Japanese automaker Toyota (NYSE:TM) is the world's largest automaker with over 19.0 trillion yen in revenues for fiscal 2010. 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. Profits on exported vehicles made in Japan have also been hit by a strengthening Japanese yen. 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.
Toyota has 51 bases in 26 different countries and regions 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. Despite this apparent diversity, 60% of production still occurs in Japan, 15% in North America, 11% in Asia, and 8% in Europe.
Business is divided into three main divisions:
The Auto segment includes the Toyota, Lexus, and Scion brands.
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:
Toyota's financial arm provides various credit services to customers.
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.
Several major trends in the United States economy bear upon Toyota's business:
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.
Distinct from norms of Western business culture, major Japanese firms have long practiced extensive cross-shareholding. 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. Below are a few examples of Toyota's cross-shareholding:
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. By 2020 Toyota plans to offer its entire lineup of cars, trucks, and SUVs with a Hybrid Synergy Drive option.
After General Motors announced it would produce the Chevrolet Volt plug-in hybrid, Toyota announced that it, too, would make one. 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.
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.