BSTR/362 IBS Center for Management Research
Toyota: The Once-in-a-Century Challenge This case was written by Syeda Maseeha Qumer, under the direction of Debapratim Purkayastha, IBS Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case was a Finalist in the 2009 John Molson MBA Case Writing Competition.
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BSTR/362
Toyota: The Once-in-a-Century Challenge “Toyota faces tremendous challenges. As an organization it has not had to deal with a down cycle before, and this is not just a cycle in one country but in virtually all of its markets.”1 -
Michael Smitka, Japanese auto industry expert.
“We’re facing a once-in-a-century crisis… I’ll try to make changes without being tied down by the past. I will consider measures quickly.”2 Akio Toyoda, President, Toyota Motors Corporation.
INTRODUCTION On June 23, 2009, Akio Toyoda (Akio) took over as President of Japanese automaker Toyota Motor Corporation (Toyota). Akio‘s appointment came in the wake of the company reporting its first losses since 1963, the year it began reporting business data. Analysts felt that the global financial crisis had had its impact on the world‘s largest automaker and that the company was also trying to cope with a shift in the global automobile industry. The challenge before Akio, grandson of the founder of Toyota, was to bring the automaker back to profits. The business segments of Toyota mainly include automotive operations, financial services operations, and other business operations.3 Automotive operations accounted for 89% of Toyota‘s total revenues in 2008. The company manufactured vehicles at 53 production sites in 27 countries around the globe. In the fiscal year 20084, Toyota sold approximately 8.91 million vehicles in 170 countries and regions under the Toyota, Lexus, Daihatsu, and Hino brands. North America was its biggest market followed by Japan, Europe, and Asia (Refer to Exhibit I for vehicle production, sales and exports of Toyota and Exhibit II for primary markets of Toyota). After booming sales through 2007, which also saw the company dethrone General Motors (GM)5 as the world‘s leading automaker, Toyota‘s sales were hit hard in 2008. The company decided to opt for a change in leadership and appointed Akio as President. Akio immediately announced a slew of measures in a bid to bring the company back to profits. ―We are talking about a once-in-acentury transformation of the market. I believe the auto industry is now trying to face the challenges of presenting a solution to this once-in-a-century change. And what is clear to me is that what is going to happen will not just simply be an extension of the past. I believe it is an important time for Toyota to present some answers for the coming 100 years,‖6 he said. 1 2
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4 5
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Todd Crowell, ―Toyoda Takes Toyota Wheel,‖ www.atimes.com, May 8, 2009. John Lippert, Alan Ohnsman and Kae Inoue, ―Toyoda Asks How Many Times Toyota Errs Emulating GM Failures,‖ www.bloomberg.com, June 22, 2009. Other business operations of Toyota include intelligent transport systems, IT and telecommunications, housing, motorboat manufacturing, and biotechnology and afforestation businesses. Toyota‘s financial year ends on March 31. General Motors Company, LLC (earlier General Motors Corporation) based in Detroit, is the secondlargest automaker in the world. In June 2009, the company filed for Chapter 11 bankruptcy protection. The bankruptcy filing was a dramatic downfall for GM, which was founded in 1908 by William C. Durant. For the year ended 2008, the company reported revenues of US$ 148.979 billion. Alex Taylor III, ―Toyota‘s New Man at the Wheel,‖ http://money.cnn.com, June 26, 2009. License to use for the MBA Program, Group J, 1
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Toyota: The Once-in-a-Century Challenge
Shortly after, Toyota announced that its net revenues for the first quarter ending June 30, 2009, totaled ¥73.836 trillion, a decrease of 38.3% compared to 2008.8 The quarterly loss was estimated to be around ¥77.82 billion (US$ 819 million). It was the company‘s third quarterly loss in a row 9. ―Although we were able to make certain improvements in fixed cost and cost reduction efforts, the decline in vehicle sales and the appreciation of the Japanese yen had a severe impact on our earnings,‖10 said Takahiko Ijichi, Senior MD of Toyota. While many analysts felt that Toyota would bounce back, some analysts expressed doubts over whether Akio would be able to manage a turnaround and pull the company out of the crisis. Some insiders were also worried that the selection of a member of the founding family as President might lead to disunity within the company. In this scenario, analysts felt that Akio had his task cut out for him. ―It will be interesting to see whether Akio Toyoda will be able to bring about the change in mentality and imagination that the company seems to need,‖11 said Ian Fletcher, automotive analyst at IHS Global Insight12.
