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The cross-badging arrangement appears to favour Toyota.


Japanese automaker Toyota (NYSE:TM) is the world's largest automaker with over 7.567 million vehicles in FY2009.[1] Toyota's sales are concentrated in Japan and North America but have seen rapid growth in Asia and South America.

Sales of the company's three automotive brands: Toyota, Lexus, and Scion. As the global economy slowed in 2008 and 2009, profits fell. From FY 2008 to FY 2009, revenues fell 23%, to $209 billion, and net income fell 125%, to -$4.4 billion.[2] These results are more severe than most other automakers because Toyota aggressively expanded production capacity over the past decade well ahead of expected demand.[3] Profits on exported vehicles made in Japan have also been hit by a strengthening Japanese yen.[4]

Toyota has a near choke-hold on the US hybrid/low-emissions vehicles market thanks to the redesigned Prius. As the American Big Three struggle to meet the 35 mpg mandate by 2020, Toyota has a head start. In late 2009 and early 2010, however, Toyota initiated two separate but related recalls to several vehicle types including the 2010 Prius that were determined by the U.S. National Highway Traffic Safety Administration as experiencing faulty acceleration.[5] The second recall on January 21, 2010 determined that the previously assumed driver's floor mat issue was not to be blamed; rather, a more serious issue regarding the "sticking accelerator pedal" was at cause.[6] Consequently, the total worldwide number of cars recalled by Toyota stand at 9 million vehicles, projecting to a cost that will exceed $3 billion USD worldwide.[7] As of February 2010, over 30 lawsuits have been filed against Toyota regarding accelerator problems.[8]

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The Prius hybrid car will face expiring government subsidies within the next year or so, leaving Toyota exposed to a possible dent in its hybrid sales lead.

Company Overview

In FY2009, Toyota lost $4.4 billion on sales of 7.56 million vehicles, 15% fewer sales than in 2008.[2] Toyota had about 64 production facilities worldwide, in Australia, China, Taiwan, India, Indonesia, Malaysia, Pakistan, Philippines, Thailand, Vietnam, Bangladesh, Kenya, South Africa, Russia, the U.K., Turkey, Portugal, Poland, France, Czech Republic, Venezuela, Colombia, Argentina, Brazil, Mexico, the U.S., Canada, and obviously Japan.[9] Despite this apparent diversity, 60% of production still occurs in Japan, 15% in North America, 11% in Asia, and 8% in Europe.[10]

Q2 FY2010 Summary

Toyota beat analyst estimates when it posted a net profit of 21.8 billion yen in the second quarter of FY2010, which was 84% down from second quarter FY2009 earnings.[11] Toyota attributed its profit to reduced provisions for its car leasing business. Like most of Toyota's rivals, Toyota also benefited from government sponsored Cash for clunkers programs.

Despite the unexpected profit, however, Toyota has been cutting costs to meet up analyst expectations. For example, Toyota withdrew from participating in Formula One racing events after 2009.[12] Furthermore, Toyota is still under the issue of excessive production capacity, which has squeezed Toyota's profitability. As a result, Toyota had decided to close an unprofitable California assembly plant.[13] Toyota continues to rely on its lineup of fuel-efficient small vehicles to sustain its earnings, such as its Prius.

Q3 FY2010 Summary

Toyota posted $1.7 million USD profit for the third quarter, and raised its annual forecast for its fiscal year 2010 ending March 31.[14] These boosts in earnings were sustained by increased sales volume and cost reduction efforts throughout FY2010. Toyota's reported third-quarter net income was 153.2 billion yen, much higher than the loss of 164.7 billion yen realized the third quarter of last fiscal year 2009.[15] Sales also totaled 5.3 trillion yen, up 10.2% from 4.8 trillion yen from the third quarter last fiscal year.[16]

As testament to Toyota's increased sales and cost cutting measures, operating income for all regions went up this quarter. For example, in Japan, operating income for Toyota increased by 198.1 billion yen compared to 33.9 billion yen third quarter last fiscal year.[17] In North America, the figure was 79.7 billion yen. Toyota posted a total of 2.07 million units sold for the third quarter, a growth of 227,000 units in vehicle sales compared to the third quarter of FY2009.[18]

