TOYOTA & THE AUTOMOBILE INDUSTRYThis report presents a brief analysis of the Toyota Motor Corporation in 2014. It analyses Toyotas performance during the recession, characterizes the nature of the auto-industry in which it competes and outlines the challenges and opportunities Toyota faces in the coming years.

INTRODUCTIONFounded in 1937, Toyota is a Japanese automotive manufacturer. It has developed into the largest automobile manufacturer in the world. Toyota engages in the design, manufacture and sale of cars and other commercial vehicles, in Japan, North America, Europe and Asia. In addition to Toyota cars, it also owns Lexus and Daihatsu and other well-known brands.

Japan26%

North Amer-ica

28%

Europe9%

Asia18%

Other Regions

19%

Toyota's key markets

Source IBIS World 2013 Global Car Manufacturing Industry Report

TOYOTA: AN INDUSTRY LEADER IN TURBULENT TIMES

The financial crash, and the collapse in aggregate demand that

followed, sent shockwaves throughout the global economy. As the

business cycle veered into recession, many industries were hit

hard. Due to its highly cyclical nature, borne out of a reliance on

disposable consumer income, the auto industry was severely hit.

The rising unemployment amongst customers combined with

dwindling consumer confidence led to curtailed or postponed

consumption of automobiles (KPMG, 2008). This problem was

exacerbated by a sudden stop in credit, making it extremely

difficult to acquire the car loans which facilitate a significant portion

of all car purchases. The demand for cars fell sharply. In 2009

alone, the auto industry contracted by 15.4% (Nkomo, 2014). This

period of volatility was epitomised by the travails of Detroit’s Big

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COMPANY PROFILE

Founded in 1937

Largest car

manufacturer in the

world

Most valuable car

brand in the world

8th most valuable

brand in the world

overall

Market Cap $200

Billion

Sold 8 million cars

worldwide in 2014

340,000 employees

Key People: Akio

Toyoda (President)

Toyota’s HQ, Toyota City, Japan

Three (Chrysler, Ford, and GM) who required capital injections from the US government. Whilst Toyota did

not require a government rescue, its financial position deteriorated significantly. Sales and production fell

sharply (Toyota Annual Report, 2009) as the private consumption boom of the previous decade evaporated

in some of Toyota’s key markets.

Toyota’s Sales Performance during the Global Recession

Region 2007(000’s of

units)

2008(000’s of

units)

2009(000’s of

units)

% Change 2008-2009

Japan 2273 2188 1945 -11.1

North America 2942 2958 2212 -25.2

Europe 1224 1284 1062 -17.3

Asia 789 956 905 -5.3

Central Asia 284 320 279 -12.8

Oceania 268 289 261 -9.7

Africa 304 314 289 -8

Middle East 433 597 606 1.5

Others 7 7 8 14.3

Total 8524 8913 7567 -15.1

Source: 2009 Toyota Annual Report

In 2009, Toyota reported losses of 4 billion dollars and saw double digit percentage declines in both its

sales and production figures (2009, Annual Report).

2006 2007 2008 2009 2010 2011 2012 2013 2014

-1000000

-500000

0

500000

1000000

1500000

2000000

2500000

Net Revenues

Millions o

f Yen

Source: 2014 Toyota Annual Report

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However, since 2011, Toyota’s performance has improved. Buoyed by a general recovery of the global

economy, and an ever-growing demand in emerging markets, Toyota has experienced recovery in the past

four years, with the immediate outlook looking extremely positive.

2010 2011 2012 2013 20140

100020003000400050006000700080009000

10000

Worldwide Sales 2010-2014

Total Sales

000's

of

Unit

s

Source: 2014 Toyota Annual Report

THE NATURE OF THE AUTOMOBILE INDUSTRY

When analysing Toyota’s performance, it must always be viewed in the context of the industry in

which it competes. Broadly speaking, this auto-industry takes the form of an Impure Oligopolistic

market structure as it contains a small number of large firms selling a differentiated product

(cars) to a large number of sellers. This oligopolistic nature of the auto industry is evident from

examining the industry in terms of Porter’s 5 Factor Model (Porter, 2008)

Industry Rivalry

The automobile industry is highly competitive. Whilst there are only a limited number of firms, they

aggressively compete with one another the basis of price, quality, reliability, and fuel efficiency. This rivalry

is usually played out through the medium of advertising. This is exemplified by Toyota who are the 16th

biggest spender in the world on advertising, allocating $1.73 billion in 2012 to advertising, $767 million

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Threats of Entry

Supplier Power

Buyer PowerSubsititutes

Competition

which was for television alone (Business Insider, 2012). Similar to other Global Oligopolistic structures, the

large capital investment required generally means that entry and exit is quite infrequent. Instead, similar

to banks and airlines, the larger firms have a tendency to acquire their competitors. These mergers and

acquisitions allow the buying firm to avail of newfound economies of scale and scope and enable them

tailor different subsidiaries to different sectors of the market.’ In Toyotas case, Lexus target the high end

clients.

