting up a new unit in Houston. Raytheon Co., a technology company that specializes in defense, last year moved its space and airborne systems unit to McKinney, Texas, from southern California. Last year, Tokyo-based security software company Trend Micro Inc. said it would move its U.S. headquarters from Cupertino, in Silicon Valley, to Irving, Texas, according to the Perry administration.

While Texas is home to Toyota’s pickup truck plant in San Antonio and a General Motors Co. factory in Arlington, the state traditionally hasn’t been a center of auto industry activity.

Annual Forecast

Toyota’s decision to scale back in California, where it established operations in 1957, comes as the company expects to report a record 1.87 trillion ($18.3 billion) of net income when it releases fiscal year results next month. Along with rising sales in North America and other international markets, Toyota’s earnings this year are benefiting from a decline in the value of the yen, which surged in 2011.

Since the company made that forecast, it agreed to a $1.2 billion fine to settle a U.S. Justice Department investigation into how it delayed recalling popular models after complaints of unintended acceleration.

Toyota’s move is about more than just saving money, said Jeff Schuster, an auto analyst with LMC Automotive.

“By locating in Texas, they locating closer to where they build,” said Schuster, who is based in Troy, Michigan. “The majority of vehicles sold by Toyota now are built here. So it doesn’t make as much sense as it did initially to be in California, when it set itself up to be closest to Japan and the ports.”

--With assistance from Keith Naughton in Detroit.