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INB 300 – Discovery Project

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INB 300 – Discovery Project 1 John Hurley Dennis Norton Pablo Quiroga Marc Zelina* Prof. Dr.

John Hurley

Dennis Norton

Pablo Quiroga

Marc Zelina*

Prof. Dr. M. Fetscherin INB 300 – Discovery Project

Date Submitted: December 1 st , 2005

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Cover Page 1 Table of Contents 2 1. Phase I- Company Analysis 4 1.1 Company
Cover Page
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Table of Contents
2
1. Phase I- Company Analysis
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1.1 Company Description
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1.1.1 Overview
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1.1.2 Japan’s Conducive Business Climate
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1.1.3 Mission Statement
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1.2 Marketing Analysis
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1.2.1 Overview
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1.2.2 The United States
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1.2.3 Other Nations
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1.3 Expansion Strategies
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1.3.1 Successful Projects Underway
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1.3.2 Failing International Expansion
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1.4 Financial Analysis
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1.5 Corporate Responsibility
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2. Phase II – Industry Analysis
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2.1. Major Competitors and International Regions
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2.1.1. Overview
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2.1.2. General Motors
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2.1.3. Daimler-Chrysler
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2.1.4. Ford Motors
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2.1.5. Nissan Motors
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2.1.6. Honda Motors
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2.2. Porter 5 Forces and SWOT Analysis
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2.2.1. SWOT
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2.2.2. Porter 5 Forces
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2.2.3. Market Potential
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2.2.4. Projected Growth
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2.3. Major Challenges Facing the Automotive Industry
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2.3.1. Integration of Dealer Networks
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2.3.2. Leveraging Customer Relationships
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2.3.3. Information Gathering and Sharing
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2.3.4. Employee Resources
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2.3.5. Ethical Basis for Production
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3. Phase III – National Business Environments Analysis
3.1.Toyota’s United States Presence
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3.1.1. Overview
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3.1.2. Present-day Toyota in the U.S. – Sales
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3.1.3. Present-day Toyota in the U.S. – Production
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3.1.4. Toyota versus Big Three
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3.1.5. Growth in Sales
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3.1.6. Future Plans for North America
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3.2.
Toyota’s International Presence
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3.2.1. Overview
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3.2.2. Europe
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3.2.3. South Africa

 

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3.2.4. Middle-East

 

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3.2.5. Asia

 

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3.3. Future Global Expansion

 

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3.3.1.

Japanese and International Divisions

 

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4. Phase IV – Synthesis

 

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4.1 Toyota’s Competitive Strategies

 

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4.1.1 Overview

 

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4.1.2 S.W.O.T. Analysis

 

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4.1.3 Diversified Products and Innovative Technology

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4.1.4 Targeted Marketing and International Positioning

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4.1.5 Efficient Manufacturing

 

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4.1.6 Internal Hedging

 

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4.2 Toyota’s Shortcomings

 

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4.2.1

Market Concentrations

 

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4.3 Company Performance

 

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5. Phase V – Emerging Market Expansion

 

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5.1

China

 

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5.1.1 Overview

 

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5.1.2 Current State of the Auto Industry

 

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5.1.3 Toyota’s Current Presence

 

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5.1.4 Potential for a Subsidiary

 

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5.1.5 A Toyota Brand

 

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6. Final Thoughts

 

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Works Cited

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1. PHASE I – COMPANY ANALYSIS

1.1. COMPANY DESCRIPTION

1.1.1. Overview

Toyota Motor Corporation is one of the leading global manufacturers of automobiles, producing all-size vehicles ranging from mini sport-coupes to large trucks. Established on August 28 th , 1937 in Japan, this company has grown to employ over 260,000 employees worldwide, with production facilities in 26 different countries. 1 Toyota’s headquarters remain in the nation of incorporation, Japan, in a city named after the automaker mogul, Toyota City. Along with its head office in the Aichi Prefecture, it has two more offices within Japan, in the capital city Tokyo and Nagoya.

1.1.2. Japan’s Conducive Business Climate

A large part of Toyota’s success can be attributed to the political, economic and demographic factors of the nation. Japan is a constitutional monarchy with a parliamentary system, whose legal model is based on that of European civil law. Currently, the Liberal Democratic Party, or the LDP, headed by Prime Minister Junichiro Koizumi, is in power, which translates into a capitalist outlook on the economy. In turn, the market forces of supply and demand dominate pricing and production. Nevertheless, government-industry cooperation remains important, and is a main reason for global acclaim of the Japanese economy. It is the second most technologically advanced economy in the world, and has the third highest purchasing power parity, following the United States and China. Despite 74.1% of Japan’s GDP being rooted in services, the importance of the industry sector is consistently growing. 2 In large part, this growth can be attributed to the technologically advanced producers of automobiles and electronics, such as Toyota and Sony. Their importance in global markets is consistently increasing, and we can expect the Japanese economy to witness a fundamental shift in years to come. The current composition of the economy reflects the cultural practices of the Japanese, most notably the fact that they are very work-oriented.