THE NUMBER ONE AUTOMAKER Over the years, Toyota had made a name for itself for its innovations, financial soundness, and global competitiveness (Refer to Exhibit III for world‘s most admired companies and Exhibit IV for Toyota‘s industry rank on key attributes). Toyota was founded by Kiichiro Toyoda in 1937. In its initial years, it focused on adapting the Ford Production System to suit the Japanese market. However, it later adopted its famed Toyota Production System13 (TPS, also referred to as ―lean manufacturing system‖), which took the automobile industry by storm and enabled the company to come out with many innovative models in a cost-efficient way. Following World War II, international manufacturers were concentrating on medium-sized and larger cars but Toyota kept its focus on small cars. Kiichiro resigned from Toyota in 1950 and the company saw a series of Presidents in subsequent years. The company started its globalization in the 1950s and entered the US market in 1957. It established its first overseas production unit in Brazil in 1959. It entered the European market in 1963. Besides manufacturing, the company started a global network of design and R&D facilities covering the three major car markets of Japan, North America, and Europe. The company underwent rapid expansion in the 1960s and 1970s and exported fuel-efficient small cars to many foreign markets. It focused on lowering its production costs and on developing more sophisticated cars. The Toyota Corolla, which went on sale in 1966, became Japan‘s most popular family car. By the early 1970s, Toyota‘s production was behind that of only GM and Ford Motor Company. It also began to tap the markets in the Middle East. By 1974, Toyota Corolla had become the largest selling car in the world, and a decade later, Toyota ranked second only to GM in the total number of cars produced. By the end of the 1980s, Toyota began to build new brands and the luxury division, Lexus, was launched. During this period, Toyota continued to strive for improvements and its manufacturing processes served as a model for other companies. 7 8 9 10 11 12
13
As of September 2009, US$1 approximately equals ¥90. www.toyota.co.jp/en/news/09/0804_1.html. Hiroko Tabuchi, ―Toyota Posts $819 Million Loss,‖ www.nytimes.com, August 4, 2009. ―Toyota Reports $819 million Quarterly Loss,‖ http://news.moneycentral.msn.com, August 4, 2009. Jorn Madslien, ―Toyota Scion to Revive Prudent Culture,‖ http://news.bbc.co.uk, June 23, 2009. Founded in 2001, IHS Global Insight provides economic, financial, and industry analysis, data and software solutions and consulting services. The first principle of TPS was called ―jidoka‖ which means that when a problem occurred, the equipment stopped immediately, thus preventing defective products from being produced. The second was the Justin-Time (JIT) concept in which each process produced only what was required by the next process in a continuous flow. 2
Toyota: The Once-in-a-Century Challenge
After some setbacks in the early 1990s, the company began to grow further under the leadership of Hiroshi Okuda, who focused on international expansion and localization of production. He also developed a strong dealership network and increased advertising. This resulted in a significant increase in sales. One of Toyota‘s major innovations was the Prius, a gasoline-electric car and the world‘s first mass-produced hybrid car. The car was launched in 1997. Prius and all the subsequent models launched by Toyota were successful in the US and further consolidated the company‘s position in the country. The company‘s overseas production increased from 1.22 million units per year in 1994 to 1.54 million units per year in 1998. In 1999, Fujio Cho became the President of Toyota. Besides increasing manufacturing centers and expanding sales networks worldwide, Cho focused on localizing design, development, and purchasing in every country. Toyota propagated the TPS and its unique corporate culture, ‗The Toyota Way‘ throughout its global manufacturing units. Toyota employees world over practiced philosophies such as Kaizen (continuous improvement), PDCA (plan, do, check, action), Pokayoke (mistake-proofing), and Just-in-Time (JIT). During the 2000s, Toyota registered strong sales in the US and Japan. In 2000, for the first time ever, Toyota‘s total worldwide production exceeded five million vehicles. In 2001, Toyota started two new plants in Europe and in 2002 it established Toyota Motor Manufacturing Turkey to manufacture Corolla sedans for export markets. In April 2002, Toyota announced a new corporate strategy ‗2010 Global Vision‘ to achieve a 15% market share of the global automobile market by early 2010. By mid-2003, Toyota had a presence in almost all the major segments of the automobile market that included small cars, luxury sedans, full-sized pickup trucks, SUVs, small trucks, and crossover vehicles. In 2005, Katsuaki Watanabe14(Watanabe) was appointed President of the company. In the first quarter of 2007, Toyota replaced GM as the world‘s leading automaker, breaking the latter‘s 77year reign. The company sold about 2.35 million vehicles compared to GM‘s 2.26 million. Based on the market capitalization, Toyota was valued at almost 12 times GM‘s value.
PROBLEMS In the new millennium, automakers had to contend with many challenges including high gas prices. As the global financial crisis deepened in 2008, the consumer demand for cars and other goods plummeted, especially in the US and European markets. Because of the credit crunch, automobile sales dropped significantly as consumers stopped buying new cars. This led to a fall in vehicle sales of auto companies. Automakers reacted by cutting back production and slashing jobs. In 2008, though Toyota‘s sales were down 4% from 2007, the company sold about 8.97 million vehicles compared to GM‘s 8.35 million.15 Toyota‘s hybrid technology car Prius became popular due to the increase in gas prices. But eventually the company too was affected and its global sales fell 32.3% in October 2008.16 In North America, which accounted for a third of Toyota‘s worldwide revenues, US sales fell 15.4% to 2,217,660 vehicles in 2008. The sales of large pickups were down about 25% and the sales of SUVs fell by 30%.17 The company‘s sales were also affected in Europe and Japan. 14
15 16 17
Katsuaki Watnabe served as the president of Toyota from 2005 to mid 2009. He led Toyota on an aggressive and a largely successful growth track. He joined Toyota in 1964 and gained experience primarily in corporate planning and administrative affairs. In 1999, Watanabe was appointed as senior managing director, after which he assumed the position of executive vice-president in 2001. In June 2005 he was appointed as the president of Toyota. Nick Bunkley, ―Toyota Ahead of G.M. in 2008 Sales,‖ www.nytimes.com, January 21, 2009. http://topics.nytimes.com/top/news/business/companies/toyota_motor_corporation/index.html. Bill Vlasic and Nick Bunkley, ―Toyota Scales Back Production of Big Vehicles,‖ www.nytimes.com, July 11, 2008. 3
Toyota: The Once-in-a-Century Challenge
In early 2009, Toyota projected a loss of ¥450 billion (US$5 billion) for the fiscal year 2009 in its vehicle-manufacturing operations. It also applied for an emergency loan of about US$2 billion funded by the Japanese government to make up for car loans in the US.18 In April 2009, Toyota sold about 126,540 cars in the US, a 42% drop compared to the corresponding period of 2008. The company slipped behind Ford, which sold almost 130,000 cars during the same period. Unsold Toyotas lay piled up on storage lots. Toyota also witnessed a drop in sales in Japan and China, where it lost out to rivals who were coming up with a wider lineup of smaller cars at reasonable prices. In May 2009, Toyota reported its first annual net loss in six decades as net revenues for the fiscal year 2009 totaled ¥20.53 trillion, a decrease of 21.9% compared to the previous year. Net income decreased from ¥1.72 trillion to a loss of ¥437 billion. Consolidated sales totaled 7.57 million units, a decrease of 1.34 million units compared to 200819 (Refer to Exhibit V, VI, and VII for balance sheet, income statement and five-year stock chart of Toyota respectively). Analysts felt that this was a dramatic turnabout for an automaker whose steady expansion and record profits had seemed unstoppable.
