July 10, 2008 / 2:44 PM / in 11 years

CORRECTED - UPDATE 2-Toyota to build Prius in U.S., slash truck output

Corrects date in dateline to July 10.

(Adds comment from dealer, analyst, background on plant costs and capacity, bylines)

By Soyoung Kim and Poornima Gupta

DETROIT, July 10 (Reuters) - Toyota Motor Corp (7203.T)(TM.N) said on Thursday it would start building its Prius hybrid in the United States in 2010 and suspend production of slow-selling big trucks for three months in a sharp reversal of strategy forced by slumping sales and high gas prices.

Toyota, which has faced widening shortages of fuel- efficient small cars in recent months, will start building its top-selling hybrid at a new Mississippi plant, originally scheduled to produce the Highlander sport utility vehicle.

The unusual and costly moves by Toyota, now the global auto sales leader, underscored the pressure across the industry as major automakers scuttle truck production and take steps to ramp up output of passenger cars to keep up with a dramatic shift in U.S. buying patterns.

Hit by an industry-wide slump in trucks and SUVs, Toyota posted a 6 percent drop in first-half sales in in the United States, its single-biggest market.

To clear inventory, Toyota said it would suspend production of its Sequoia SUV and redesigned Tundra pickup truck for three months beginning in early August.

At the same time, Toyota said it would work to retool a plant still under construction near Tupelo, Mississippi to build the new Prius, starting in late 2010. All of the Prius models now sold in the United States are built at a dedicated assembly plant in Japan.

The Tundra represents Toyota’s attempt to break into the market for full-size pickup trucks, still dominated by Detroit automakers. The Japanese automaker had called plans for its expanded production in the United States its most important vehicle launch ever.

But Toyota, like its American rivals led by General Motors Corp (GM.N), overestimated demand for the heavy work trucks that had seen a boom over the past decade when gas was cheaper and the U.S. housing market was embarking on its own rally.

Toyota said it would stop making the Tundra pickup truck at its Princeton, Indiana, plant and concentrate production at the $1.2 billion plant it opened in San Antonio in early 2007.

Those steps will cut Toyota’s Tundra production capacity by a third to 200,000 units annually, a concession that the pickup truck market is not going to bounce back.

Jeff Liker, University of Michigan engineering professor and author of “The Toyota Way” said Toyota had made a rare, out-sized mistake by betting big on the Tundra.

“That was more bold and ambitious than I normally expect from Toyota and more risky than they are used to,” he said. “What they are doing now with the adjustment is more traditional Toyota.”


By moving Prius production to the United States, Toyota raised the stakes for a showdown with GM on the next-generation of electric vehicles.

GM is scheduled to begin production of its all-electric Chevrolet Volt in a Detroit plant in late 2010. The U.S. automaker is looking for the rechargeable hybrid to trump the Prius as the green car of choice for consumers looking to reduce gas consumption and make an environmental statement.

For its part, Toyota will show off its next-generation Prius at January’s Detroit auto show amid expectations it will broaden its hybrid line-up under the Prius brand.

But in the meantime, it has had to contend with falling sales and Prius shortages.

U.S. sales of the hybrid fell 26 percent in June as dealers simply ran out of the cars. Buyers face a six-month wait for new orders of the hybrid, credited with creating a kind of environmentally friendly cachet for the Japanese automaker.

“It’s tremendous news. We are very excited,” said John McEleney, a Toyota dealer in Clinton, Iowa.

“We’ve been sold out for five months and we have nothing to show customers in showrooms,” he said. “Prius is very popular and the brand is going to become stronger and stronger.”

Toyota’s Tupelo plant, the company’s eighth assembly plant in North America, had been budgeted at $1.3 billion with capacity to produce 150,000 vehicles per year.

Toyota announced plans for the plant in early 2007 after winning $296 million in tax incentives from Mississippi.

Liker said Toyota’s supplier would have to scramble to adjust to the radical shift in its production plans, which could cost the automaker billions of dollars.

“This is going to be painful for their suppliers, as well who were tooling up in Mississippi to make Highlander parts,” he said. (Reporting by Poornima Gupta and Soyoung Kim; Editing by Steve Orlofsky and Andre Grenon)

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