1.1.3. Mission Statement

The growth of these high-tech industries is only made possible by following specific guidelines. Toyota’s “guiding principles,” originally devised in Japanese in 1990 and later revised and translated in 1997, address many of the concerns that international businesses must react to in the continuously changing nature of the global market. Its seven principles are as follows:

1 Toyota Motor Corporation. Company Overview. www.toyota.co.jp

2 CIA World Factbook. www.cia.gov

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1. Honor the language and spirit of the law of every nation and undertake open

and fair corporate activities to be a good corporate citizen of the world.

2. Respect the culture and customs of every nation and contribute to economic

and social development through corporate activities in the communities.

3. Dedicate ourselves to providing clean and safe products and to enhancing the

quality of life everywhere through all our activities.

4. Create and develop advanced technologies and provide outstanding products

and services that fulfill the needs of customers worldwide.

5. Foster a corporate culture that enhances individual creativity and teamwork

value, while honoring mutual trust and respect between labor and management.

6. Pursue growth in harmony with the global community through innovative

management.

7. Work with business partners in research and creation to achieve stable, long-

term growth and mutual benefits, while keeping ourselves open to new

partnerships. 3

In abiding by these guidelines, Toyota Motors is making an effort to act responsibly in its penetration of foreign markets. With global expansion comes a need to balance company values with the values of the foreign culture, and the reasoning is two- fold. First, it is imperialistic to enter another country and impose one’s own values with blatant disregard for others, and secondly, it is in the best interest of the company to respect cultural differences. The product will have a greater chance of success if Toyota enters a market and embraces a certain culture, instead of trying to change it outright. These principles successfully helped Toyota become the third largest automaker in the world and the largest in Asia with revenues totaling over $172 million USD in 2005. 4 Trailing marginally behind the world’s top two, General Motors and Daimler Chrysler, respectively, Toyota’s vision for the future make it a valiant competitor for jumping into first place.

1.2. MARKETING ANALYSIS

1.2.1. Overview

Toyota has become a global company, with 51 manufacturing companies in 26 countries, and markets in over 140 countries. Nevertheless, it continues to provide respectable employment opportunities in its home country Japan, with 12 plants and 11 manufacturing subsidiary companies. 5 So, while Japan reduces its labor costs by producing in foreign markets, it still occupies an important role at home, through the provision of an adequate job market. Toyota Motor Corporation is a publicly traded company on many national stock exchanges around the world. As such, its ticker symbol varies; on the New York Stock Exchange (NYSE), TM refers to Toyota Motors. As of September 30 th , the Toyota stock

3 Toyota Motor Corporation. Mission Statement. www.toyota.co.jp 4 Hoover’s A D& B Company. Toyota Motor Corporation. Hoover’s Company Records – In-depth Records.

5 Toyota Motor Corporation. www.toyota.co.jp

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price was $92.37USD, which represents a slight decrease of 1.69% since it closed the day before. This figure is not too far from this year’s stock peak of $94.33, and it is a great improvement from when it hit rock bottom, trading four months ago at $70.95.

1.2.2. The United States

Shares of Toyota climbed 20% in 2004, while many of its largest competitors’ stock prices fell. This gain on the field can be attributed to its competitive cost advantages that allow it to manufacture automobiles cheaper in its foreign plants. Since its entrance into the U.S. market, it has been challenging the Big Three. In 2004, Toyota was in 4 th place with a market share of 12.2%, but managed to jump into third in the beginning of 2005:

but managed to jump into third in the beginning of 2005: Figure 1.1: Toyota’s Market Share

Figure 1.1: Toyota’s Market Share in the U.S. 6

Its U.S. sales account for a large percent of its market-base, and so Toyota is taking advantage of foreign trade zones (FTZs) where customs and taxes are much lower. More specifically, Toyota uses these zones for final assembly, to reduce their ultimate distribution costs.

assembly, to reduce their ultimate distribution costs. Figure 1.2: Toyota’s Production in the U.S. 6 Ridder,

Figure 1.2: Toyota’s Production in the U.S.

6 Ridder, Knight. Toyota may become World’s Biggest Automaker Next Year. Tribune Business News.

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Foreign sales are almost three times that of domestic sales at 69.3% of total sales, and although this seems usual given the population difference between Japan and the rest of the world, we must keep in mind the difficulty of penetrating foreign markets, where domestic producers already dominate the industry (i.e: GM, Ford in the U.S.). Toyota is at the top of the list when it comes to foreign presence, but it continues to pursue an ambitious globalization strategy. Its foreign presence includes existing plants in almost every continent, and its plans to expand into more developing countries carries a strong strategy to become one of the most dominant corporations on the planet.

1.3. EXPANSION STRATEGIES

1.3.1. Successful Projects Underway

Toyota’s global expansion strategy focuses on producing reliable and durable cars at affordable prices. An example of an existing and highly profit-driven expansion project was their 1990’s project to develop in India. Toyota continues its pursuit of a strong market share in the growing industrialization and population of India, already operating two highly productive plants. While the ability of the population to purchase these low cost vehicles is only now beginning to rise, Toyota’s sales are projected to grow in next five years. With the success of Toyota’s presence in India, the company has looked to expand its company’s borders to even more distant locations. Other recent expansions include a plan to develop the company’s 6 th manufacturing plant in North America. Toyota chose San Antonio for its location and hopes to boost its revenues in North America to gain ground on General Motors and Ford. These two traditional automakers have long dominated the industry of truck sales, while Toyota has stayed atop cars with reliable Camry model. The introduction of the plant in San Antonio will boost Toyota’s truck sales for one main reason.