Q4 and Full Year FY2010 Summary

Toyota finished the fiscal year with a net profit of 209.4 billion yen despite the continuing global economic weakness and severe recalls.[19] Toyota finished Q4 FY2010 earnings also in the black with 112 billion yen ($1.2 billion) compared with a 766 billion yen loss the year prior.[20]

Toyota attributes cost-saving efforts and good performance in emerging markets for its move into profitability; however, sales overall for the fiscal year declined 8% to 18.95 trillion yen and the number of cars sold shrank 4% to 7.237 million.[21] Other reasons that helped fourth-quarter profit include aggressive sales incentives that drew US customers back to its popular Prius hybrid and Corolla sedans. This allowed fourth quarter revenues to jump to $57 billion from around $40 billion one year prior.[22]

Toyota continues to rely on its Prius hybrid and small vehicles to drive profits into FY2011. However, after recalling more than 8 million cars worldwide for faulty gas pedals, braking software glitches, faulty floor mats, and other defects, Toyota faces more than 300 state and federal lawsuits in the US alone.[23] Despite the $16.4 million fine that Toyota has paid, the NHTSA could punish another fine for the steering issue. In total, Toyota has spent $1.1 billion on recall expenses, and lost an estimated $800 million in sales in association with the recalls; despite this, Toyota projects the annual profit to rise 48% for fiscal 2011.[24]

Business Segments

Business is divided into three main divisions:

Automobiles (91% of net sales in FY2009)

The Auto segment includes the Toyota, Lexus, and Scion brands.[25]

Toyota follows a pyramid strategy, selling large numbers of low-cost models (Corolla, Camry) and smaller numbers of higher-cost models (Tacoma pickup truck, Lexus luxury vehicles). This product breakdown reflects Toyota's strategy of segmenting the market into wealth levels and selling accordingly. Below are several of Toyota's most important models:

  • Tundra: Toyota's newest pickup truck and a key piece of Toyota's North American strategy, the Tundra is intended to steal truck share from US competitors GM and Ford. Tundra sales started off strong, but recent market pressures (real estate and fuel costs) have worked to dramatically decrease demand. Despite this through a single plant Texas plant solely responsible for the Tundra in North America.[26] Toyota continues to invest in the product, hopeful that by adding a diesel variant and a larger heavy duty version of the truck they can continue to increase market share.[27]
  • Lexus: Toyota's luxury division, Lexus has been focused on North America since its 1989 launch. In fiscal 2009, Toyota sold approximately 378,000 units, a decrease of 132,000 units from 510,000 units in FY2008.[28] Now Toyota is aggressively expanding the Lexus brand into Japanese markets. As a luxury brand, Lexus's success is particularly important to Toyota--each Lexus sold yields significantly more profit for the company than do mass-market counterparts.
  • Prius: The Prius is Toyota's first hybrid line. A Lexus hybrid is just now entering markets, but Prius remains the hybrid standard for Toyota as well as the rest of the industry. This is due in part to Toyota's role as one of the first car makers to develop hybrid technology. However, Toyota now leases its technology to Ford and faces hybrid competition from Honda. With government subsidies for hybrid vehicles running out, Toyota may find itself depending on the innate popularity of the Prius to maintain sales. Largely because of the Prius, Toyota vehicles represent 73% of the hybrids sold in the U.S.[29]

Financial Services (5.34% of net sales in FY2009)

Toyota's financial arm provides various credit services to customers.[30]

Other (3.16% of net sales in FY2009)

Toyota's other segment includes revenue from investments as far-flung as housing, aerospace[31], marine operations, biotechnology, and telecommunications.[32]

Emerging Economies

Growth in car sales in the developed economies of the United States, Japan, and Western Europe is expected to remain slow as the GDPs of developed economies grows more slowly and the automotive needs of most consumers are already satisfied. This means that major automakers like Toyota will increasingly look to emerging markets to produce sales growth, especially Brazil, Russia, India and China - BRIC countries. Toyota tapped demand in emerging markets earlier than most other automakers and has thus developed numerous manufacturing facilities, distribution networks, and brand reputation.