WHAT WENT WRONG? Analysts felt that Toyota‘s bad performance was due to the fact that it had expanded its global production facilities in the mid-2000s to meet brisk demand, particularly for its fuel-efficient cars, leaving it vulnerable to the current slump in worldwide sales. Toyota‘s drive into the American big truck market also contributed to its troubles. ―The damage was great at Toyota because it was heading toward aggressive expansion with its foot slammed on the accelerator,‖ 20 said Tatsuo Yoshida auto analyst at UBS Securities Japan Ltd.21 Some analysts opined that Toyota‘s troubles had started in 2006. In November 2006, Toyota opened a new plant in San Antonio, Texas, to manufacture the largest pickup the company had ever built, the Tundra, just before cracks emerged in the US subprime-mortgage market. Usually Toyota designed each assembly line to accommodate many models, but in San Antonio, it broke the rule, dedicating a whole plant to the production of a single vehicle. Watanabe invested about US$ 3 billion in the plant and launched the Tundra in 2008. Analysts pointed out that the pickup had been launched at a time when the global auto industry was witnessing a slump. The relatively high-priced Tundra failed to make a dent in the market and its inventory piled up. Subsequently with sales of pickups and SUVs tumbling, Toyota had to shut down truck production at its two US plants for about three months in 2008. ―In many ways, Toyota‘s strategy hasn‘t been any different than G.M. or Ford, which was to build bigger vehicles with bigger engines and bigger profits,‖22 said Maryann Keller, an industry consultant. In February 2009, Toyota‘s Honorary Chairman Shoichiro Toyoda (son of Toyota‘s founder) summoned 400 company executives to the redbrick factory in Nagoya, Japan. During the meeting, he confronted Watanabe about the losses incurred by the company and the threat to everything his family had created over the years. Critics felt that Watanabe had failed miserably in predicting the loss in sales and also in taking quick decisive corrective action. Watanabe attributed the poor results to a fall in vehicle sales, particularly in the US and Europe, the strong appreciation of the yen against the dollar and the euro, and the rising cost of raw materials. Toyota manufactured 18 19 20 21
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Ian Rowley, ―Auto Bailout: Et Tu, Toyota?‖ www.businessweek.com, March 3, 2009. www2.toyota.co.jp/en/news/09/0508_1.html. ―Toyota Reports $819 Million Loss,‖ http://www.nytimes.com, August 4, 2009. Based in Tokyo, UBS Securities Japan Ltd. is an investment-banking firm which provides financial advisory services. Bill Vlasic and Nick Bunkley, ―Toyota Scales Back Production of Big Vehicles,‖ www.nytimes.com, July 11, 2008. 4
Toyota: The Once-in-a-Century Challenge
about half of its vehicles in Japan and a stronger yen made exports from Japan more expensive. Experts were of the opinion that as Toyota exported about 40% of its American sales from Japan, the profit margins had been lowered. Talking about the problem, Nomura Securities Co., Ltd.23 analyst Shinya Naruse said, ―Automakers cannot profit from exported cars at current forex conditions. There is no way to recover without restructuring.‖24 Toyota announced that it would lose another ¥550 billion (US$5.5 billion) in 2009. Experts opined that the company, which was expected to lose US$ 5.7 billion more in the fiscal year 2010, would not recover till 2012 even if sales rebounded. According to Christian Takushi, a portfolio manager for Swisscanto Asset Management AG25, ―Toyota has overdone itself with capital spending because they really wanted to be No. 1. They‘re paying a high price.‖26
CHANGE IN LEADERSHIP Toyota expected that the global vehicle demand would eventually increase. However, for the fiscal year 2010, the company expected its global unit sales to fall about 14% to 6.5 million vehicles.27 The projected slip forced Toyota to make changes at every level right from its plants to its dealerships to the top management of the company. The automaker made production cuts across its 74 global assembly lines, laid off temporary workers in Japan, and cut pay for its managers. It suspended production at some of its factories, implemented shorter workweeks, and offered buyouts to American workers. Toyota did not shut down any factories and retained its production capacity of 10 million vehicles per year but put construction of new plants on hold. Directors too had to forego bonus pay and for the fiscal year 2009, Toyota slashed its annual dividend by ¥40 to ¥100, thereby ending a decade-long record in which the dividend had jumped six-fold. The company began looking for a leader who would steer the company back toward profits. In January 2009, the company announced that it had selected Akio to lead the company and manage a turnaround. In June 2009, the Toyota board replaced Watanabe with Akio, heralding the return of a member of the founding family as the head after 14 years. After a stint as an investment banker, Akio had joined Toyota in 1994 as a junior manager and