A Tow Hold in the Market

An industry characterized by a struggling economy and cash-strapped customers presents a daunting test for companies looking to push a product into a new marketplace.
Toyota Industrial Equipment Manufacturing Inc. has found itself in such a precarious position. The company announced in March 2008 that it would add production of its diesel baggage and cargo tow tractor to its Columbus, Ind., production facility in a push to further infiltrate the U.S. market.

Since the announcement, the market has seen a dramatic shift in its operations. Capital availability has become an elusive concept due to the financial hardship of the airlines and the search for alternative-fueled equipment has become increasingly important.

Toyota has found itself in a challenging situation as it strives to become formidable competition among the established North American tow tractor manufacturers.

The company has relied upon its philosophy of limited production and the reputation of its brand name to grow its share of the market.

A New Market
Toyota has been in the business of producing cargo and baggage tow tractors since 1979 in Japan, when the product line was developed to serve the Asian GSE market. The tow tractor line was made available to North American customers in 1986 on a special-order basis.

Its tractor product has since evolved into two models: diesel and electric. The diesel model features a 2.4 liter Toyota 1DZ-III diesel engine and a 5,500 pound drawbar pull capacity.

Having gained a solid customer base with United Airlines and FedEx emerging as the largest domestic customers, the company decided that added production would present a local appeal to other potential buyers.

“Our basic idea is that we are interested in producing that product in the markets where it is being used throughout the world, so we have manufacturing facilities located throughout the world to be able to manufacture locally as best suited for that individual marketplace,” says Tom Lego, senior manager, purchasing and sales administration at Toyota Industrial Equipment Manufacturing.

To accommodate the production of the diesel model in the United States, the company added 20,000 square feet to its already 850,000 square-foot U.S. manufacturing facility, which has been in use to produce the company’s line of lift trucks.

The company completed manufacture of the first tow tractor in the United States in May and moved into production in July 2008. Following the business philosophy of “less is more” when it comes to the manufacture of products in a new marketplace, Toyota has kept production on an order-only basis.

“The reason for that is so we can have a better handle on the inventory in the field, because we’re trying to run a very level production from the factory, and we don’t want to flood the field with orders that are not destined for retail users,” Scott Redelman, manager, production control and business system planning at TIEM. “That way we can more aptly see what the actual market conditions are. We feel like our lead time is short enough that we can do that and kind of go with the flow with the surges on the market.”

The market has seen a dramatic downturn in demand for new GSE, which the company has seen firsthand. “I think if you look at the overall U.S. and world economy, I think that we’ve certainly seen some major changes during the course of this year and the tow tractor is not any different than any other product that is being offered right now in that it’s feeling the tough economy,” Lego says.

The combination of small-scale production and the lack of market demand has produced modest, yet expected results for the company. Since the tractor was brought over for manufacture in the U.S., the company has received orders for less than 100 tractors and production of the product is a very small percentage of the total manufacturing activity at its Indiana facility.

“We’re trying to do things to make sure that we’re producing good quality and controlling our manufacturing costs and just doing all the right things here irrespective of what is taking place in the market, so that we’re producing the best product possible at the lowest cost,” says Tom DePalma, senior manager quality assurance at TIEM.

“Toyota has developed a very fine reputation for only producing good quality product,” Lego says. “Certainly we understand that we have a reputation to uphold with this product.”

Domestic Perspective
The Toyota brand name was what allowed the product to gain a strong domestic customer on the part of United Airlines.

“I think No. 1, anything Toyota — reliability and quality — speaks for itself, and I think we’ve found a similar level of reliability in their cargo tractors that you’d find in their Camrys,” Bill Kasdorf says, manager of ground equipment and facilities planning at United Airlines.

United Airlines began purchasing the Toyota cargo tractors in the late ’80s. Having acquired the pieces of equipment sporadically through the years, the Toyota product has grown to about 1,700 units, or 80 percent of United’s entire cargo tractor fleet.

“From a user perspective, what we hear is that they are highly maneuverable, very good turning radiuses. The visibility also is very good,” he says.

The airline has also found the maintenance requirements to be a draw. “Basically if you look at the reliability, the simplicity from a technical standpoint as far as the actual maintenance on them, and combine those two, you really have a piece of equipment that the mechanics certainly feel is the best quality,” says Ray Ames, manager of line maintenance at 85 United stations. “When you factor that against the total cost of ownership and you measure the cost per hour of the vehicle, you end up really identifying the best value for the company.”

Environmental Consideration
The “best value” for many airlines has expanded in scope to include environmentally friendly equipment.

United began purchasing the electric version of the Toyota tow tractor, and it has grown to a fifth of its Toyota tractor fleet.

Kasdorf says the airline will aggressively pursue alternative-fueled GSE, including electric, to add to its fleet. “We are moving from the compliance side to the preservation side,” he says. “Prior to preservation, we were focused on complying and what we’re trying to do now is beyond the compliance and do the right thing from an environmentally sound perspective.”

Toyota said it is aware of the current market shift toward exploring alternatives, and said that an increased interest in its alternative-fueled GSE could mean a change in its production strategy.

“I think the biggest challenge for us is going to be going forward hitting that market as far as what the specific fuel types and requirements from the specific customer are, because that is changing so fast,” Redelman says. “When we first brought this over, the market study that we received told us that diesel is the way to go and this was the market we should start with and since then there have been requests to investigate gasoline-powered or battery, so as alternative fuel sources are developed and things change within that shift in the country, I think that could determine a different change in direction for our production.”

Kasdorf says United has continued to assess its fleet and develop a plan for purchasing equipment. “I think going forward our strategies will become much more fleet-based and environmentally based … to think much more about commonality, environmental and focus on getting the fleets more aligned,” he says.

Though when those spending decisions will be put into play has yet to be determined. “We’re kind of holding to see what does happen,” he says. “But I will say this: should capital become available, we definitely know what we would do with it.”

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