Threats of Entry

The threat of entry into the automobile industry is quite weak. Entrance requires large amounts of capital

and any prospective entrant would need to achieve immediately high sales figures in order to achieve the

economies of scale of existing firms. In addition, firms like Toyota and the Detroit firms have extremely

strong brand recognition which gives them a crucial advantage over any would-be competitor. The

presence of network effects, entry costs and economies of scale collectively make the emergence of new

entrants highly unlikely. This difficultly with overcoming the status quo is reflected in the global market

share.

10%

10%

7%

6%

68%

Market Share in the Automobile Industry

ToyotaVWGMFordOther

Source: IBIS World 2013 Global Car Manufacturing Industry Report

Whilst new entrants to the automobile industry may not challenge the auto giant’s global market share,

new entrants to particular regions can cause a lot of disruption. This has recently happened in Europe

where the Renault subsidiary “Dacia” has experienced exponential growth in its market share (Irish Times,

2014).

Input Supplier Power

Input supplier power is also weak as Toyota and its rivals use a myriad of small suppliers from across the

globe. For example, Toyota and its affiliates produce cars and their related parts through more than 53

manufacturing companies in 27 countries, excluding Japan (Toyota Global Vision, 2014). In addition, Toyota

has some scope for in substitution (i.e. If one input becomes too expensive, substitute it for similar,

cheaper alternative)

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Buyer Power

Buyer power amongst consumers in the automobile industry is very strong. For Toyota, buyers loosely fall

into two groups - businesses and households.

75%

25%

Toyotas Major Customers

Households

Businesses

Source: IBIS World 2013 Global Car Manufacturing Industry Report

When buying a new car consumers can switch from one brand to another with relative ease. Individuals are

generally cost sensitive. Therefore, since cost encompasses an acquisition cost (price) as well as a running

cost (fuel efficiency), both influence purchasing decisions. However, responsiveness to price can be

dampened if consumers develop an affiliation with a particular brand. This benefits Toyota as they have

ranked the most valuable automotive brand in the world for the 11 years running, with an estimated brand

value in the region of $31 billion dollars (Forbes, 2014).

Substitutes

Toyota, as part of the automobile industry, are effectively selling a method of transportation. In this sense

there are a number of substitutes to cars – bikes, public transport etc. A rise in the use of these substitutes

would diminish the demand for cars. However, these alternatives do not offer the same freedom and

convenience of a car. For this reason we can tentatively suggest that the automotive industry does not

face a strong substitute.

CHALLENGES

The car market is an ever-changing environment. If Toyota is to maintain its place as the preeminent force

in the automobile industry, it will need to overcome a number of challenges. Understanding what these

issues are can provide a great deal of insight into the long-term future of the Toyota Motor Corporation.

The Effect of Product Recalls on Brand Recognition

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Toyota proudly asserts that it makes the “best built cars in the world”. However, this bold assertion has

recently been placed in some doubt due to a number of well-publicised product recalls which have had a

damaging effect on Toyota’s stellar brand name and reputation. Between the 2009 and 2011 Toyota

experienced a large number of issues regarding its vehicle’s pedal accelerators, floor mats, and anti-lock

breaking software. This forced Toyota to engage in unprecedented recalls of over 10 million vehicles. This

culminated in Toyota president Akio Toyoda testifying before a US congressional hearing after it was

revealed that Toyota had knowing concealed safety problems in its vehicles (Reuters, 2014) and eventually

resulted in a 1.2$ dollar settlement .These recalls eroded some of the positive reputation Toyota had built

up over many years and undermined Toyota’s efforts to navigate its way through the harsh

macroeconomic climate. The combined effect of the recall and recession is clearly shown in the poor

performance of Toyota stock from 2007-2011.

0

20

40

60

80

100

120

140Stock Price Fluctuations

Daily Closing Price

$ S

hare

Pri

ce

2006 2010 2014

Source: Yahoo Finance

Input Costs

The ongoing ability of Toyota to remain price competitive will depend heavily on the cost of its inputs.

Looking at Toyota’s cost structure it is clear that input purchases account for the majority of its costs.

