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WIKI ANALYSIS
Japanese automaker Toyota (NYSE:TM) is the world's largest automaker with over 19.0 trillion yen in revenues for fiscal 2010.[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. Profits on exported vehicles made in Japan have also been hit by a strengthening Japanese yen.[2] 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.
Company Overview
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.[3] Despite this apparent diversity, 60% of production still occurs in Japan, 15% in North America, 11% in Asia, and 8% in Europe.[4]
FY2011 Q1 Earnings Summary
- Net profits of 190.47 billion yen, compared to a net loss of 77.82 billion yen in same quarter FY2010[5]
- Sales were 4.87 trillion yen, up 27% compared to Q1 FY 2010.[6]
FY2011 Q2 Earnings Summary
- Net earnings of 9,678 billion yen, or $1.2 billion USD, for the second reporting quarter of FY2011, a 15% increase compared to same period last year.[7]
- Revenues were $59.5 billion for the fourth quarter compared to $56.1 billion same quarter last year.[8]
FY2011 Q3 Earnings Summary
- Net earnings of 93.6 billion yen, down from 153 billion yen, a 39% drop from same quarter last year.[9]
- Toyota's top line also fell 12% to 4.673 trillion yen compared to same quarter last year.[10]
FY2011 Q4 Earnings Summary
- Quarterly profit fell 77% due to the Sendai Earthquake, with operating profit falling 52%, to 46.1 billion yen ($571.5 million).[11]
- Sales in the quarter fell 12 percent, to 4.6 trillion yen ($57 billion).
Business Segments
Business is divided into three main divisions:
Automobiles (90.7% of net sales in FY2010)[12]
The Auto segment includes the Toyota, Lexus, and Scion brands.[13]
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.[14] 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.[15]
- Lexus: Toyota's luxury division, Lexus has been focused on North America since its launch. 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.[16]
Financial Services (6.5% of net sales in FY2010)[12]
Toyota's financial arm provides various credit services to customers.[17]
Other (2.8% of net sales in FY2010)[12]
Toyota's other segment includes revenue from investments as far-flung as housing, aerospace[18], marine operations, biotechnology, and telecommunications.[19]
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.
Key Trends and Forces
Within Japan
- Retiring customers: A third of Toyota’s sales are concentrated in Japan, where the population is aging: over 20% of the population is 65 or older. 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:
- Housing market: The strength of the housing market is traditionally tied to car-buying, as homeowners sometimes finance new cars with second mortgages. Recently in the US, both residential real estate prices and construction starts have begun to stagnate or fall after a period of rapid ascent.
- Demand for green technology: Gas prices continue to fluctuate and the demand for hybrids is rising. Toyota already has a leg up in meeting the government's new environmental standards for automobiles, 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
- 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: 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.
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.[20]
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.[21] 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.[22] 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.[23] By 2020 Toyota plans to offer its entire lineup of cars, trucks, and SUVs with a Hybrid Synergy Drive option.[24]
After General Motors announced it would produce the Chevrolet Volt plug-in hybrid, Toyota announced that it, too, would make one.[25] 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.[26][27]
Competition
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.
References
- ↑ Toyota Motors 2010 Form 10-K, Page 5
- ↑ Reuters: Toyota vulnerable after chasing fast growth
- ↑ Toyota assembly and parts plants
- ↑ Toyota 2008 Annual Report: Performance Overview
- ↑ Summary Box: Toyota returns to quarterly profit
- ↑ Toyota logs group net profit of 190.47 bil. yen for April-June
- ↑ Toyota quadruples net income
- ↑ Toyota quadruples net income
- ↑ Toyota raises full-year view despite tough quarter
- ↑ Toyota's quarterly profits fell 39% amid weak sales and strong yen
- ↑ After Quake, Toyota’s Profit Plummets 77%
- ↑ 12.0 12.1 12.2 TM 2010 20-F pg. 8
- ↑ Toyota 2008 Annual Report: Business Overview
- ↑ Toyota Motors 2009 Form 10-K, Page 23
- ↑ Tundra Headquarters
- ↑ Vehicle Production Rises, But Few Cars Are "Green"
- ↑ Toyota 2008 Annual Report: Business Overview
- ↑ Toyota to sink $67.2 mln in Mitsubishi passenger jet, China Economic Net, May 23, 2008
- ↑ Toyota 2008 Annual Report: Business Overview
- ↑ Financial Times: US Congress takes aim at Tokyo over yen
- ↑ The Economist: Cross-shareholdings in Japan
- ↑ The Economist: Cross-shareholdings in Japan
- ↑ Auto Makers Work Out Fuel-Efficiency Game Plans
- ↑ Auto Makers Work Out Fuel-Efficiency Game Plans
- ↑ Planet Ark : Toyota to Offer Some Plug-Ins by 2010
- ↑ TOYOTA: Plug-in Hybrid Vehicle
- ↑ Report Toyota PHEV Road Test in Japan + Possible Unveiling in Fall
- ↑ Ford 2010 Form 10-K, Page 51
- ↑ Ford 2010 Form 10-K, Page 51
- ↑ Ford 2010 Form 10-K, Page 51
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