1.3.2 Failing International Expansion

Toyota’s ability to expand manufacturing plants into the middle of flourishing local markets has not always resulted in success. For instance, in the early 1990’s, Toyota found it very difficult to grasp any sort of market share in Central and Western Europe due to the high cost of production. Europe remains a thriving market for economy cars, and Toyota simply could not cater to this demand. Moreover, it was a market already saturated by domestic manufacturers, like Citroen and Renault. Toyota’s expansion plan into Turkey solved the problem of high production costs. With the introduction of manufacturing plants in Turkey, Toyota was able to lower their costs of production, as well as provide a relatively regionally local export country with lower tariff percentages into the European Union. Although Turkey is considered part of the Middle East, it borders Eastern Europe and provides an export-oriented manufacturing division of Toyota that can ship finished products into the European market at a production cost that can compete with the existing domestic vehicle manufacturers.

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1.4. FINANCIAL ANALYSIS

The continuously more efficient economic cars of Toyota are helping it cope with today’s volatile oil prices. Despite the negative effect recent gas shortages and price hikes are having on the global automotive industry, Toyota is continuing to expand in terms of total sales, and revenue. When automakers released their month-end reports of September, 2005, GM and Ford Motors both reported drastic decreases in sales, 24% and 20%, respectively. In stark contrast, Toyota’s overall sales rose 10%, thanks to a 22% increase in car sales. Moreover, they witnessed a 90% increase in sales of Toyota’s hybrid, Prius. 7 An examination of Toyota’s financial figures gives further insight into the growth trends of the corporation, as well as its division between domestic and foreign markets. First, the following figure shows the consistent sales increase since 2001:

figure shows the consistent sa les increase since 2001: Figure 1.3: Toyota’s consolidated vehicle sales for

Figure 1.3: Toyota’s consolidated vehicle sales for 2005. 8

Toyota’s vehicle sales rose 10.3% from 2004 to 2005, with export sales increasing at a faster rate than domestic ones. At the same time, overall vehicle production rose 5.4%, 14.1% overseas and 2.3% at home. 9 This discrepancy shows the increased incentive of producing abroad, in markets that Toyota intends to sell its products. For example, transportation costs are reduced by producing vehicles in the U.S., instead of in Japan and later shipping them overseas. It is interesting to note that although sales and revenues have increased consistently throughout past years, net profits have not followed suit. While a 6.9% decrease in profit does raise some questions for potential investors and shareholders, it is essential to look at the bigger picture. These “losses” are the result of a temporary increased research and development budget, in which the company hopes to continue developing earth-shattering products that will hit the market with a bang. More specifically, these R&D costs focus on developing alternate fuel sources, such as the fuel

7 Associated Press. GM, Ford Sales Tumble in September. www.abcnews.go.com

8 Toyota Motor Corporation. Financial Highlights. www.toyota.co.jp

9 Toyota Motor Corporation. Financial Highlights. www.toyota.co.jp

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cell or the fully electric vehicle. As mentioned above, these investments are already yielding high returns, with the 90% increase of hybrid vehicles.

1.5. CORPORATE RESPONSIBILITY

With the increasingly important effects of globalization, both in terms of production and markets, corporate social responsibility is at the forefront of international business decisions. More specifically, companies are being reminded to act ethically and responsibly, so as not to inflict harm on any group of people. According to International Business: The Challenges of Globalization, social responsibility is defined as the “practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities.” Toyota is leading by example in this regard, and in fact the majority of its “guiding principles” target this particular issue. As a global automaker, perhaps one of the finest examples of social responsibility is protecting the environment through pollution reduction measures. Toyota has taken a stand on this issue, and is leading the way with its production of hybrid vehicles that substantially lower emission quantities. In his Environment and Social Report of 2005, the President of Toyota Motors, Katsuaki Watanabe, noted the importance of producing a product that benefits all its stakeholders. More specifically, the President noted that Toyota must strive to create a product that “benefits both people and the world as a whole,” an assertion that can be seen empirically by the huge research and development costs of Toyota Motors. From 2004 to 2005, R&D costs increased from less than 6 billion USD to over 6.6 billion USD. 10 The general trend of increasing R&D expenses can be seen in the following figure:

R&D expenses can be seen in the following figure: Figure 1.4: Capital Investment and R&D Expenses.

Figure 1.4: Capital Investment and R&D Expenses. 11

As the leading producer of hybrid vehicles, its global competitors are being put to the test in an effort to create a car of comparison. Toyota has set out stringent 2010 fuel efficiency standards, which many of its current cars are already conforming to. This is not

10 CoreData, Inc. International Institutional Database. Toyota Motor Corporation. Financial Highlights. 11 Toyota Motor Corporation. Research and Development. www.toyota.co.jp

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only an environmental accomplishment, but also one that deals with the constant decrease of global oil supply.

2. PHASE II – INDUSTRY ANALYSIS

2.1. MAJOR COMPETITORS AND INTERNATIONAL REGIONS

2.1.1. Overview

Throughout the lifespan of the automotive industry, many competitors have emerged in Japan and throughout the world to compete with Toyota Motor Corporation. Its main competitors are Ford Motors, Honda, General Motors and Daimler-Chrysler. The auto industry is going through an intense period of change, and the shifts in the top companies’ rankings are forcing each enterprise to search for a catalyst to put them at the top. Automobiles reflect a technological revolution of the 19 th century that will not soon be lost, so it is Toyota’s future goal to strive for global market share and outperform its competitors.

