CINCINNATI - It was a bold move that bowled us all over, but the Texas Two Step could backfire on Toyota Motor Corp.
“The primary risk is that they’re going to lose some talent,” said Ohio State University Management Professor Peter Ward. “Some people just are not going to move to Texas.”
In case you missed it last week, the Japanese automaker shocked the region – not to mention the governors of California and Kentucky – by announcing a headquarters relocation that will move about 4,000 Toyota employees to Plano, Texas by 2017.
Toyota will offer incentive packages to encourage 3,000 employees to move from Torrance, Calif., where Toyota’s sales and marketing headquarters was established 57 years ago. About 1,000 jobs will be relocated to Texas from Toyota’s 18-year-old North American Manufacturing headquarters in Erlanger, Ky., which is also losing 300 engineering jobs to Georgetown, Ky., along with 250 research jobs to Ann Arbor, Mich.
“We understand the risk of losing some talent,” said Mike Goss, vice president of communication for Toyota Engineering & Manufacturing North America Inc. “We want to keep as many of our people as possible. We’ve invested a lot in them. So, we’re putting together nice packages to incentivize our people to go with us.”
Goss wouldn’t give details on the incentive packages, nor would he share what attrition rate human resources consultants have told Toyota to expect.
“I’d be surprised if half the people move,” said Ward, who chairs the management sciences department at Ohio State’s Fisher College of Business. He’s an expert on lean manufacturing, which Toyota pioneered. “Historically, it’s really hard to get people to move from either coast but particularly the west coast to anywhere in the middle of the country, including Texas.”
Dallas area human resources consultant Di Ann Sanchez agreed that a 50 percent attrition rate is likely. Both think more Toyota employees will move from Kentucky than California, but Sanchez argues Toyota is giving itself plenty of time to handle the disruption by staging the relocation over the next three years. That leaves enough time for Toyota transplants to teach new Dallas recruits how to run a car company.
“The risk is in the knowledge transfer because their industry is highly complex. We’re not Detroit, so we don’t have that industry knowledge here. That’s the risk,” said Sanchez, president of DAS HR Consulting, LLC of Grapevine, Texas. “But two years? I don’t see them having a lot of risk if they’ve got that kind of time span.”
Sanchez is proof that Californians can be convinced to leave the golden state. She is a UCLA graduate who left Laguna Beach "kicking and screaming," ultimately settling in Dallas.
"This is a wonderful place," she said. "We have a beautiful cost of living, low taxes. My kids are going to schools that rank in the top 200 nationally. I think the the ones who are going to come are those with young families who want to live in a nice, big home for $250,000 and just watch their money go a lot further."
The National Center for Policy Analysis said Toyota workers who move to Texas could save thousands of dollars annually in taxes, according to its state tax calculator . A 30-year-old single employee earning $100,000 a year, for example, would save $2,700 annually by moving from California to Texas and $1,900 moving from Kentucky to Texas. The median price of homes listed for sale in Dallas is $245,000, compared to $117,000 in Cincinnati and $625,000 in Torrance, Calif., according to www.zillow.com .
All of that means Toyota can pay new employees less in the Lone Star State.
“They’re trading a high-priced labor market in California for a much cheaper market in Texas,” Ward said.
Goss said cost savings weren’t the primary motivator for Toyota. Neither was the $40 million incentive package offered by Texas or the direct flights to Japan that Dallas offers but CVG Airport in Hebron does not.
“It truly was a discussion around a neutral location where we could bring our companies together to start over,” said Goss. “We think that getting in the same building with a lot of these administrative functions will allow us to communicate better and collaborate better.”
Toyota wanted a neutral site for its combined headquarters because it didn’t want the corporate culture of its sales, manufacturing, engineering or research divisions to dominate the combined entity. And it wants a combined entity because it wants to be “a company that pleases its customers very well,” said Goss. “When you think about it, it’s kind of silly to have these different organizations that need to collaborate with each other in different locations. Ford and GM has sales and manufacturing in Detroit. Even Nissan consolidated sales and manufacturing in Tennessee.”
Ward said communication among divisions has been a weakness for Toyota, one that contributed to a huge crisis in 2009 when engineering concerns over sudden acceleration problems weren’t heeded in California and Japan. Ultimately,
Toyota was forced to recall 10 million vehicles. In March, it reached a $1.2 billion settlement with the U.S. government in a deferred prosecution agreement that ended a four-year criminal investigation into whether Toyota misled U.S. consumers.
“Auto companies all have silos,” said Ward. “If anything, they’re more siloed because of the geographic separation. Despite all the amazing things that we do with electronic communication today, face to face is still very effective, particularly with regards to nuanced communication. This is an opportunity for them to get stronger in that area.”
Goss confirmed that internal communication was a problem in 2009, but added: “This is not a reaction to the recall. The poor communication and information sharing between affiliates has since been smoothed out. We made organizational changes to get that worked out. This is kind of a bigger evolutionary step to get all of our organizations on the same page.”
Whether the strategy works could largely depend on how much talent leaves the company in the next three years and how well the Dallas labor market supplies new talent to fill the void.
"It may be they want to clean house a little bit," Ward said. "When they say new culture, part of the deal with the new culture is going to be new people."
Goss said that is definitely not the goal. He said the company's ideal retention rate is 100 percent. In addition to the relocation packages, Toyota is offering retention incentives to keep employees from leaving for new jobs before the Erlanger facility is ready to close.
“I plan to work in Dallas,” said Goss. “The building is just full of folks talking to each other in one-on-one conversations. We think that’s a good thing for people to talk to each other and sort this all out. It was surprising news for most of the people in the building. They were stoic. They asked very good questions. Now, I’m sensing a kind of, ‘OK, let’s figure this out and get it done attitude.’ I know for a fact that they overwhelmingly agree that this is the right business decision. I know because we asked them. And they responded overwhelmingly that they understand the decision and agree with it.”