Toyota Motor (TM)

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See all 4 Bulls Reasons Bulls: Reasons To Buy High profit level in conjunction with growth 100% agree High profit level in conjunction with growth In conjunction with growth, Toyota’s high profit level is particularly exciting. Growth normally signals a downturn in profits as prices fall to accommodate business expansion.They have become great not by making giant leaps but by continous, steady improvement over a long... read more View or Edit Reason 2 votes 100% agree Regional Airliner with Mitsubishi? 100% agree Regional Airliner with Mitsubishi? Japan’s Mitsubishi Heavy Industries Ltd. (PINK: MHVYF) has unveiled a plan to develop a "regional" jetliner for use by airlines all around the world. The controversial project gained global credibility in recent weeks after analysts began to speculate that Toyota Motor... read more View or Edit Reason 1 votes 100% agree Profits rising on sales in developing nations 100% agree Profits rising on sales in developing nations Toyota's profit for the fourth quarter in 2007 jumped 7.5% from the previous year as booming sales in emerging markets such as China, Africa and South America offset declining US sales and about a 20 Billion Yen loss due to an unfavorable exchange rate. The robust sales are... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Japanese yen is appreciating steadily 0% agree Japanese yen is appreciating steadily Toyota’s profits are denominated in the yen, and it has been appreciating steadily, which is good for the bottom line, but there is no guarantee it will last. Congress is pressuring Japan to adjust its exchange rates. View or Edit Reason 0 votes 0% agree Gasoline prices show no sign of decreasing 0% agree Gasoline prices show no sign of decreasing Gasoline prices show no sign of lowering; steel prices are similarly problematic. View or Edit Reason 0 votes 0% agree Profits are threatened by increasing competition 0% agree Profits are threatened by increasing competition Competition should heat up in most markets, from the United States to China, so profits may be threatened if Toyota has to lower its costs. In 2006, for the first time ever, Toyota offered incentives on the Prius, despite its popularity, a sure sign of increasing competition. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Japanese auto manufacturer Toyota (NYSE:TM) is currently one of the most successful companies in the auto industry. It sold almost 8 million vehicles worldwide in 2006 and led the industry in operating profit; by early 2007 Toyota had deposed GM to become the new industry leader. Although the company posted income growth of 4.5% for the financial year ending in March of 2008, Toyota forecasts its profits will decline by about 30% for the next year. This downturn is largely a result of slowdowns in the economies and car markets in the United States, Japan, and Western Europe.

Toyota's sales are concentrated in Japan and North America, but has seen rapid growth in Asia and South America. The company has a reputation for quality and gas efficiency in all of its offerings, from the low-end Scion and Yaris lines to stalwart Corolla and even luxury Lexus, and it has had unusual success with product pitches, accurately predicting (and in some cases, driving) consumption patterns towards the trendy and the fuel-efficient. But the company stands out most for its high production efficiency: Toyota's low production costs and relatively affordable price points drive exceptional profits.

Toyota currently has a near choke-hold on the US hybrid/low-emissions vehicles market. The redesigned Prius has launched into cultural-icon status, leaving its previous eco-hippy image to enter the mass market in force in the form of taxis, government sponsored shared cars, and private vehicles. As the American Big Three struggle to meet the 35 mpg mandate by 2020, Toyota should be coasting. Toyota is now also trying to enter the SUV/truck market, traditionally the domain of the US Big Three. Recently Toyota unveiled the Tundra line of pickup trucks in the US, and it is opening two new plants dedicated to their production in Indiana and Texas. Despite the durable reputation of Toyota Trucks, this expansion has been unsuccessful as U.S. gasoline prices have reached record highs and American consumers spurn larger vehicles.

Like many Asian automakers, Toyota faces three principal risks: rising oil prices, rising steel and aluminum prices, and exchange rate fluctuations. Rising oil prices raise the cost of car ownership and drive down sales. Rising steel and aluminum prices raise the cost of car production and reduce profitability. And when the yen appreciates, Toyota earns less per vehicle sold in North America, leading to diminishing levels of profitability. Throughout the second half of 2008, Toyota appears to be besieged by all three of these challenges.

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.

[edit] Business

In 2007, Toyota earned 1.72 trillion yen (about $16 billion) on sales of 9.37 million vehicles. Business is divided into three main divisions:

• Autos: 90.2% of total Toyota revenue, the Auto segment includes the Toyota, Lexus, and Scion marques. (See Product Lines below.)
• Financial: 8.3% of total revenue, Toyota's financial arm provides various credit services to customers.
• Other: at just 1.5% of total revenue, Toyota's other segment includes revenue from investments as far-flung as housing, marine operations, biotechnology, and telecommunications.

Although Toyota has expanded rapidly for the past decade, sales are actually expected to decline in 2008, mainly on weakness in Toyota's main markets of Japan and the US. Despite this, the company is moving aggressively into the expanding Eastern European, Chinese, South American, and Middle Eastern auto markets, which are expected to continue growing rapidly.