2.1.2. General Motors

General Motors has always been a colossal force in the auto industry and is among the rivals of Toyota. Because of its enormous revenues of around $193.5 billion USD, GM ranks number five on the 2005 Fortune 500 list ahead of Daimler-Chrysler (6) and Toyota (7). General Motors is the number one automotive maker in the world with numerous brands of cars and trucks. GM’s brands include Buick, Cadillac, Chevrolet, Pontiac, Saab, Saturn and the popular newly acquired company Hummer. Recently, almost all the main competitors in the auto industry have reported slow or negative growth in profits, and GM is no exception. Their domestic troubles come as a result of their high health care costs, as they are required to provide a healthcare program as benefits for their employees. GM, along with Ford, strive to reduce production costs and launch new models, all while providing their employees with the benefits they deserve. Even with growth in sales and top rank in revenues, GM is not satisfied with its position in the automotive industry. Complete domination of the automotive industry is the goal that GM has in mind, and their plan to invest in competitors is a way to begin this quest. They recently purchased Suzuki and Daewoo stock, and withdrew their stake in Subaru.

2.1.3. Daimler-Chrysler

Daimler-Chrysler has been a powerhouse in the automotive industry for decades and continues to be a popular brand worldwide, ranking second in global automotive sales. Daimler-Chrysler owns Mercedes and the Chrysler Group, and has been looking for a long term growth plan after a decrease in sales in the first two quarters of 2005. With the addition of four new commercial ads featuring the ever popular Lee Iaccoca, Chrysler is resorting to its advertising in the U.S. to capture the American consumer. Iaccoca, who was previously employed by GM, is being used by Chrysler, as well as pop

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icons such as Snoop Dogg and Jason Alexander. Chrysler ranks number six on the Fortune 500 global list with approximately $176.7 billion USD in revenues in 2004. In more recent times, there has been a decrease in the demand for their large-size engine vehicles due to high interest rates and high prices of oil, which affect their market more than that of producers of fuel-efficient vehicles. Despite this fact, the new gas guzzling Mercedes models are still considered Chrysler’s catalyst for expanding their foothold on worldwide markets. They have not yet publicly mentioned any interest in hybrid or fuel celled technology to boost sales, although we can be sure that their engineers are considering the possibilities. 12

2.1.4. Ford Motors

Ford has held its strong reputation for over one hundred years since Henry Ford first invented the “Model T”. Still considered an auto giant with a commanding market share, Ford has thrived by developing its various brands including Aston Martin, Ford, Jaguar, Lincoln, Mercury and Volvo. Ford also owns Hertz, the leading car rental company which has enjoyed success in the U.S. and foreign markets. Ford has primarily relied on its two most popular models to achieve global auto market dominance, which are the Taurus and the F-150 truck series. It has introduced new models since declining revenues in 2001 in hopes of regaining profits. Its new Models include the highly anticipated remake of the Ford Mustang and Mustang GT; however, their numbers have only proven to increase marginally. Ford, much like Toyota, feels that hybrid cars are the new innovative technology that could increase sales revenue due to the recent changes in the economy. Hybrids are an emerging opportunity for the entire automotive industry. They believe that a reduction in the number of its current models by half, while introducing new models of hybrid cars, would translate into lower production costs and attract new consumers based on recent surging gas prices. Ford has had some success with its first hybrid, called the Escape, and is willing to continue production by adding the Mercury Mariner, Fusion, Mercury Milan, and Mazda Tribute. With popularity exponentially increasing for hybrid models due to the environmentally unsafe gas powered pollutants, and irregular gas prices, Ford is considering a movement towards the production of cars powered by fuel cells. With this new innovation, Ford believes it can drastically counterbalance its recent weak profits in North America and Europe that began in 2001.

2.1.5. Nissan Motor

Nissan Motors currently ranks 2 nd in terms of Japanese auto sales, behind Toyota and ahead of Honda Motor Corporation. This is a result of their heightened success of new model cars and trucks in the U.S and Japan. Nissan also owns Infinity, which is an upscale version of Nissan models. They have incurred a solid increase in sales and net income in the past four years following their unfortunate losses of around 300 billion dollars in 2000. Nissan is traded on the NASDAQ, and their stock closed at $22.98 on September 30 th , 2005. Renault, the French automobile company, now has a controlling stake in Nissan and recently implemented its legendary CEO, Carlos Ghosn, considered

12 Daimler-Chrysler Corporation. www.daimlerchrysler.com

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famous for cutting costs in various automotive companies. Nissan is a company aiming to prosper in the future and move up from its 29 th position on the Fortune 500 global list. 13

2.1.6. Honda Motor

Honda ranks two spots higher of the Fortune 500 global list ahead of Nissan Motors despite trailing in the Japanese market. It differs by selling other types of products such as construction and recreational vehicles like motorcycles, as well as cars and trucks. They have five different manufacturing plants in Japan and twenty others located across the rest of the globe. They also have the Honda brand and Acura brand which have been successful lately with gas prices rising. The company’s motorcycle division account for around 13% of its annual revenues, making it one of the largest motorcycle companies in the world. Honda is also traded on the NYSE and currently sits at approximately $29.50 per share. Toyota is not threatened in the short run by Honda, but the volatile nature of the automotive market will surely keep its competitors on its toes. 14

