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Flash Player 9 or higher is required to view the chart Click here to download Flash Player now See all Bulls Reasons Bulls: Reasons To Buy High profit level in conjunction with growth 74% 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 39 votes 74% agree Market leader in hybrid and energy efficient cars 66% agree Market leader in hybrid and energy efficient cars Toyota's flagship hybrid vehicle, the Prius, has been the world's most successful hybrid and has helped make hybrid cars mainstream. Their leadership in the energy efficient car segment has helped drive sales during a time of high gasoline prices. The hybrid technology is... read more View or Edit Reason 6 votes 66% agree Profits rising on sales in developing nations 66% 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 3 votes 66% agree Add your own Bulls Reason See all Bears Reasons Bears: Reasons To Sell Japanese yen is appreciating steadily 67% agree Japanese yen is appreciating steadily Toyota’s profits are denominated in yen, which has been appreciating steadily, meaning that when Toyota sells a car abroad and exchanges this foreign currency for yen, it receives less yen than before for each sale thereby hurting profitability. Congress is also pressuring Japan to adjust its exchange rates. View or Edit Reason 31 votes 67% agree Profits are threatened by increasing competition 50% 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 6 votes 50% agree Add your own Bears Reason Send the authors a comment or suggestion service manual motor b [Dismiss] [Done] See All Suggestions

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Sales of the company's three automotive brands: Toyota, Lexus, and Scion, grew explosively between 2000 and 2008, with average annual profits tripling over the period. However, as the global economy slows in 2008, Toyota's forecasts its earnings will decline upto 75%.^[1] These results are more severe than most other automakers because Toyota aggressively expanded production capacity over the past decade well ahead of expected demand.^[2] Profits on exported vehicles made in Japan have also been hit by a strengthening Japanese yen.^[3]

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. This is key for the company because as the world economy cools, sales have also stagnated in Japan, Europe, and even the emerging markets; causing Toyota to predict a 7% sales decrease for the 2008 calendar year.^[4]

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 Overview

In FY 2008, Toyota earned 1.72 trillion yen (about $17 billion) on sales of 8.9 million vehicles.^[5] Toyota has 53 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.^[6] Despite this apparent diversity, 60% of production still occurs in Japan, 15% in North America, 11% in Asia, and 8% in Europe.^[7] Toyota has been publicly traded in Japan since 1949 and internationally since 1999.^[8] Business is divided into three main divisions:

• Autos: 89.5% of total Toyota revenue and 94.7% of net operating income, the Auto segment includes the Toyota, Lexus, and Scion brands.^[9] (See Product Lines below.)
• Financial: 5.5% of total revenue and 3.8% of net operating income, Toyota's financial arm provides various credit services to customers.^[10]
• Other: at just 4.9% of total revenue and 1.5% of operating income, Toyota's other segment includes revenue from investments as far-flung as housing, aerospace^[11], marine operations, biotechnology, and telecommunications.^[12]

Source:Toyota 2008 Annual Report: Financial Section^[13]

2007 Toyota Geographic Sales Breakdown^[14]

[edit] Accounting Ratios

[edit] Product Lines

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. A new Tundra-specific plant opened in Texas in September 2006 and another shortly thereafter 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 closed these two truck manufacturing facilities for several weeks during the summer of 2008, which reduced annual capacity in these two plants to 45% and 72%, respectively.^[16] Despite this, 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.^[17]

• 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. In the summer of 2008, Toyota was unable to produce enough of the Prius to satisfy market demand, which resulted in a 34% drop in Prius sales. Toyota has responded by announcing plans to begin manufacturing the Prius for the first time in the United States; in a Mississippi factory originally planned for truck and SUV production.^[18] Largely because of the Prius, Toyota vehicles represent 73% of the hybrids sold in the U.S.^[19]

[edit] 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 has considerable room to grow into these markets, as combined they only accounted for 15% of the company's FY 2008 profits.^[20] The company has found success so far with sales in China, where revenues doubled between 2004 and 2008.^[21] And in South America, where FY 2008 revenues increased 19.3% and operating income growing 72.4%.^[22] Overall emerging market revenue grew 17.8% during FY 2008.^[23] Toyota tapped demand in emerging markets earlier than most other automakers and has thus developed numerous manufacturing facilities, distribution networks, and brand reputation.

[edit] Incentives and Brand Recognition

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.). Automakers' incentive spending in the United States averaged $3,213 per vehicle in June 2008, but for Toyota it was an average of $1,186 per vehicle compared to $3,427 for Chrysler, $2,745 at Ford, GM's $3,454, and $1,367 for Honda.^[24]

Over the past decade Toyota has increasingly sought to bolster its brand recognition through motorsport. Since 2000, with moderate success, Toyota has entered Formula One, Nascar, Nascar truck, and Super GT competitions worldwide, thereby challenging European and American producers in an arena they once dominated.^[25]

[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 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: Through mid-2008 oil prices increased dramatically. 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.