During the 4th fiscal quarter ending on March 31st, 2008, Toyota reported a decrease in income of 28% on a 3.8% increase in revenue, over the same time period in 2006. Operating income became more equally balanced among the regions during the quarter, with significantly higher contributions from growing markets, specifically emerging and resource-rich countries^[1]. Higher fuel prices continue to make Toyota's reliable, fuel-efficient product line ever more appealing, allowing the firm to steal market share from the Big Three American car manufacturers, however, a depressed U.S. auto market has not prevented overall decline in company sales hitting Truck sales especially hard.

Toyota realized unparalleled growth in South America and Asia in the quarter ending December 31st, 2007, especially in Thailand and Indonesia where production capacity has been increased to meet demand. In addition to significant revenue increases, operating income more than double in the South America/Africa/Oceania and Asia regions ^[2]. Strong Lexus sales in China have been a major stimulus of growth, while earnings increased modestly in saturated and aging Japan.

[edit] The Toyota Way

A fourteen-point overall company philosophy that emphasizes strategic thinking, accountability, and efficiency, "The Toyota Way" is intended to empower workers to take responsibility for the cars they make, and to think with quality in mind. While emphasizing abstract goals like long-run thinking and loyalty to the company, "The Toyota Way" also tries to minimize waste of personnel and production capacity. Perhaps the philosophy is successful--while General Motors, Volkswagen, and Ford all earn more revenue per vehicle than Toyota, their average costs per vehicle are also significantly higher--almost $24,500 to Toyota's bare $21,000.

One important corollary of the Toyota Way is Just-in-Time production, a system that promotes the efficient factory operation that contributes to Toyota's low costs. Just-in-Time tries to produce cars just as they are ready to be sold, matching parts to orders and inventory to sales. This reduces financial costs on both ends: parts can be ordered right when needed, and cars sold at the same time. Just-in-Time production also lowers storage costs and reduces product write-off from unsold cars. And since cars are produced only a few at a time, product defects can be spotted before much damage is done. Since 2003, Toyota's inventory selling days have hovered around 35-40, indicating that Toyota cars are selling significantly faster than rest of the industry (industry standard: 60 days).

[edit] Product Lines

Toyota's 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). In 2006, Toyota sold almost double the number of Camrys and Corollas as it did Lexus and Tacomas. This product breakdown reflects Toyota's strategy of segmenting the market into wealth levels and selling accordingly. Below are a few Toyota cars of particular note:

• 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. A new Tundra-specific plant opened in Texas in September, 2006, and another recently opened in Indiana, with combined capacity of 350,000 vehicles/year. Tundra sales started off strong, but recent market pressures (real estate and fuel costs) have worked to dramatically decrease demand. Toyota is planning to close its two truck manufacturing facilities in the U.S. for several weeks during the summer of 2008, which will reduce capacity in these two plants to 45% and 72%, respectively.^[3] Still, Toyota continues to invest in the product, confident that by adding a diesel variant and a newer, larger heavy duty version of the truck [1] they can continue to increase market share.

• Lexus: Toyota's luxury division, Lexus has been focused on North America since its 1989 launch. Last year some 80% of the 415,000 Lexus vehicles sold were sold in North America. 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.

[edit] Geographical Markets

Toyota sells cars throughout the world, but its principal markets are Japan and the United States. Although in 2006 Toyota sold fewer cars in Asia--excluding Japan--than it did in Europe, the region remains strategically important because of its high growth potential. China's economy has far outpaced the world's, growing at an annual rate of 10% since the early 1990s. Its automotive sector has grown twice as fast.

Toyota's sales breakdown, 2006

[edit] Capacity and Growth

Toyota's revenue has increased by 43% between 2002 and 2006; between 2005 and 2006, it grew by 13%. Whether Toyota can keep growing at this rate depends on how it manages its investments and capacity, and on whether the global economy keeps growing. In 2006 Toyota sold 7.97 million vehicles, but produced only 7.71 million, so some of its growth is from excess inventory. However, Toyota has new plants coming into operation throughout the world: the Indiana and Texas plants for Tundra production are just coming online, and a new plant opening in Canada will produce 200,000 vehicles annually. In 2010, Toyota planned to open an SUV plant in Mississippi, however due to decreased demand for SUVs in the U.S. Toyota announced that the opening of this facility would be delayed. This facility is expected to produce 150,000 vehicles a year. In China, Toyota has opened five new plants since 2005. Despite all the U.S. capacity, Japan produces 46% of all vehicles sold in the States.

[edit] Brands, Profits, Incentives

Toyota has strong brand recognition, particularly with the Prius and Lexus. Brand recognition allows Toyota to charge higher prices than its competitors and thus earn higher profits. This is particularly important as the leading U.S. auto companies—Ford and General Motors—have been struggling with sales and, consequently, are offering impressive incentives (low financing, reduced prices, etc.). Incentives spending in the United States averaged $2,670 in per vehicle in February, 2006, but for Toyota it was an average of $1,200 per vehicle ($1,600 for the Lexus, and just $100 for the Scion).

[edit] Trends and Forces

[edit] 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.

[edit] 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 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, and its federal tax rebates will have all expired by the end of 2007. This could allow competitors who entered the hybrid market late to catch up with Toyota, as many of their rebates have yet to expire.