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FY2009 Toyota Consolidated Vehicle Sales by Region.[33]

In October 2009, Toyota announced that it would begin producing car engines in India to take advantage of the country's low-cost manufacturing costs. TM will produce these engines through Toyota Kirloskar, a division under Toyota which is 89% owned by TM and 11% owned by India's Kirloskar group.[34] The reason for this change is Toyota's need to increase its market presence in India's auto industry, where it falls behind companies such as Suzuki Motor Corp., General Motor Co. and Hyundai Motor Co.[34] Toyota plans to introduce its maiden small car in India by December 2010, which will be produced by Toyota's upcoming 100,000 unit-a-year plant in its factory on the outskirts of Bangalore.[35]

Key Trends and Forces

Within Japan

  • Retiring customers: A third of Toyota’s sales are concentrated in Japan, where the population is aging: 10% of the population was 65 or older in 1990, and by 2006 that number had doubled. Aging populations tend to save less, and to spend more on luxury items, such as Lexus vehicles.
  • Health Insurance: Much of Toyota's production takes place in Japan, including production set for export. Japan provides national health insurance. Although Toyota has to pay for some of its Japanese employees' insurance in the form of higher taxes, American automakers pay for the entirety of their employees' insurance.

Within U.S.

Several major trends in the United States economy bear upon Toyota's business:

  • Demand for green technology: Gas prices continue to rise, and so does the demand for hybrids; so much so that in 2006, dealerships often sold out of Priuses as soon as they arrived on the lot. In December of 2007, the American government passed a bill that mandates 35 mpg for all passenger cars, trucks, and SUVs sold in the U.S. Toyota already has a leg up in meeting these standards, which should simultaneously increase demand for fuel efficient vehicles.
  • Hybrid Legislation: In the U.S., government agencies on the federal, state, and municipal levels have enacted legislation encouraging the adoption of hybrid technology. Under current laws, people who buy a hybrid vehicle can qualify for a federal income tax credit of up to $3,400. Once a manufacturer sells 60,000 hybrid vehicles, however, the rebate will be reduced to 50% of the original amount for the following two quarters, 25% of the original amount for the two quarters after that, and 0% from then on. Toyota has sold over 1 million hybrid vehicles. This could allow competitors who entered the hybrid market late to catch up with Toyota, as many of their rebates have yet to expire.


  • Global commodity price trends are integral to Toyota's profitability because they determine both the cost of making a car. Also, gasoline prices determine the long term ownership cost of cars to consumers.
  • Steel: One of the main ingredients in cars is steel and Toyota cannot use less steel to reduce its costs, unlike labor or almost any other input into car production.
  • Aluminum is also a significant production input, accounting for around 300 pounds of a new car's weight.
  • Oil: Although oil prices dropped dramatically in 2009, it has risen back up to its $85/barrel levels. Consequently, the cost of gasoline doubled inflating the day-to-day cost of car ownership. Since consumers buy cars only infrequently, rising oil prices have only a limited impact on year-to-year car sales, but over time they cut into the industry's sales, and force companies to design more fuel-efficient fleets. Although oil prices have since moderated they will likely remain definitive in the future as the global economy recovers.

A String of Recalls is Bound to Hurt Toyota's Short Term Profitability and Long Term Image

Several separate recalls on Toyota's most profitable product lines such as the Toyota Camry, Corolla, Prius and even some Lexus vehicles have hurt Toyota's image of marketing itself as the economic yet reliable brand. Toyota realized as early as 2007 that several vehicles from different product lines experienced unintended acceleration, but suspected that it was due to an "all-weather" floor mat issue.[36] In November 2009, the company recalled 3.8 million vehicles on the same line.[37] However, it was apparent by early 2010 that the issue included not a problem with the floor mat, but rather an underlying accelerator problem. The subsequent events included mass media coverage, NHTSA scrutiny, and US congressional hearings.[38]

In the short-term, the recent recall crisis is estimated to cost Toyota over $3 billion USD worldwide.[39] As of February 2010, over 30 lawsuits have been filed against Toyota, adding onto further litigation costs. A total of 9 million vehicles have been recalled by Toyota worldwide, and each US Toyota dealer is estimated to lose approximately $2 million a month in revenue totaling $2.47 billion USD around the country.[40]

In the long-term, the recent recall crisis has hurt Toyota's brand image, both for its Toyota and Lexus lines. A day after Toyota's announcement of recalls, several of Toyota's competitors snatched the opportunity to steal market share away. Chrysler offered a $1000 trade-in cash for owners who traded in a Toyota Tundra, Tacoma, or Sienna for a brand new Chrysler, Dodge, or Jeep Vehicle.[41] Ford offered $1000 rebates to owners of Toyota, Lexus, and Scion vehicles for new Ford vehicles. Hyundai offered $1000 for Toyota owners who traded in their vehicles for either a Sonata, Elantra, or Elantra Touring.[42] Because the average length of car ownership in the US is approximately 6 years, competitors can not only take these old Toyota owners away, but also capitalize on subsequent maintenance costs.