had worked his way up. He had assumed various domestic and international positions and was also credited with spearheading some of Toyota‘s online initiatives. He joined the Toyota board in 2000 and in 2001, he became the Chief Officer of the Asia and China Operations Center. In 2002, he assumed the position of MD and after a year he was made a senior MD. In 2005, he became an Executive Vice-president (EVP) of the company and oversaw Toyota‘s China operations, Japan sales, and the company‘s Internet business. At conservative Toyota, Akio was considered a bit of a radical and was not averse to pushing through unpopular decisions. Reactions to Akio‘s appointment were mixed among analysts as well as those in the company. Some welcomed the appointment as they felt that he had enough experience in the automobile market and was aware of all aspects of the company‘s operations. However, there were also murmurs in certain quarters that nepotism had played a role in Akio‘s accession to the top position. They felt that with less than a 2% stake in the company, the founding family could not make an automatic claim to this position. Chris Richter, a senior research analyst at CLSA28, said, ―Good management requires good skill and good training and doesn‘t necessarily follow blood lines.‖29 23 24 25
26 27 28 29
Nomura Securities Co., Ltd. is a brokerage firm in Japan. Yuki Oda, ―A Rough Road Ahead for Toyota‘s New Chief,‖ www.time.com, January 22, 2009. Swisscanto Asset Management AG is a Switzerland based asset management company which offers investment solutions to clients. ―Toyota‘s New President Switches Gears,‖ www.miamiherald.com, July 20, 2009. Hiroko Tabuchi, ―Toyota Posts an Annual Loss,‖ www.nytimes.com,May 8, 2009. A Hong-Kong-based brokerage house. Yuki Oda, ―A Rough Road Ahead for Toyota‘s New Chief,‖ www.time.com, January 22, 2009. 5
Toyota: The Once-in-a-Century Challenge
Many were surprised by the appointment as it was rare in Japan‘s conservative corporate culture that valued seniority, to appoint a person in his 50s as the President of the company. Some analysts were concerned that the company had been put in the hands of a relatively young member of the Toyoda family at such a turbulent time. James Womack, chairman, Lean Enterprise Institute, added, ―I don‘t think anybody sees Akio as a highly original kind of guy, but he‘s really earnest. He‘s been in the Toyota system all his life. He doesn‘t know anything else but to go back to the basics.‖30 As part of the management reshuffle, five new EVPs and eight board members were appointed, while two key company members, Shoichiro and Senior Adviser Okuda, resigned from the board. Former Toyota executives Yoshimi Inaba and Yasumori Ihara were called back, while Watanabe was appointed Vice-chairman.
BACK TO BASICS Akio planned to adopt a ―back to basics‖ approach to revive the company. ―The global automobile industry has been facing extreme hardships since the latter half of last year… We expect our losses to deepen this fiscal year, and so all of us in the new management team at Toyota feel like we are setting sail during a storm. Unfortunately, we are currently losing money… So, we must start again from the very bottom up.‖31 He planned to produce small, fuel-efficient and competitively priced cars that people could afford, cut costs, and establish a strong presence in emerging markets. Akio wanted to re-instill dedication to one of the pillars of TPS – genchi genbutsu32 (―go and see for yourself‖). ―If I am going to be at the top of the car company, I want to be the owner-chef. I taste my car, and if it tastes good, I provide it to the customer,‖33 he said. He added that he would follow the corporate traditions of the company, embrace change, and at the same time, maintain his own individuality. Akio intended to squeeze costs from the company‘s already lean operations so that the company would be profitable using just 70% of its production capacity and use the downtime to train workers. He had no plans to close plants or cut full-time jobs as he was banking on customers and the rank-and-file to steer the automaker out of its worst crisis. Akio volunteered to take a 30% pay cut for one year and other top managers too accepted pay cuts. The aim of the company was to save extra US$ 8.5 billion in costs in 2009. According to Akio, the company‘s entire product lineup would be reviewed to ensure a better focus on its offerings to every region in the world. Toyota would concentrate on building more small cars and fewer large cars. ―Rather than asking, ―How many cars will we sell?‖ or, ―How much money will we make by selling these cars?‖ we need to ask ourselves, ―What kind of cars will make people happy?‖ as well as, ―What pricing will attract them in each region?‖34 he said. Toyota was also to focus on ―green‖ technology like hybrids and plug-in electric vehicles. Akio slashed the price of the third-generation Prius to a reasonable US$ 21,000, almost US$ 11,000 less than the fully equipped models. The company said that it would begin making its Prius gas-electric hybrids at a new plant in Mississippi by late 2010.