[edit] Global

• Global commodity price trends threaten to drive up the cost of both car manufacturing and car ownership.

• Steel: One of the main ingredients in cars is steel, and its price has been on the increase over the last several months. Toyota cannot use less steel to reduce its costs, unlike labor or almost any other input into car production.

• Oil: Oil prices have increased dramatically in the last four years, from $33/barrel in 2003 to $65 in 2007. Consequently, the cost of gasoline has doubled and the day-to-day cost of car ownership has gone up as well. 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. Toyota is one of the industry leaders in this department, however, and is well positioned to weather the oil price storm.

• Aluminum: Aluminum is also a significant production input, accounting for around 300 pounds of a new car's weight.

In an attempt to offset these increasing commodity prices, Toyota announced plans to raise prices on the FJ Cruiser, the Yaris, and the Prius, three of its most popular models.

[edit] China

Toyota's sales have been growing 10% annually, but that pace cannot continue in the saturated European, Japanese, and American markets, where many already have cars and GDP growth is slow. China's economy as a whole has grown at 10% per annum since the early 1990s, and auto sales have been growing at a 20% rate. These growth rates are unsustainable; the latter implies a doubling every 3.5 years. Toyota counts China as part of its Asia sales network, which includes also Thailand and Taiwan. Overall sales in Asia grew by 5.7% from 2005 to 2006, to 880,000 vehicles. Production grew by 29%--a lot--to 836,000. The majority of the production growth occurred in China, with a new plant opening in Guangzhou that can produce 100,000 Camrys yearly. Toyota is also opening its first research-and-development center in China next year. Based near Shanghai, and is expected to build more R&D sites in Tianjin (China’s third largest urban area near Beijing) and Guangzhou (China’s third-largest metropolitan area about 75 miles north of Hong Kong). In early 2008, Toyota announced it would spend $214.6 million to boost production capacity at a facility in Tianjin by 50% to 150,000 vehicles a year.

[edit] Exchange rates

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.[2]

[edit] Competition

[edit] Market share

In 2006, worldwide auto sales totaled 67.5 million vehicles, of which 7.97 million were Toyota, second most behind General Motors' 9.1 million autos sold.

Source: Company reports

In the first quarter of 2007, Toyota passed General Motors as the largest automaker in the world with total sales of 2.35 million vehicles as opposed to GM's 2.26 million. For all of 2007, however, GM maintained its No. 1 position, holding Toyota off by about 3,000 vehicles by reporting worldwide sales of 9,369,524 cars and trucks, up 3% from a year earlier. Toyota’s U.S. market share hit a record high 17.4% in April, which means May’s sales totals could put Toyota within two or three percentage points of GM in its home market. Strong growth in Latin America, Asia Pacific and Eastern Europe offset diminishing market share in North America. Unlike Toyota, however, General Motors (GM) posted an adjusted net loss in 2007.

[edit] Operational Comparison

The following table compares Toyota to three other leading auto makers.

Notes: From company reports. Revenue and profit reported in billions of Dollars. Volkswagen revenue and profits reported assuming a Dollar-Euro exchange rate of 0.745.

In 2006, Toyota is the second largest manufacturer by revenue and vehicles sold, but the largest by operating profit (and operating margin). The first two columns hint at the explanation for Toyota's high margins: it sold more cars than it produced, unlike Ford. Of course, Volkswagen and General Motors also sold more than they produced, without the high profit margins. Volkswagen and General Motors' profit is driven by (relatively) high revenue per unit: $24,600, and $22,700, respectively. Toyota's profit, on the other hand are driven by low costs per unit: $20,950, compared to $24,140 for Volkswagen, for example.

General Motors and Ford are performing badly because they need to generate large revenue streams to pay off pension plans. Due to poor pension management and the falling stock market at the beginning of this decade, GM and Ford relied on high sales to pay their retired employees; consequently they have focused on revenue rather than profit, and the results show it. Ford and GM also both have to pay for their employees' health insurance, unlike Volkswagen and Toyota, which principally employ labor in states with nationalized health care. Toyota's advantage over Volkswagen stems from its lower cost, which is in turn due to the efficient production system and the Toyota Way philosophy.

In addition to these traditional 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) produce considerably cheaper cars that are affordable to a wider phase of the populace.

[edit] Hybrid Market

Toyota - the world leader in hybrid sales - sold about 429,400 hybrid vehicles in 2007, an increase of 37% from 2006. The company announced just last month that sales of its Prius hybrid car topped 1 million units worldwide since its launch just over a decade ago. The Prius, the world’s first mass-produced gasoline-electric hybrid car, first went on sale in Japan in late 1997, and since then, more than 1,028,000 cars have been sold. Toyota's hybrids have been so popular that it is having trouble producing enough lithium-ion batteries to power these vehicles.

[edit] Notes

1. ↑ Toyota Press Release, February 2008
2. ↑ Toyota Press Release, February 2008
3. ↑ http://online.wsj.com/article/SB121381223935385281.html?mod=rss_whats_news_us