On April 18, 2010 another recall from Toyota, this time unrelated to the Prius issue, made Toyota recall 600,000 Sienna minivans, covering all Siennas from 1998 to 2010 with a two-wheel drive. Officials say that road salt may have cased the spare tire carrier cable to rust and break, thereby allowing the spare tire to fall off.[43]

Fluctuating Exchange Rates Play an Important Role in Toyota's Revenue Recognition

As a Japanese company, Toyota's profits are recorded in Japanese yen, but its sales are denominated in euros, dollars, pounds, Chinese yuan, and many other currencies. Fluctuations in the exchange rate between these currencies and the yen can lead to fluctuations in Toyota's profits; these fluctuations can be very large. Had the dollar-yen exchange rate been 1% lower last year (say 118.5 instead of 120), Toyota's profits would have fallen by 5 billion yen ($42 million). Toyota hedges its exchange rate risk by arranging currency swaps and purchasing futures, but these operations are costly and threaten to cut into the bottom line. In the long run, these effects are even more exacerbated: as the dollar depreciates against the yen, American sales are worth less to Toyota, and Toyotas are more expensive to consumers, so they buy fewer. Thus profit per revenue and absolute revenue both fall from depreciating exchange rates. While Toyota can hedge out the risk to its profit margins, it cannot easily manage the risk from falling demand. Exchange rates have become a sensitive subject among US legislators, who allege that Japan has kept the yen undervalued to stimulate sales.[44]

Japanese Business Culture and Foreign Shareholders often Result in Conflicts of Interests

Distinct from norms of Western business culture, major Japanese firms have long practiced extensive cross-shareholding.[45] This process serves to both smooth domestic business relations, while at the same time preventing widespread foreign acquisition of Japanese businesses. This has several potential pitfalls for common shareholders. First, it means that a company can experience significant write downs due to stock declines of other companies it owns, even when business is otherwise healthy. Second, accumulation of such ownership stakes means that capital is being diverted from other often more profitable tasks, such as reinvestment in the automaking business or dividends to shareholders. Third, cross-shareholding makes it more difficult for shareholders to hold management accountable, as the managers at other major firms who own the firm in question, can and frequently do run interference for their counterparts.[46] Below are a few examples of Toyota's cross-shareholding:

Toyota Plans to Gain an Edge over the Auto Industry through Fuel Efficient cars

While Toyota was traditionally known for its smaller more fuel efficient vehicles, the company has since diversified into both luxury vehicles and large trucks and SUVs. Toyota is the largest seller of hybrid vehicles in the world and the first to commercially mass-produce and sell such vehicles, the best example being the Toyota Prius. It is important to note that while most automakers lose money on the sale of every hybrid, Toyota actually makes money on every Prius sale due to its high production volume.[47] The popular minivan Toyota Sienna is scheduled to join the hybrid lineup by 2010, and by 2020 Toyota plans to offer its entire lineup of cars, trucks, and SUVs with a Hybrid Synergy Drive option.[48]

After General Motors announced it would produce the Chevrolet Volt plug-in hybrid, Toyota announced that it, too, would make one.[49] Toyota is currently testing its "Toyota Plug-in HV" in Japan, the United States, and Europe. Like GM's Volt, it uses a lithium-ion battery pack. The PHEV (plug-in hybrid electric vehicle) could have a lower environmental impact than existing hybrids.[50][51]


Toyota has a large market share in the United States and Japan, but a smaller presence in Europe. Toyota vehicles such as the Hilux and Hiace van are also well regarded in developing markets for their reliability. Due to its Daihatsu subsidiary it has significant market shares in several fast-growing Southeast Asian countries.