2.1.7. Automotive Industry Competition

       

Global

 

Innovation

Differentiation

Marketing

Brand

Production

Toyota

Toyota
Toyota
Toyota
Toyota
Toyota

GM

GM
GM
GM
GM
GM

Ford

Ford
Ford
Ford
Ford
Ford

Daimler-

Daimler-
Daimler-
Daimler-
Daimler-
Daimler-

Chrysler

Honda

Honda
Honda
Honda
Honda
Honda

Figure 2.1: McKinsey Bubble Analysis of Competitors

Toyota, Ford, and Honda rank highest when it comes to company innovation in the automotive market. This is the result of first-mover development in the hybrid automobile and fuel cell market. Daimler-Chrysler ranks the lowest in this category as they have not yet expressed interest in the development of a hybrid. In comparing the brand names above, all seem to have a low level of differentiation when it comes to their line of automobiles. This is a judgment made relative to the entire automotive industry,

13 Nissan Corporation. www.nissan-global.com

14 Honda Motor Corporation. www.honda.com

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taking into account the luxury brands of Germany and Great Britain. In terms of marketing, it was difficult to differentiate between the successes of the brands. Each excel in different regions more than the other, and there was no clear cut winner in the category. For example, GM already has been successful in marketing its product in China, while Toyota has done a better job in Canada. These conclusions are drawn from

sales figures and personal experience, as concrete marketing-specific data was not found.

A similar scenario exists with global brand recognition; however, we attributed global

branding with technological innovation and overall high sales. Chrysler trailed in the innovation department, and so scored less than the field; moreover, Honda’s sales were not important in all their markets.

2.2. PORTER 5 FORCES AND SWOT ANALYSIS

2.2.1. SWOT

External

+ Emerging hybrid market Decreases in raw material prices New innovative products Increasing technologies

- Increasing oil prices High interest rates Increases in raw material prices

Figure 2.2: Opportunities and Threats to the Market

The emerging hybrid market can be viewed as an opportunity for the entire industry, as it represents potential to gain market share from scratch. If companies can

invest properly in new emerging hybrid technology, they can ensure future sales due to the threat of increasing oil prices. Raw material prices can be considered an opportunity

or a threat to the automotive industry, depending on whether they increase or decrease.

Increasing raw material prices boosts the cost of production and threatens the profit margin of the entire industry. On the other hand, decreasing raw material prices increase profit margins and create heightened competition. Other opportunities include the development of new innovative products, as well as increasing technologies which can be

used to create different models to suit the changes in consumer tastes.

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INB 300 – Discovery Project 2.2.2. Porter 5 Forces 1 4 Figure 2.3: Porter 5 Forces

Figure 2.3: Porter 5 Forces

In marketing, every company listed seems to have generally the same level of marketing capabilities and strategies. In the global brand category, Toyota, GM, and Daimler-Chrysler lead the way in sales throughout the world. These are the three biggest automakers in the world mainly because they have provided brands that are acceptable to more markets throughout the world. Within the markets that Ford and Toyota exist, they are the leading producer of specific automobiles within that market. Ford leads the way with its truck lines, while Toyota leads the way with its economical Camry. Their production measures within their existing markets are at the highest. A summary of the five forces affecting the automotive industry including potential entrants, suppliers, industry competitors, buyers, and substitutes are listed below.

2.2.3. Market Potential

In examining industry trends, it is evident that the automotive industry will continue to grow over the long-term. The automotive market is currently generating sales of more than 60 million units and it is expected to reach 75 million vehicles over the next decade. Global automotive competition is becoming more ferocious as auto manufactures develop large numbers of new models and continue innovating new generation technologies that address environmental issues. Toyota’s response to these conditions is to continue controlling their solid financial infrastructure to strengthen their market competitiveness and continuing to create foundations for long-term growth.

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Projected expansions, along with the growth of Toyota’s hybrid sales, have inspired other competitors to enter the market. The market potential is continually growing due to the gas prices which are making consumers consider purchasing hybrid vehicles.

2.2.4. Projected Growth

According to the Porter 5 Forces model, there are five forces that determine industry attractiveness and long-run industry profitability. The automotive industry is very difficult to penetrate as a new business. Barriers to entry include the high cost of capital that is needed, as well as investment requirements. Public transportation has been a substitute of the automotive industry for as long as it has existed, but only recently has it posed a serious threat to sales. With the increase in oil and gasoline prices, there has never been a better time for consumers to consider the possibilities of traveling in the less convenient, but cheaper modes of public transportation. The threat of public transportation as a substitute to purchasing automobiles is a challenge the industry has dealt with for many decades, and must continue to attend to as we progress into this new millennium. The intensity of rivalry in the automotive industry will continue to be intense given its structure, according to the Porter 5 diagram. There are many equal size competitors with comparable market shares, each trying to assert themselves as the biggest and the best. In recent times, with the growth of new technologies, a majority of the automakers are beginning to develop hybrid models of their own, creating even more intense rivalry.