[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.^[26]

[edit] Japanese Business Culture and Foreign Shareholders

In 2001, Toyota's Toyo Trust and Banking merged to form the UFJ, United Financials of Japan, which was accused of corruption by the Japan's government for making bad loans to alleged Yakuza crime syndicates with executives accused of blocking Financial Service Agency inspections.^[27] The UFJ was listed among Fortune Magazine's largest money-losing corporations in the world, with Toyota's chairman serving as a director.^[28] At the time, the UFJ was one of the largest shareholders of Toyota. Toyota also owns majority stakes in Daihatsu, and 8.7% of Fuji Heavy Industries, which manufactures Subaru vehicles. They also acquired 5.9% of Isuzu Motors Ltd. in 2006.

Distinct norms of western business culture, major Japanese firms have long practiced extensive cross-shareholding.^[29] 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.^[30] Below are a few examples of Toyota's cross-shareholding:

[edit] Toyota and Fuel Efficiency

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.^[31] 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.^[32]

After General Motors announced it would produce the Chevrolet Volt plug-in hybrid, Toyota announced that it, too, would make one.^[33] 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.^[34][35]

[edit] Competition

Daimler AG U.S. Market Share^[36]

2007 Worldwide Vehicle Market Share Data^[37]

2007 European Automotive Market Share Data^[38]

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.^[39]

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.

[edit] References

1. ↑ Reuters: Toyota vulnerable after chasing fast growth
2. ↑ Reuters: Toyota vulnerable after chasing fast growth
3. ↑ Reuters: Toyota vulnerable after chasing fast growth
4. ↑ Autoblog: Toyota cuts sales forecast almost 7%
5. ↑ Toyota 2008 Annual Report: Performance Overview
6. ↑ Toyota 2008 Annual Report: Production Sites
7. ↑ Toyota 2008 Annual Report: Performance Overview
8. ↑ Toyota for investors, Frequently Asked Questions. Toyoto Motor Corporation Global Site. Toyota Motor Corporation (2007-02-02). Retrieved on 2008-07-11.
9. ↑ Toyota 2008 Annual Report: Business Overview
10. ↑ Toyota 2008 Annual Report: Business Overview
11. ↑ Toyota to sink $67.2 mln in Mitsubishi passenger jet, China Economic Net, May 23, 2008
12. ↑ Toyota 2008 Annual Report: Business Overview
13. ↑ "Toyota 2008 Annual Report: Financial Section"
14. ↑ Toyota Performace Overview
15. ↑ Accounting Ratios: Toyota Motor Corporation.
16. ↑ Toyota Truck Sales to Falter in U.S.
17. ↑ Tundra Headquarters
18. ↑ IHT: Toyota to make Prius in the U.S.
19. ↑ Vehicle Production Rises, But Few Cars Are "Green"
20. ↑ Toyota 2008 Annual Report, page 11
21. ↑ Toyota 2008 Annual Report, page 11
22. ↑ Toyota 2008 Annual Report, page 11
23. ↑ Toyota 2008 Annual Report, page 11
24. ↑ Edmunds AutoObserver: GM, Toyota boost Incentives
25. ↑ Toyota 2008 Annual Report: Motor Sports
26. ↑ Financial Times: US Congress takes aim at Tokyo over yen
27. ↑ Ex-UFJ Execs.Japan Times Weekly: April 30, 2005.
28. ↑ UFJ Holdings Inc., company profile Yahoo Finance. Retrieved on May 8, 2007.
29. ↑ The Economist: Cross-shareholdings in Japan
30. ↑ The Economist: Cross-shareholdings in Japan
31. ↑ Auto Makers Work Out Fuel-Efficiency Game Plans
32. ↑ Auto Makers Work Out Fuel-Efficiency Game Plans
33. ↑ Planet Ark : Toyota to Offer Some Plug-Ins by 2010
34. ↑ TOYOTA: Plug-in Hybrid Vehicle
35. ↑ Report Toyota PHEV Road Test in Japan + Possible Unveiling in Fall
36. ↑ http://www.autoobserver.com/2008/01/2007-a-historic-year-for-us-vehicle-sales.html
37. ↑ http://oica.net/wp-content/uploads/world-ranking-2007.pdf
38. ↑ Suite 101: Top Selling Cars in Europe in 2007
39. ↑ Toyota's plan for Lexus is a reminder of its real goal (August 1, 2005). Financial Times, p. 16.