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John Lippert, Alan Ohnsman and Kae Inoue, ―Toyoda Asks How Many Times Toyota Errs Emulating GM Failures,‖ www.bloomberg.com, June 22, 2009. ―Toyota Clings to World Number-One Sales Spot Despite First-Half Decline…,‖ www.edmunds.com, July 30, 2009. Genchi Genbutsu means ―Go and see the problem first hand‖ The Company believed that practical experience is valued over theoretical knowledge. Martin Fackler and Bettina Wassener, ―Grandson of Toyota Founder Will Lead,‖ www.nytimes.com, January 20, 2009. www2.toyota.co.jp/en/about_toyota/message/index.html. 6
Toyota: The Once-in-a-Century Challenge
Toyota also planned to take advantage of government incentives around the world, such as the cash-for-clunkers35 schemes, promoting more environmentally-friendly cars in Japan, Europe, and the US.
REGIONAL AUTONOMY The company‘s management was to place a priority on meeting the needs of regional markets by closely watching consumers and markets and noticing changes. In order to respond to consumer needs, each of the EVPs was to oversee a global region — North America, Europe, Japan, and emerging markets. Depending on the region, the company would then come out with an appropriate product strategy. Akio added that a more regionally-oriented management structure would help the company provide cars that met specific local tastes rather than offering a full lineup of vehicles in all markets. ―Together, we will create clear ―Regional Vision‖ plans by determining what role Toyota should play and what we want to achieve in each region. We will also consider our capacity and the market situation in those regions, in order to identify areas where we want to advance, and areas where we need to take a step back. These decisions will allow us to better prioritize the allocation of our resources,‖36 he said. On July 31, 2009, Toyota announced that it was setting up two marketing companies, one to operate within Japan and one for the global market to handle marketing and focus on customer-centered activities. The companies would start operating on January 1, 2010. In Japan, the size of the overall market was estimated at about 12 million vehicles. In 2009, the market size for new cars was expected to be less than 3 million units. In the Japanese market, Toyota‘s sales were stable mainly because of the incentives offered by the Japanese government such as the ―eco-car tax deduction‖ and the ―scrap incentive for buying eco-cars.‖ Akio did not foresee any problems in sales but felt that its capacity in Japan was a problem area and the company needed to right-size.37 Though Toyota‘s sales in the North American market had dropped sharply because of the economic downturn, Akio was confident that the market would recover gradually. Toyota‘s US sales declined 38% in 2009.38 As North America was one of the important markets for Toyota, Akio aimed to build more autonomous operations in this region and shift its focus to marketing a region-specific vehicle line-up. The company aimed to revamp its image in North America with the restructuring of the Lexus and the Scion. ―Toyota had a strong desire to become a U.S. car company. I believe that decision was correct, and we will try to strengthen even more. Of course, looking at the current situation, I would say our production capacity may be a little bit too much,‖39 he said. Akio said that the company would discontinue building pickups in Indiana and move all of its Tundra production to San Antonio and devote the new Mississippi facility to the Prius, which had earlier been built exclusively in Japan. As a cost-cutting measure, Toyota decided to suspend truck production at its plants in Princeton and San Antonio from August 2009 until November 2009. In July 2009, the company announced that it might end production at the NUMMI40 plant in Fremont as its partner in the joint venture, GM, had decided to quit the facility. 35
36 37 38
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In April 2009, US officials introduced the cash-for-clunkers program under which car owners who upgraded to cleaner, fuel-efficient vehicles from cars that were at least 13 years old received government subsidies. http://www2.toyota.co.jp/en/about_toyota/message/index.html. http://www2.toyota.co.jp/en/about_toyota/message/index.html. Ken Thomas, ―Toyota Executive: Automaker Hoping to Make Quick Decision on California Joint Venture Plant,‖ http://gadgetophilia.com, July 20, 2009. Alex Taylor III, ―Toyota‘s New Man at the Wheel,‖ http://money.cnn.com, June 26, 2009. GM and Toyota resurrected the plant after GM had closed it down in 1982. The NUMMI venture began production in 1984. In addition to the Vibe, the plant was making the Toyota Tacoma and Toyota Corolla in 2009. 7
Toyota: The Once-in-a-Century Challenge
Toyota also planned to bolster its presence in Europe by developing a distinctive Toyota business model in the region. Its presence had been rather weak in this region and the company wanted to change this by focusing on its hybrid technology. ―[A]s stricter environmental regulations come into place, we are gradually shifting our focus to the hybrid segment. We are confident that this will create a stronger position for Toyota in Europe. Europe is also a place where Toyota can learn about ―automotive culture.‖ I have always admired the fact that cars play a major role in the lives of Europeans and that they love the experience of driving. Hopefully, we can find ways to transfer that excitement to other regions around the world,‖41 said Akio. Toyota would start making hybrid cars in Europe from 2010 onwards. Akio also gave more importance to emerging markets such as China, Asia, and South America as he felt that these regions had very good potential. ―These markets have amazing growth potential, and I can see that China will someday stand alongside the United States as a giant single market. In order to meet customers‘ needs, we will – as always – take straightforward steps… Expanding our reach in these markets will help increase our overall sales volume and profits, so I am determined to establish proactive business plans in these areas,‖42 he said.