2.3. MAJOR CHALLENGES FACING THE AUTOMOTIVE INDUSTRY

2.3.1 Integration of Dealer Networks

As the number of dealerships of major automakers grows, the importance of communication between headquarters and these dealers is increasing as well. In order for “consumer’s primary touch point” to be successful in customer service and relations, and in order for these dealers to portray a solid image of the company, there must be a free flow of information both to and from dealers. This transfer of information has recently been facilitated by standardized practices that have been established by the headquarters of these multinational corporations. Also, the increased functions of the internet and email aid in making this flow of information more efficient.

2.3.2. Leveraging Customer Relationships through Demand Chain Planning

The main issue here concerns the reduction of costs through efficiency in catering to customers. Car companies are constantly challenged by new ways of presenting their models, and swaying their client-base to purchase their vehicles. This can fundamentally be traced back to customer service, efficient management and effective advertising campaigns. Beginning in the late 20 th century, internet and information technology in general revolutionized the way the automotive industry related to its consumers, giving

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them the ability to not only view highly advanced websites, but also to email the company directly with any of their concerns. This attempt at establishing a more personal relationship is a step in the right direction to foster consumer loyalty, while reducing overall costs of advertising and customer service.

2.3.3. Information Gathering and Sharing

This issue concerns the effective sharing of information between the different functional units of a corporation, in hopes of reducing overall costs by not having to repeat the same work over. In the past, “traditionally independent functional groups such as sales, service, and marketing” have not collaborated in their research of consumer patterns and customer information, and this has resulted in an inability to maximize “share of wallet” from every customer through cross-selling. In sharing information about their client-base, not only are costs being reduced, but the company is also establishing a unified view of their consumers. This helps in promoting new products on the market

2.3.4. Employee Resources

Similar to the aforementioned point of information sharing, this must extend to include all employees at any dealership. Automotive companies must provide their employees with all the necessary information to deal with clients in such a fast-paced industry, as customers have other options if they feel dissatisfied.

2.3.5. Ethical Basis for Production

The main ethical issue surrounding the automotive industry is one which most industries are facing in today’s day and age, that of outsourcing. Is it ethical for global automakers to export their production to countries where labor costs are reduced, even if brings about certain negative humanitarian ramifications? If we examine this issue from a strictly economic standpoint, and from the company’s perspective, the answer is a resounding yes. In this competitive industry, automakers are constantly trying to reduce costs in hopes of being able to undersell their competitors both domestically and internationally.

3. PHASE III – NATIONAL BUSINESS ENVIRONMENT ANALYSIS

3.1. TOYOTA’S UNITED STATES PRESENCE

3.1.1. Overview

Since Toyota Motors’ incorporation in 1937, its emphasis on foreign market penetration and its successes therein have been remarkable. 2005 marks the year when this automaker asserted its true dominance in the largest automobile market in the world, overcoming a mogul that no other company has yet been able to challenge. Toyota

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increased its market share in the United States to 15.1%, and finally broke into the top three ranking that was forever occupied by the Big Three. It passed Daimler-Chrysler in terms of net sales in the beginning of 2005, and is quickly gaining ground on Ford Motors and General Motors.

3.1.2. Present-day Toyota in the United States - Sales

Despite the U.S. market being the largest and richest automobile market in the world, at this time, it is experiencing a period of stagnation. Domestic auto sales fell 14% in October to 1.15 million vehicles, and left GM and Ford crippled in terms of growth figures. Both suffered 26% sales drops, which represents the third consecutive month of negative sales. They agree that “the industry appears to be headed for a period in which strong players use their financial and market power to hammer weaker ones into surrendering market share,” and so we can expect the larger corporations to draw eventual long-term benefits. 15 For Toyota, the United States already represents a huge block of its sales, and the effect of the stagnation will ironically only propel it more in the future. The following figure shows the vehicle sales by region.

The following figure shows the vehicle sales by region. Figure 3.1: Vehicle Sales by Region 1

Figure 3.1: Vehicle Sales by Region 16

From the above graph, North America represents 30.7% of Toyota’s consolidated sales in 2005, with the U.S. representing a majority of about 70% of consolidated sales. The importance of Canada in Toyota’s production and sales is consistently increasing, and it will be discussed in more detail in a later section of the paper.

1.3.3 Toyota in the United States – Production

The importance of production in the United States does not match the importance of its sales. While it is constantly expanding through the building of new plants in all of North America, it currently relies on its Japanese plants and exports to stock its inventory in foreign markets. Strategic penetration techniques however, such as the use of Foreign Trade Zones, are increasingly being used to reduce transportation costs and in turn the

15 Shirouzu, Norihiko. “Toyota targets U.S. market with expansion plan”. Wall Street Journal

16 Toyota Motor Corporation. Financial Highlights. www.toyota.co.jp

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selling price. The following figure shows Toyota’s current structure of production, showing the importance of its Japanese production plants:

showing the importance of its Japanese production plants: Figure 3.2: Vehicle Production by Region 1 7

Figure 3.2: Vehicle Production by Region 17

With the creation of sixth plant in process, and number seven and eight scheduled soon after, we can expect the 16.0% figure to jump substantially, perhaps as much as 5% by the end of the decade. Toyota is adapting its production to its sales, and thus must reorganize to cater to the growing U.S. market.

