Market maker: Toyota looks for rapid growth in Mexico in its bid to become the planet's biggest car company.

For the suits at Japanese auto giant Toyota, it's inconceivable that in Mexico, a country of 100 million people, auto sales are just 1 million vehicles a year. Convinced that the auto-buying public could increase considerably, Toyota has set to work vigorously to cut itself a large slice of the market.

"It's ridiculous to think that a country with a 100 million people that the industry has only a million customers. I see significant potential in the long-term," says Adolfo Hegewish, general director of Toyota Motor Sales Mexico.

Toyota landed in Mexico in April 2002 with moderate forecasts but expectations that these would soon be surpassed. In the first year of operations it sold 3,800 vehicles, starting off with three models--the Camry, Corolla and Matrix--and set up six dealerships.

Two years later, Toyota took off in Mexico, with sales hitting nearly 24,000 vehicles--a market share of 2.1%--on the launch of new models, including the Yaris, MR2 Spyder and Solara, as well as the Sienna minivan, while dealerships rose to 29. "We have grown more than we expected," says Hegewish. "In the first two years we grew by more than 100%."

Yet Toyota, the No. 2 automaker in the world, is still thinking long-term. If things continue at this rate, in nine years the automaker figures it will be a big player in the Mexican market. "By 2015 we want 15% of the market, with the safest cars, and to be the cleanest company," says Hegewish.

Cleanest because, at the global level, part of the Toyota offense is to take market share from U.S. auto giant General Motors globally by way of an investment plan aimed at producing cars that pollute less. Toyota rocked the auto world with a bold early move into hybrids--cars that augment a normal gasoline motor with a battery system--in particular with the Prius, a car capable of getting 25.5 kilometers per liter in city driving.

In 2004, when Katsuaki Watanabe became president of Toyota, he said that the company had enough cash to cover $7 billion in R&D spending that year alone, a luxury in the industry now. General Motors and Ford face grave problems in the United States, closing 26 plants and firing 26,000 workers.

"The Prius is a successful product that sold better than expected, practically worldwide," says Hegewish. "One of the reasons that we have not sold it in Mexico is due to problems with production capacity." In the medium term Toyota expects to have its entire line of products available with optional hybrid engines, but there is no defined launch date for the Mexican market.

In addition, Toyota has a sales ally in Mexico: increasingly available credit. In 2005, credit for consumer durables--including automobiles--grew 13% compared to the previous year, according to the Mexican Association of Banks. "Competitive rates help more people get access to credit which, in turn, helps the industry grow," Hegewish says.

In 2005 Toyota sold 35,318 vehicles, making it the seventh-largest car seller in the country. That figure is still far from the sales of General Motors, traditionally No. 1 in Mexico, at 249,842 vehicles that year. But the Japanese automaker expects a 40% jump to 53,000 vehicles during 2006, although that goal might change given that in the first quarter it increased sales by 92% compared with the same period in 2005.

In August 2004 Toyota started up a production plant on 284 hectares in Tijuana, in northern Mexico near the California border, an investment of $144 million. "In Mexico, the industry continues to grow, and being near the United States offers us an enormous potential," says Hegewish.

The initial goal of the factory was to produce cabs for the Tacoma pickup for its New United Motor Manufacturing plant in California. But in 2005 Toyota began making the truck there for both the United States and Mexico. "The Mexican market was stronger than we had originally thought, so now we're going to continue producing more for it," says Joe da Rosa, general manager of manufacturing for Toyota Motor Manufacturing de Baja California, the Tijuana plant.

In 2005 the Tijuana operation built 426 Tacoma trucks for Mexico and 23,572 for the United States. For now, making trucks in Tijuana is not cheaper than elsewhere. "Today we are very competitive in quality and efficiency, but not on cost. To reduce that we are going to have to increase production volume by much more," says da Rosa.

So Toyota, in January, announced an investment of $30 million to expand the Tijuana factory and increase production capacity to 50,000 Tacoma trucks from 30,000. "This plant has shown that Toyota in Mexico can make better quality products and that we have a very dedicated workforce," says da Rosa.

In terms of labor, Toyota has no complaints. "For me, they are the best I've worked with. If you look at our progress on quality and output, we achieved it very quickly, and that's because of the quality of our people," da Rosa says. According to a Toyota study of its own plants, the Tijuana plant is the best in North America and is ranked among the top 10 worldwide in quality, among Toyota plants. Although da Rosa says he doesn't want to compete with U.S. plants, he does want the Tijuana operation to matter. "If you're not at the head of the herd of elephants, your view is always the same, so you have to be in front," he says. "I want this plant to be in the lead."

Part of the high costs that the factory faces in terms of logistics is high tolls on roads into the United States and the lack of first-class rail service and multimodal transportation in Tijuana, as well as the work schedules of customs agents. "The lack of understanding of the auto industry, because of its complexity, makes getting our products [into the United States] a bit slow and that hurts us," says Robert J. Ried, administrative vice president of the plant.

Locating in Baja California, one of the Mexican states that has most attracted Asian investment, has its advantages. "For Toyota, positioning ourselves here has allowed us to attack big markets in the United States and in Mexico," says Sergio Tagliapietra, economic development chief for the state. Plus, the factory takes advantage of the NAFTA trade accord between Mexico, the United States and Canada. "NAFTA allows us to manufacture and to enjoy the advantages that Mexico offers, with its various free trade agreements, to sell the cars elsewhere and to use the material supply network of the agreement signatories," says Leonardo Sarabia, an external affairs specialist with the Toyota plant.

Beginning three years ago, Mexico has taken in a variety of automotive investments with the expectation of producing 3.5 million vehicles a year by 2010, more than double the current output of 1.6 million, Mexico Economy Secretary Sergio de Alaba told reporters in a press conference last year. Of the $1.20 billion in Japanese investments expected in 2006, most will go toward auto production. At the close of the first quarter of 2006, Japanese car makers, among them Toyota and Jatco--a Nissan unit that makes auto transmissions--projected investments of more than $920 million to expand plants in Baja California and Aguascalientes, respectively; in addition, Suzuki Motor invested in new dealerships.

"Toyota is one of the biggest at the global level and it wasn't in Mexico. With its entry into Mexico, one expected a big push, and it is growing quickly," says Humberto Jasso, general director of heavy industry and high technology at the Mexico Economy Ministry. "In 2005 the company closed the year at 3.1% of the market."

No worries. Despite its surprising advance, competitors are not yet worried. "We have even more of the market, and we took more market share compared to last year," says Louise Goeser, vice president of Ford Motor Company and president and general director of Ford Mexico. No. 3 in the country, Ford closed 2005 with 190,839 vehicles sold.

The industry as a whole is expected to grow a little more than 3% in terms of sales on nearly 1.14 million vehicles sold in 2005, and estimates are that production will increase 25% above the 1.6 million output in 2004. "We are a free market, open to the world," says Cesar Flores Esquivel, executive president of the Mexican Automotive Association. "All of the players have their chance to grow and all will have to come on to the field ready to compete."

MARISOL RUEDA * MEXICO CITY AND TIJUANA

STARTING LINE
Toyota has its work cut out in
Mexico.

2005 sales

General Motors         22%
Nissan                 21%
Ford Motor             17%
Volkswagen             13%
DaimlerChrysler        11%
Honda                   3%
Toyota                  3%
others                 10%

Source: Amia

Note: Table made from pie chart.