CHALLENGES AHEAD Akio expressed confidence that Toyota would bounce back but he added that it would take at least two more years for the company to turn a profit. Some analysts too echoed this view. According to CLSA‘s Richter, ―Toyota has a history of rising to overcome crises. I think it will be quite a few years before anyone could challenge Toyota‘s No. 1 spot.‖43 Despite the drop in sales by 26% in the first half of 2009, Toyota was still the world‘s top-selling automaker (Refer to Exhibit VIII for world‘s top 10 auto groups by 2009 H1 sales). Analysts also felt that the company‘s strong financial position would help it withstand even a situation in which sales continued to decline for another two years. They noted that Toyota was in a much better position than its major competitors whose very survival was at stake. According to the company, Toyota was witnessing signs of recovery as its global production in June 2009 decreased by a modest 23.7% to 636,307 units from the same period in 2008.44 The company forecast a smaller annual loss in 2009 due to deep cost reductions and predicted vehicle sales of 6.6 million units in 2009. The sales boost was expected from Japan where production had picked up due to incentives and tax breaks on environmentally-friendly vehicles. Toyota said that it expected a ¥450 billion (US$4.7 billion) loss for the fiscal 2010, less than the ¥550 billion loss that had been initially projected. Toyota might be able to boost its American market share to 21.3% by 2011 as GM and Chrysler shut plants and dealerships, analysts said. According to James Hunt, an investor at Tocqueville Asset Management LP,45 ―Toyota should emerge from the downturn in an even stronger position relative to competitors.‖46 Toyota was optimistic that sales would improve gradually in all its major markets driven by the popularity of some of its models like the Prius. Commenting on how the company would respond to the challenges it faced, Akio said, ―We may have to slightly change some of the ways of doing 41 42 43 44
45 46
www2.toyota.co.jp/en/about_toyota/message/index.html. www2.toyota.co.jp/en/about_toyota/message/index.html. Yuki Oda, ―A Rough Road Ahead for Toyota‘s New Chief,‖ www.time.com, January 22, 2009. ―Toyota Clings to World Number-One Sales Spot Despite First-Half Decline, Sets Up New Marketing Companies,‖ www.edmunds.com, July 29, 2009. Tocqueville Asset Management LP (TAM) is a US-based privately owned investment management firm. John Lippert, Alan Ohnsman and Kae Inoue, ―Toyoda Asks How Many Times Toyota Errs Emulating GM Failures,‖ www.bloomberg.com, June 22, 2009. 8
Toyota: The Once-in-a-Century Challenge
business, depending on the changes of the market. Some of the good things we did, and also notso-good things we did, may not completely fit the situation. So while preserving our good DNA, I would like to have the courage to change some things if those things have to be changed.‖47 Economists warned that the economic situation would not bottom out until the second half of 2009 and that the sales trend in major markets such as the US and Japan indicated that the demand for automobiles had not yet improved. Experts felt that Toyota would have to adjust to this new paradigm of lower sales growth and higher technology spending.48 But some analysts felt that a cyclical recovery was underway in the industry. In June, purchases had started improving led by China in the emerging markets and Germany in the developed markets (Refer to Exhibit IX for international car sales outlook and Exhibit X for car sales in developing nations). Some analysts were, however, apprehensive about Toyota‘s future performance and said that the company faced an ‗identity crisis‘ and might take time to adjust to the changes made by the new President. Some felt that Akio might not be able to take key decisions independently because at Toyota, major decisions were traditionally taken through consensus. In the US, its key market, the company would have to also closely analyze the changing political climate with President Barack Obama urging consumers to ―buy an American car‖. Some analysts were also concerned that Toyota‘s focus on smaller vehicles might reduce its earnings. Analysts felt that Akio had been handed over the reins of the company at a critical time and as such, every decision he took would be under scrutiny. In addition, there was pressure on him to prove his detractors wrong. According to Dirk Gibson of DCJAutoParts.com49, ―The billion yen question is whether Akio Toyoda can pull it off? Can you imagine coming into a more difficult situation than the 2009 auto market? He seems ready for the task with his first step being to cut his own salary by 30 percent. While a good PR move, his decisions over the next two years will be far more telling when it comes to the restoration of the reputation of Toyota.‖50
47
Alex Taylor III, ―Toyota‘s New Man at the Wheel,‖ http://money.cnn.com, June 26, 2009. ―Toyota‘s New Boss Vows Changes amid ‗Stormy‘ Start,‖ www.businessworld.in, June 25, 2009. 49 DCJAutoParts.com is an online retailer of auto parts and accessories. 50 Dirk Gibson, ―Toyota : A Look at the New CEO,‖ www.articlealley.com, July 21, 2009. 48