3.1.4. Toyota versus Big Three

In recent months, Toyota has been able to gain ground on its main competitors in

the U.S. market due to a decline in demand for the traditional gas-guzzling vehicles produced by American automakers. In large part, this success can be attributed to the recent price hikes for gas that have forced many people in America, and the world in general, to reassess their priorities in selecting an automobile. The increased focus on fuel efficient automobiles has manifested itself through the sales figures of the main automakers, where GM and Daimler-Chrysler have witnessed double-digit declines while companies such as Nissan and Toyota have witnessed increases. Exactly a year ago, the Big Three had a combined stake in the U.S. market of 57%; today, that number dropped by 5%, and now lies at 52%. Not only does this signify a decline in the influence of U.S. automakers, it more importantly signifies a rise in Japanese presence and by extension, a growing demand for smaller and more efficient automobiles. This will force U.S. producers to rethink their cost-cutting strategies and product development, in order to compete with the more affordable, reliable, and fuel efficient vehicles of Toyota and Honda.

A major dichotomy between Toyota and the Big Three lies in the capital spending

amounts of 2004, which reflect current production and sales capabilities. The Japanese producer invested $8.5 billion into capital, a figure about 16% larger than GM’s $7.3 billion. This capital investment can be seen through plant construction, as its sixth is

17 Toyota Motor Corporation. Financial Highlights. www.toyota.co.jp

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currently being built in San Antonio, Texas, and its plans to build two more by the end of the decade.

3.1.5. Growth in Sales

Toyota’s U.S. sales increased from 2004 by 10.4%, selling a total of 2.06 million cars and trucks. To put this number into perspective, Isuzu’s total sales in 2004 matched the average one week sales of Toyota. Although this growth rate is expected to slow by 2010, by this time Toyota hopes to pass Ford Motors and jump into second position of largest automaker in the U.S. In October, Toyota increased sales by 1.3%, and while this figure does not seem impressive, we must put it into perspective. The automobile market trends reveal negative sales figures, and other automakers are still fighting to get out of double-digit red numbers. Toyota’s increase in sales has to do with cutting costs in production, but largely to do with the marketing techniques and demand for Toyota’s models. First, the very fact that the Big Three agreed to rich pension and health-care packages increases the cost of every vehicle by 1 to 2 thousand USD.

3.1.6. Future Plans for North America

First, Toyota’s plant size in North America is expected to reach a total of seven by the end of this decade. Toyota is working on continued production of its new hybrid automobiles, as is apparent by the creation of a plant in Kentucky to solely produce the new hybrid Camry model. It is targeting the preferences of the new American consumer, more interested by fuel efficiency. One of Toyota’s main tools to ensure consistent return on investment is a sort of internal hedging. Since Toyota’s markets are so diverse, and the currencies they use all different, this works as a natural hedge as they have the ability to shift production to any designated region. For example, if the value of the Yen drops against the U.S. dollar, Toyota can choose to increase production at home and reduce production in the U.S., so as to reduce their real cost of production, this is however highly unlikely to happen. This is just one benefit on the multinationals.

3.2. TOYOTA’S INTERNATIONAL PRESENCE

3.2.1. Overview

As a result of high demand Toyota Corp. is opening new plants in continents such as Asia, United States, Latin America, Africa and Europe. Their global presence is rapidly exploding as a result of consumer preference. Toyota will start their campaign to further dominate the automotive industry in Japan. Toyota will boost vehicle and parts production at its five factories in Japan, including one in Hokkaido, two in Kyushu, one in Tohoku, and at Kanto Auto Works Ltd., its vehicle assembly affiliates. This expansion will boost Toyota and its luxury

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brand Lexus' domestic production by 8.6 percent to 3.8 million units in 2006, from 3.5 million units now 18 .

3.2.2. Europe

There are many advantages for Toyota in the European markets. European consumers have a reputation for being cost conscious and environmentally conscious consumers; these characteristics appeal to Toyota’s vehicles. In result, an important advantage for Toyota is the ability to construct manufacturing facilities in lower-cost countries throughout Europe such as Czech Republic. During this year Toyota Corp. and PSA Peugeot Citroën, Europe's second-largest carmaker, raised the competition in Europe when they unveiled three small cars they are producing jointly in a Czech factory. 19 On May 30, Toyota Motor and PSA Peugeot Citroën inaugurated a $1.8 billion joint factory to produce 300,000 cars a year in Kolin, a city of almost 30,000 just east of Prague in the Czech Republic. The plant will employ 3,000 workers. “When it reaches [full capacity], Kolin will be Toyota's most efficient factory in the world,” says Shinichi Sasaki, president and CEO of Toyota Motor Europe. 20 Furthermore, 60% of Toyota’s automobiles sold in Europe are made in the region. For example, the family-size Corolla Versa is made in Turkey for sale only in Europe and the tiny Toyota Aygo is made in the Czech Republic. Europeans are finding ways to cooperate with Toyota like sharing a production line, as PSA Peugeot Citroën does with Toyota in Czech Republic. Toyota faces a challenge because it must gain traction in Europe to reach its stated goal of a 15 % global market share, which would put it ahead of GM as the world's largest carmaker. After analyzing Toyota’s recent growth in the European market the potential for growth is inevitable.