Purcahases; 70.7

Wages; 6.3

Depreciation; 6

Rent & Utilities; 1.7

Other; 10.4

Profit; 4.9

Toyota's cost structure (% Share)

Source 1 IBIS World 2013 Global Car Manufacturing Industry Report

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Whilst Toyota has the freedom to choose its suppliers, general rises in the price of oil, steel and plastic will

raise their production costs regardless. These cost rises will inevitably be passed on the consumer,

resulting in compensator price rises. Due to the automobile industry’s downward sloping demand curve,

this will result in potentially lower vehicle unit sales. A rise in the price of steel or a resurgence in oil prices

could have pernicious effects on Toyota’s production costs.

Asymmetric Shocks

Toyota also must be wary of unforeseen asymmetric shocks that could have the potential to harm its

operations. An example of this was the 2011 Tōhoku earthquake which halted domestic production in

Japan. From a financial point of view, Toyota, as a global company, must also monitor currency exchange

fluctuations. For example, an appreciating yen against the dollar would have a negative effect on the firm’s

balance sheet in terms of profitability as it is denominated in yen. However, this is of little concern

currently as the yen remains weak but this may not last forever. In addition, exchange rate risk may be

mitigated to some extent through the purchase of exchange rate future contracts.

OPPORTUNITIES

Whilst mindful of its challenges, Toyota must also be equally observant of potential opportunities for

growth and innovation. Otherwise, it risks being overtaken by the chasing pack.

Emerging Markets

The auto industry has had a strong recovery, with sales figures matching and surpassing pre-crash levels

(Annual Report, 2014). Over the next 4 years, the industry is expected to grow at an annual rate of 2.5%,

reaching 2.6 trillion dollars in 2018 (Nkomo, 2014). Whilst some of this strong performance is the result of

pent-up demand which accumulated in the recession years, a great deal of the growth is also derived from

the emerging markets of the BRIC countries. With rising incomes, cars become more affordable and open

up a previously untapped market for cars. In the period 2000-2011, Toyota’s sales to emerging markets

increased from 18.6 to 45% (2014, Annual Report). This market will soon surpass the developed world’s

consumption of Toyota products. If the company can assert dominance in these emerging markets and

attain a powerful market share, it will reassert its dominance as the world’s number one automobile

manufacturer.

Innovation and Product Development

An automobile manufacturer is only as good as the quality of its products. Toyota must continue to remain

at the cutting edge of technology and live up to its promise of building “always better cars” (Toyota Global

Vision). As fuel efficiency becomes increasingly important, Toyota must work tirelessly to improve the

safety, quality and environmental quality of its products. Rather than be scared of the shift in consumer

taste towards smaller fuel efficient cars, Toyota has the potential to thrive as a result. The company has a

strong focus on R&D, where it accounted for 3.5% of revenues in 2014 (Annual report 2014). With R&D

expenditures increasing year on year, there seems little reason to believe it will abdicate its role as a

technological leader in the industry.

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2010 2011 2012 2013 20140

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

R&D Expenditure

R&D Expenditure

Millions o

f Yen

Source: 2014 Toyota Annual Report

GOING FORWARD

As Toyota moves into a new era, the question remains - how can it continue to dominate the global

automobile industry? Having undertaken a detailed analysis of Toyota, as well as the automobile as a

whole, we recommend three key policies which can help Toyota to consolidate its position as leader.

Targeting Emerging Markets

As previously discussed, the emerging markets of the BRIC countries, a virtually untapped market, looks

set to grow and grow. By targeting these countries early, Toyota gains an early foothold in a rapidly

growing market and attains an unassailable market share. By setting up production in these countries,

they also provide Toyota with the ability to bring its goods closer to the final customer, whilst utilising the

low-wage and production costs associated with these markets.

Focus on Fuel Efficient Technology

All evidence points towards a dramatic shift in consumer preference towards environmentally friendly fuel

efficient cars. Toyota must structure its product lines to meet this demand and should focus on creating

and producing fuel efficient vehicles at a reasonable price. This will necessitate significant R&D investment

but as the cost of not responding to consumer taste would be higher, it is undoubtedly a worthwhile

investment.

Restoring Toyotas Reputation for Reliable Cars

Toyota’s reputation as a supplier of reliable, quality automobiles has been undermined by recalls. Toyota’s

brand image took a severe dent. This cannot be repeated for the foreseeable future or Toyota risks

consumers viewing their products as somewhat suspect. To this end, Toyota must reexamine its production

standards and ensure that these standards are being met across all of its operations.

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