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Toyota
Motor Corporation – A Success Story A Study by Economist Intelligence Unit Overview Toyota Motor Corporation embodies the success of Japanese auto makers in the global market. A perennial leader in customer satisfaction, the company has lent its name to the Toyota Production System, a manufacturing process which it credits with reducing production costs, eliminating defects and improving the overall quality of its vehicles. Toyota also pioneered the hybrid petrol/electric technology, and has been reaping the rewards in an environment of record-high petroleum prices. The company's success is all the more impressive because the Japanese producers are latecomers in the auto industry. Kiichiro Toyoda didn't found Toyota Motor until 1937, when the company grew out of the textile firm set up by his father two decades earlier. Headquartered in Toyota City in central Japan, the company still maintains family continuity. Akio Toyoda, Kiichiro's grandson, is the company's executive vice president, well positioned to assume the helm in the future.
However, it is Katsuaki Watanabe, appointed president in 2005, who will lead Toyota to the coveted No. 1 spot among world's automakers, overtaking General Motors of the US. Toyota sold over 8mn vehicles in fiscal 2006 (year-end March 31st), and will continue to grow sales this year while GM is retrenching. In a highly symbolic transaction, Toyota bought GM's 8.7% stake in Fuji Heavy Industries, a Japanese maker of Subaru cars, in 2005. Toyota has long been the world's largest carmaker in terms of market capitalisation. At over USD 200bn, it is nearly 10 times as large as GM and Ford combined. Market position Toyota's main line of business is the design, production and sales of passenger cars and trucks. It markets its cars under the Toyota, Lexus and (in the US) Scion marques. Toyota's automotive operations account for over 90% of revenues - unlike at most of the big Detroit firms - with financial services and other businesses contributing only a small portion. During the last fiscal year, Toyota continued to benefit from strong sales and market share growth in the North American market, which accounts for around 30% of its global sales. The company sold 2.6mn vehicles in the US, marking yet another year of two-digit growth. It benefited from strong sales of new models such as the Avalon and Tacoma, as well as a rush to buy its Prius hybrid in an environment of rising gasoline prices. Its market share in the US measured 15.2% in April, neck-to-neck with Chrysler, while the dominance of the two Detroit automakers continues to dwindle. Nevertheless, intense competition and a focus on sales incentives have been pushing down Toyota's profit margins in the US. In Japan, which accounts for 30% of the carmaker's sales, operating margins are still robust at around 8.2%. Unfortunately, the company's Japanese sales have been declining, falling by 17,000 in the last fiscal year to 2.4mn. Still, Toyota has been the world's most profitable automaker, as well as profitability record-holder among Japanese companies. It broke through the ¥20,000bn barrier in revenues for the first time in fiscal 2006, while net income increased to a record for the fourth straight year. After a flat fiscal 2005, profits rocketed 17%, to ¥1,370bn (USD12.3bn). Corporate strategy Toyota's top management has periodically talked about extending a helping hand to GM and Ford, in particular by raising prices in the US market. But the company's ambition is to make Toyota the world's largest automotive company. The firm intends to continue gaining market share, to reach 15% of the global market over the next decade, and it continues to be the largest investor in the industry. Its capital expenditures are slated to reach ¥1,550bn in the current fiscal year. The sixth-generation Camry, the company's flagship vehicle and the best seller in the US market in eight of the past nine years, exemplifies Toyota's global reach. Its first example of a globally designed vehicle, 2007 Camry is scheduled to be produced at two US plants, in Georgetown, Kentucky and at the former Subaru plant in Lafayette, Indiana, as well as in Japan, Taiwan, Thailand, Australia, China, Russia and Vietnam. North America remains a key market, where Toyota plans to open its sixth plant in the second half of 2006, which will be located in Texas. Another plant will open in Canada in 2008. Toyota has lagged behind other leading automakers in China, which has emerged as the world's second largest car market. However, it is working toward a goal of raising its vehicle sales in China to 1mn by 2010. As part of this strategy, it intends to triple its local production to around 900,000 vehicles. Toyota maintains its lead by watching its costs, designing attractive new vehicles which consumers actually want, providing high quality products and maintaining production efficiency. Its investment in fuel-saving technology has paid off with the success of its Prius petrol/electric midsize. The company contends that the car gets as much as 60 miles per gallon, though that is probably only true in city centres. In 2006, a Camry hybrid has been introduced. Strategic Risks/Opportunities Toyota's spectacular profitability and a stellar AAA credit rating underpin its drive for the global No.1 position. However, conditions may start to get more difficult. The weakening of the yen during the 2006 fiscal year contributed nearly 20% to company's operating income, as dollar-denominated sales translated into higher yen revenues. The yen has strengthened in early 2006, and the US dollar is likely to be undermined further in the second half. This, combined with tougher competition and rising prices of oil and non-oil commodities, has prompted the management to forecast a 4.5% decline in net profit in the current fiscal year. Toyota will aim to maintain an operating profit-to-sales ratio of about 9%, in line with an 8.9% margin in fiscal 2006. However, some analysts are starting to question its ability to post consistently high revenue growth from an increasing higher base and to achieve similarly high returns on its massive investment. Competition has been getting tougher, as everyone is gunning for the leader. The global auto industry is still suffering from overcapacity, and the pace of consolidation has slowed. At home, Toyota is facing a resurgent Nissan; Chrysler is making a comeback in North America; and Fiat is doing the same in Europe. The Detroit Big Two are also determined to sort out their problems in coming years, giving Toyota a run for its money. |
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