The size and diversity of Toyota's product offering means the company competes with all the world's major car manufacturers for all passenger car niches. In addition to these established competitors, Toyota faces a number of regional car companies in developing markets, such as Russia, China, or Indian, that it seeks to penetrate. The problem is that Toyota's cars are often too expensive for these developing markets, while companies like Tata Motors (TTM) or produce considerably cheaper cars that are affordable to a wider phase of the populace.

Dollar figures in billions
Dollar figures in billions
Dollar figures in billions


  1. Toyota Motors 2010 Form 10-K, Page 5
  2. 2.0 2.1 Toyota Motors 2010 Form 10-K, Page 1
  3. Reuters: Toyota vulnerable after chasing fast growth
  4. Reuters: Toyota vulnerable after chasing fast growth
  5. Toyota Resale Values Take Another Hit
  6. 2010 Prius brake issues prompt new Toyota recall
  7. Toyota Recall Cost to Exceed $2 Billion, Lawyers Say (Update2)
  8. Toyota Wrongful Death Lawsuit Filed Over Defective Gas Pedal
  9. Toyota assembly and parts plants
  10. Toyota 2008 Annual Report: Performance Overview
  11. Toyota returns to the black in second quarter
  12. 2nd UPDATE:Toyota Posts 1st Profit In Year, Sees Slow Recovery
  13. Toyota posts quarterly profit, cuts loss forecast for year
  14. Toyota quarterly profit tops forecasts
  15. [Toyota quarterly profit tops forecasts Toyota Motor Corp. F3Q10 (Qtr End 12/31/09) Earnings Call Transcript]
  16. Toyota Posts Q3 Profit; Lifts Annual View Despite Recall Woes - Update
  17. Toyota Posts Q3 Profit; Lifts Annual View Despite Recall Woes - Update
  18. Recalls hang over Toyota as it reports earnings
  19. Toyota quarterly profit $1.2 bln as sales recover
  20. Toyota Registers Surprise Profit
  21. Toyota Ends Tough Year with Bumper Profits
  22. Toyota returns to profit but remains cautious
  23. Despite recalls, Toyota manages $1.2B profit
  24. Toyota posts profit during recall quarter
  25. Toyota 2008 Annual Report: Business Overview
  26. Toyota Motors 2009 Form 10-K, Page 23
  27. Tundra Headquarters
  28. Toyota Motors 2009 Form 10-K, Page 11
  29. Vehicle Production Rises, But Few Cars Are "Green"
  30. Toyota 2008 Annual Report: Business Overview
  31. Toyota to sink $67.2 mln in Mitsubishi passenger jet, China Economic Net, May 23, 2008
  32. Toyota 2008 Annual Report: Business Overview
  33. Toyota Motors 2010 Form 10-K, Page 11
  34. 34.0 34.1 Toyota Plans to Make Car Engines in India
  35. Driving Ambition: India's Emergence as a Hub for Compact Cars
  36. Toyota fumbling recall public relations crisis
  37. UPDATE: Toyota: 400,000 Vehicles Subject To Recall Worldwide
  38. Lawmaker: Toyota hid evidence from plaintiffs
  39. Recall Information
  40. Toyota Begins Interim Notification to Owners Regarding Future Voluntary Safety Recall Related to Floor Mats
  41. Chrysler, Ford, GM, Hyundai Taking Advantage of Toyota Recall Frenzy with New Incentives
  42. Toyota Recall: Scandal, Media Circus, and Stupid Drivers – Editorial
  43. Toyota Announces Another Recall
  44. Financial Times: US Congress takes aim at Tokyo over yen
  45. The Economist: Cross-shareholdings in Japan
  46. The Economist: Cross-shareholdings in Japan
  47. Auto Makers Work Out Fuel-Efficiency Game Plans
  48. Auto Makers Work Out Fuel-Efficiency Game Plans
  49. Planet Ark : Toyota to Offer Some Plug-Ins by 2010
  50. TOYOTA: Plug-in Hybrid Vehicle
  51. Report Toyota PHEV Road Test in Japan + Possible Unveiling in Fall
  52. Ford 2009 Form 10-K, Page 51
  53. Ford 2009 Form 10-K, Page 51
  54. Ford 2009 Form 10-K, Page 51
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