9
Toyota: The Once-in-a-Century Challenge
Exhibit I Vehicle Production, Sales and Exports of Toyota*: 2008 Toyota
Daihatsu
Hino
Total
Japanese Production Overseas Production
4,012 4,198
793 115
106 -
4,912 4,313
Total Global Production
8,211
908
106
9,225
Sales in Japan Overseas Sales
1,470 6,526
642 224
41 69
2,153 6,819
Total Global Sales
7,996
866
110
8,972
Exports
2,586
130
67
2,783
*In units, 1 unit=1000 vehicles (Figures rounded to the nearest hundred) Source: Toyota in the world 2009
Exhibit II Toyota‟s Primary Markets*: 2008
*Based on Vehicle Unit Sales for fiscal 2008. Source: Toyota Motors 2008 Annual Report
10
Toyota: The Once-in-a-Century Challenge
Exhibit III World‟s Most Admired Companies 2009 Rank
Company name
2008 Rank
Company name
1
Apple
1
Apple
2
Berkashire Hathaway
2
General Electric
3
Toyota Motors
3
Toyota Motors
4
Google
4
Berkashire Hathaway
5
Johnson &Johnson
5
Procter & Gamble
6
Procter & Gamble
6
FedEx
7
FedEx
7
Johnson &Johnson
7
Southwest Airlines
8
Target
9
General Electric
9
BMW
10
Microsoft
10
Microsoft
Source: http://money.cnn.com
Exhibit IV Toyota‟s Industry Rank on Key Attributes: 2009 Attributes
Industry Rank
Innovation
3
People management
3
Use of corporate assets
2
Social responsibility
1
Quality of management
2
Financial soundness
1
Long-term investment
2
Quality of products/services
2
Global competitiveness
2
Source: http://money.cnn.com
11
Toyota: The Once-in-a-Century Challenge
Exhibit V Toyota‟s Balance Sheet (All amounts in US$ millions except per share data)
2009
2008
2007
Cash
25,093.7
16,401.1
16,115.2
Net Receivables
56,618.1
63,864.0
55,513.1
Inventories
14,710.7
18,386.8
15,297.5
Other Current Assets
17,470.7
23,068.5
13,003.5
113,893.2 121,720.4
99,929.4
Current Assets
Total Current Assets Net Fixed Assets
74,608.9
78,674.7
68,353.2
Other Noncurrent Assets
104,443.2 126,492.7 107,951.6
Total Assets
292,945.3 326,887.8 276,234.1
Current Liabilities Accounts Payable
13,098.5
22,284.8
18,754.3
Short-Term Debt
63,677.2
62,723.7
49,739.5
Other Current Liabilities
29,964.4
35,246.7
31,291.9
106,740.1 120,255.2
99,785.6
Total Current Liabilities Long-Term Debt
63,518.8
60,244.0
53,115.2
Other Noncurrent Liabilities
21,269.5
26,850.5
22,963.3
Total Liabilities
191,528.4 207,349.7 175,864.1
Shareholder‟s Equity Preferred Stock Equity Common Stock Equity Total Equity
--
--
--
101,417.0 119,538.0 100,370.1 101,417.0 119,538.0 100,370.1
Shares Outstanding (millions)
1,567.9
*Toyota Motors financial year ends on March 31. Source: www.hoovers.com
12
1,567.9
1,567.9
Toyota: The Once-in-a-Century Challenge
Exhibit VI Toyota‟s Income Statement (All amounts in US$ millions except per share data)
2009
2008
2007
Revenue
206,938.1 264,758.9 203,079.8
Cost of Goods Sold
186,034.5 205,975.5 163,056.8
Gross Profit
20,903.6
58,783.4
40,023.0
10.1%
22.2%
19.7%
SG&A Expense
25,550.6
25,162.5
21,039.0
Depreciation & Amortization
15,071.3
15,017.2
11,724.4
Operating Income
(5,176.1)
25,009.7
20,622.0
Operating Margin
--
9.4%
10.2%
(1,906.5)
2,144.7
519.1
923.2
(464.4)
--
(5,648.6)
24,545.3
20,203.7
(568.9)
9,179.7
7,617.7
Net Income After Taxes
(5,079.7)
15,365.6
12,586.1
Continuing Operations
(4,404.3)
17,300.8
13,941.4
--
--
--
Total Operations
(4,404.3)
17,300.8
13,941.4
Total Net Income
(4,404.3)
17,300.8
13,941.4
Net Profit Margin
--
6.5%
6.9%
(2.80)
10.89
8.68
2.07
2.84
1.91
Gross Profit Margin
Nonoperating Income Nonoperating Expenses Income Before Taxes Income Taxes
Discontinued Operations
Diluted EPS from Total Net Income (US$) Dividends per Share *Toyota Motors financial year ends on March 31. Source: www.hoovers.com
13
Toyota: The Once-in-a-Century Challenge
Exhibit VII Five-Year Stock Chart of Toyota
Source: http://bigcharts.marketwatch.com.
Exhibit VIII World‟s Top 10 Auto Groups by 2009 H1 Sales Rank
Company
Sales (US$ million)
1
Toyota Motor Corp
3.564
2
General Motors Co
3.553
3
*Volkswagen AG
3.265
4
#Hyundai Motor Co
2.153
5
**Ford Motor Co
2.145
6
PSA Peugeot Citroen
1.587
7
Honda Motor Co
1.586
8
Nissan Motor Co
1.546
9
Suzuki Motor Corp
1.15
10
Renault SA
1.107
*Excludes Scania ** Ford publishes wholesale, not retail, figures # Including Kia Motors Corp (000270.KS) Source: www.reuters.com
14
Toyota: The Once-in-a-Century Challenge
Exhibit IX International Car Sales Outlook (Millions of units) 1990-99 2000
2001-06 2007
2008
2009
Total Sales
39.20
46.64 48.63
54.92 52.17 48.19
North America*
16.36
19.77 19.45
18.83 15.85 12.44
Canada United States Mexico
1.27 14.55 0.54
Western Europe 13.11
1.55
1.60
17.35 16.81 0.87
1.04
14.75 14.54
1.65
1.64
1.42
16.09 13.19 10.20 1.09
1.02
0.82
14.75 13.54 12.93
Germany
3.57
3.38
3.32
3.15
3.09
3.71
Eastern Europe
1.18
2.38
2.36
3.58
4.01
3.41
Russia
0.78
1.03
1.25
2.31
2.73
2.18
Asia
6.91
7.85
10.23
China
0.33
0.61
2.26
5.15
5.04
6.30
India
0.31
0.60
0.75
1.18
1.20
1.32
South America
1.64
1.89
2.05
3.34
3.70
3.63
Brazil
0.94
1.17
1.30
1.98 2.19
14.42 15.07 15.78
2.30
*includes light trucks Source: Global Auto Report, www.scotiacapital.com, July 31, 2009.
