Toyota Seeks to Head Off Trump With a Big Investment in U.S. Manufacturing

By John Rosevear Markets Fool.com

Another day into the Trump administration, another automaker announcing a big investment in U.S. manufacturing. This time, it'sToyota Motor Corporation(NYSE: TM), which said on Tuesday that it will invest $600 million in an Indiana factory to increase production capacity for its midsize Highlander crossover SUV.

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What Toyota said: 400 new jobs at a key U.S. factory

Toyota said that it will spend $600 million to expand and "modernize" its factory in Princeton, Indiana. The expansion will add 400 jobs and increase the plant's production of Highlander SUVs by 40,000 annually. The plant produced over 400,000 vehicles last year, Toyota said, the highest annual total in its 20-year history.

A workerinspects a Toyota Highlander on theproduction line at Toyota'sfactory in Princeton, Indiana. Image source: Toyota Motor Corporation.

Echoing language we've heard from the Detroit-based automakers, Toyota said that the project "is part of Toyota's localization strategy to build vehicles where they are sold." Earlier this month, Toyota U.S. chief Jim Lentz said that the company would invest $10 billion in the U.S. over the next five years.

But there's a catch: Toyota isn't planning to begin the expansion work until the fall of 2019.

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Why would Toyota announce this almost three years in advance?

Unless you've been living under a rock, you know that the United States has a new president -- and you've surely heard that President Donald Trump wants to see companies that do business in the U.S. invest in U.S. manufacturing.

For months, Trump has used tweetsto harangue U.S. manufacturers building factories outside of the country and pressure them to invest in U.S. plants instead. Earlier this month, Ford Motor Company (NYSE: F) and Fiat Chrysler Automobiles (NYSE: FCAU) both announced significant investments in U.S. factories. Ford also announced the cancellation of a plan to build a new factory in Mexico, which was well received among Trump supporters.

Both moves had clearly been in the works for a while, but -- just as clearly -- the announcements were intended to head off the possibility of becoming presidential Twitter targets and to let the new administration know that the automakers are willing to work with it.

It's likely that today's announcement from Toyota is along the same lines and also part of a larger plan that predates the November U.S. presidential election. But like Ford and FCA, Toyota sees advantages in making a point of announcing the investment (and those 400 new jobs) now.

Why does Toyota want to expand this factory?

Let's be clear: The timing of the announcement may have been driven by politics, but there's a very good business reason for the plan itself. Toyota's U.S. sales fell 1.7% last year, a drop that the company blamed in part on short supplies of hot-selling crossover SUV models, including the popular Highlander.

Toyota's bread and butter in the U.S. has long been its well-regarded Corolla and Camry sedans. They're still well liked, but buyer preferences have been shifting away from sedans and toward the new generation of car-based crossover SUVs. During Toyota's most recent earnings call in November, CFO Takahiko Ijichi acknowledged that the company has been slow to respond to that shift, and said that tight supplies of both the Highlander and smaller RAV4 have limited the company's overall sales growth.

Toyota sold 191,379 Highlanders in the U.S. last year. That was up over 20% from 2015, a good result. But it's possible that its current production lines are maxed out, meaning that it may not be able to build enough Highlanders to generate much growth from current sales levels. (Note that a significant portion of the Highlanders made in Indiana are exported to other markets where SUVs are also in high demand.)

What's next for Toyota

Lentz promised $10 billion in U.S. investments over the next five years. I suspect there will be more announcements in the coming months as Toyota, like its U.S. rivals, looks to build influence with the new administration.

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John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.