Automaker Toyota continues to draw a line in the sand regarding the company’s commitment to domestic manufacturing within Japan. The Wall Street Journal today reported highlights of Toyota’s Annual Meeting held last Friday where President Akio Toyoda repeated his pledge to maintain about 40 percent of global production, namely three million vehicles, domestically within Japan.  He also called on Japan’s political leaders to defend that country’s industrial base, arguing that the Japan-based supply chain has strong relationships and that manufacturing wages are higher than service sector wages. Toyota executives further reiterated that the company will protect profit margins by continuing to cut costs and improve efficiencies.

As we noted in our October commentary, the company plans to slim-down production lines in order to make a profit on more flexible assembly lines and lower volumes. Also noted in our commentary was a report from The Economist indicating that three-quarters of Japanese-owned production facilities external to Japan, were at the same technical level as Japanese domestic plants, thus neutralizing the argument of the Japan “mother-factory” advantage.

Meanwhile, rival Honda produces approximately 28 percent of its vehicles domestically while Nissan produces 25 percent, leaving Toyota the sole large Japanese automotive OEM still inclined to leverage Japan as an export base. Honda announced in December that it would shift a larger portion of global manufacturing capacity into North America over the next few years. If Honda’s full plans are implemented, North America would represent more than 50 percent of Honda’s global production capability, with export volumes in the range of 200,000 to 300,000 vehicles annually.

While Toyota’s ongoing loyalty and commitment to Japan is laudable, the company has embarked on what can only be described as a high risk, potential reward strategy.

On the increased risk side, the global economic climate is very uncertain, and a potential unraveling of the European Union’s currency along with severe recession involving Europe’s economy could have more negative consequences to the currency of Japan. Other risks have to include the increase occurrences of severe earthquakes and natural disasters involving geography surrounding Japan, along with that country’s continuing energy shortfall crisis caused by the shutdown of all the country’s nuclear based power generation facilities. All of these risks can add to increased costs for manufacturing within Japan. Meanwhile, Toyota’s Japanese based OEM competitors have already made their commitments toward a more intensified, external to Japan production presence.

On the reward side, further gains in efficiencies predicated on a flexible manufacturing strategy could add another iteration of the Toyota Production System and subsequently boost Toyota’s longer-tern capabilities to be a more efficient manufacturer.

As noted, the consequent success and/or shortfall of the current strategy are yet to be played out, and bear watching over the coming months.

Bob Ferrari