Exhibit X
Source: Global Auto Report, www.scotiacapital.com, July 31, 2009.
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Toyota: The Once-in-a-Century Challenge
References & Suggested Readings: 1. “Uncertainty Remains over NUMMI Plant‟s Fate,” www.tradingmarkets.com, August 5, 2009 2. “Toyota Announces First Quarter Financial Results,” www.toyota.co.jp, August 4, 2009. 3. “Toyota Reports $819 million Quarterly Loss,” http://news.moneycentral.msn.com, August 4, 2009. 4. Yuri Kageyama, “Toyota Reports $819 million Quarterly Loss,” www.wtop.com, August 4, 2009. 5. Global Auto Report, www.scotiacapital.com, July 31, 2009. 6. “Toyota Clings to World Number-One Sales Spot Despite First-Half Decline, Sets Up New Marketing Companies,” www.edmunds.com, July 29, 2009. 7. “Toyota‟s New President Switches Gears,” www.miamiherald.com, July 20, 2009. 8. Ken Thomas, “Toyota Executive: Automaker Hoping to Make Quick Decision on California Joint Venture Plant,” http://gadgetophilia.com, July 20, 2009. 9. Alex Taylor III, “Toyota‟s New Man at the Wheel,” http://money.cnn.com, June 26, 2009. 10. Robert Farago, “New Toyota CEO: “We Need Vehicles That Bring Joy to the Driving Experience,” www.thetruthaboutcars.com, June 26, 2009. 11. Ian Rowley, “Japan: Toyota‟s www.businessweek.com, June 25, 2009.
New
President
Takes
the
Wheel,”
12. “New President at Toyota,” http://english.ntdtv.com, June 25, 2009. 13. “Toyota‟s New Boss Vows Changes amid „Stormy‟ Start,” www.businessworld.in, June 25, 2009. 14. “Founder‟s Grandson to Lead Toyota,” http://news.bbc.co.uk, June 23, 2009. 15. Jorn Madslien, “Toyota Scion to Revive Prudent Culture,” http://news.bbc.co.uk, June 23, 2009. 16. Kae Inoue, “Toyota‟s President Toyoda Takes over Amid U.S. Slump,” www.bloomberg.com, June 23, 2009. 17. “Toyota, Nissan Vow to do Better; Green Cars Key,” www.reuters.com, June 23, 2009. 18. John Lippert, Alan Ohnsman and Kae Inoue, “Toyoda Asks How Many Times Toyota Errs Emulating GM Failures,” www.bloomberg.com, June 22, 2009. 19. Micheline Maynard, “Toyota, Too, is Looking to Cut Costs,” www.nytimes.com, May 12, 2009. 20.
Hiroko Tabuchi, “Toyota Posts an Annual Loss,” www.nytimes.com,May 8, 2009.
21. Todd Crowell, “Toyoda Takes Toyota Wheel,” www.atimes.com, May 8, 2009. 22. “Toyota Announces Year-End Financial Results,” www.toyota.co.jp, May 8, 2009. 23. “Toyota Motor Posts Annual Loss, Forecast Operating Loss of 850 Billion Yen for FY2010,” www.domain-b.com, May 8, 2009.
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Toyota: The Once-in-a-Century Challenge
24. Micheline Maynard, “Taking the Wheel as Toyota Skids,” www.nytimes.com, February 14, 2009. 25. Martin Fackler, “Toyota Forecasts First Annual Net Loss since 1950,” www.nytimes.com, February 6, 2009. 26. “Toyota Predicts Net Loss in Current Fiscal,” www.thaindian.com, February 6, 2009. 27. Yuki Oda, “A Rough Road Ahead for Toyota‟s New Chief,” www.time.com, January 22, 2009. 28. Martin Fackler and Bettina Wassener, “Grandson of Toyota Founder Will Lead,” www.nytimes.com, January 20, 2009. 29. “Toyota Names Akio Toyoda as New President,” www.telegraph.co.uk, January 20, 2009. 30.
“Toyota Taps New President as Global Sales Slide 4%,” www.usatoday.com, January 20, 2009.
31. “Toyota Taps Founder‟s Grandson as New President,” www.chinadaily.com.cn, January 20, 2009. 32. Bill Vlasic and Nick Bunkley, “Toyota Scales Back Production of Big Vehicles,” www.nytimes.com, July 11, 2008. 33. “Toyota „World‟s Largest Carmaker‟,” http://news.bbc.co.uk, April 24, 2007. 34. Jeff Tyler, “Toyota‟s Number One,” http://marketplace.publicradio.org, April 24, 2007. 35. www2.toyota.co.jp 36. Toyota Motors 2008 Annual Report 37. http://money.cnn.com 38. http://bigcharts.marketwatch.com 39. www.reuters.com 40. www.hoovers.com
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