3.2.3. South Africa

Previous to 2004, mining was atop the charts as the number one source of GDP in South Africa. In 2004, there were record domestic sales in the automotive industry, contributing to 7.2 percent of the total GDP of South Africa, finally surpassing that of mining. In 2004, Toyota achieved net sales of 127,868 units in South Africa, finishing the year with a market share of 27.6 percent and achieving the number one spot for 25 years in a row since 1981. The recent boom in sales over the last year was due to a moderate increase in the demand for more urban-style and affordable cars. With the promising growth of South Africa’s currency and business opportunities, there has been a rapid increase in investment throughout the nation. Japan is currently the second largest investor in the overall economy of South Africa, just trailing that of Germany 21 . Auto sales in South Africa are only predicted to increase in the next few years, headed by the industry leading presence of Toyota. Toyota has been a huge community influence in South Africa since it developed its first production plant there in 1961. Since then it has had a significant impact on the

18 Kae Inoue. Toyota Raises Capital Spending 12% to Record 1.4 Trillion Yen. Bloomberg News

19 Tierney, Christine. Toyota, Peugeot make big plans for tiny cars across Europe. The Detroit News.

20 Gail Edmondson. Eastern Europe is becoming the world's newest car capital. Buisness Week Online.

21 www.osakanews.net

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economy of South Africa by developing its numerous production facilities and warehouses. Since the 1970’s, Toyota has also directed its business in South Africa towards sales and service in the region alongside its already thriving manufacturing presence. Currently, there are 249 Toyota dealerships in the 13 colonies of South Africa that are managed by Toyota SA, Toyota’s primary subsidiary in Africa. With the largest network of dealers in South Africa, Toyota has developed a subsidiary that controls a significant stake in the automotive market of the country and its bordering nations. 22 With the significant presence of Toyota affecting the economy of South Africa, Toyota SA has developed various programs to influence the surrounding culture. One of the most successful cultural programs Toyota SA introduced is the Toyota Academy of Learning, a program developed to help train and develop citizens into employees demanded by the increasing automotive industry.

3.2.4. Middle East

The global demand for cars in the region has led Toyota to expand its sales into the Middle East. Toyota currently runs manufacturing companies in India, Turkey and Pakistan. In April 2004, Toyota began exporting the popular Camry from Australia to the Middle East, making its 300,000 th delivery in the region 23 . After years of success with the Australian built Camry in the Middle East, Toyota feels confident that sales will grow 3 percent in this area within the next year. The Dubai Transport Company, which is the largest taxi service in the United Arab Emirates, has also enjoyed great success with the Camry and would like to continue its imports of them. The Australian manufacturing plant has been a great source for the imports needed in the Middle East. The demand for the Camry has forced the Australian manufacturing plant to switch 93% of its exports to the Middle East in the form of the Camry model. The model seems to be popular in the region due to its affordability. The variety of budgets and service policies make Toyota the most successful automotive company in the UAE and have the most potential for future sales throughout the rest of the Middle. The Middle East is an emerging market where Toyota feels its global popularity and implementation of manufacturing plants can hopefully find a permanent and profitable niche in the Middle East.

3.2.5. Asia

Since shortly after its establishment in 1937, Toyota Motor Corporation developed a strong foothold in the Asian automotive market with an enduring presence in Indonesia, Thailand, and Eastern Russia; however, Toyota’s influence in China has always been neglected due to strong internal political and economical policies held by its government. In recent years though, the Chinese government has realized many of the positive advantages that capitalism can hold, and has partially opened its borders to specific markets of interest. Toyota, in turn, has taken its invitation into the Chinese automotive market as one of its primary focuses of interest in the upcoming years in hopes of boosting its influence in the Asian automotive market to new levels.

22 Toyota Motor Corporation. Toyota Global. www.toyota.co.jp

23 Toyota UAE. http://.autoweb.drive.com.au/

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3.3. GLOBAL EXPANSION

Two of the main reasons why Toyota is expanding their production plants overseas are to counter a stronger yen and deliver models faster to dealers around the world. In Europe, Toyota plans to add 30,000 units of capacity to its current 775,000 units, by expanding its factory in Valenciennes, France. Thus, the company is reacting to demand for a new version of the Yaris compact, sold as the Vitz in Japan. Also, Toyota plans to open its first factory in Russia, which will add 50,000 units to European production. By 2007, Toyota will have a total capacity of 855,000 units in Europe. 24 Toyota’s recent development of the Innovative International Multi-purpose Vehicle project could add to their strategic production plans. Toyota began the IMV project for several reasons. They are attempting to expand their global manufacturing and supply systems for multi-purpose vehicles to meet market demands in more than 140 countries. In addition, through this project Toyota is exercising their Business Process Offshore Outsourcing strategies to allow faster vehicle delivery and lower cost while still assuring Toyota’s quality products. The diagram below depicts Toyota’s network locations worldwide:

agram below depicts Toyota’s network locations worldwide: Figure 3.3: Toyota Motors’ Vehicle Supply Network 2 5

Figure 3.3: Toyota Motors’ Vehicle Supply Network 25

From a geographical and historical perspective, the IMV venture represents the third phase of manufacturing for Toyota. In the first stage, Toyota manufactured vehicles in Japan and exported them worldwide. In the second stage, Toyota initiated operations only in key market areas. However, supported by free trade initiatives such as CEPT in the ASEAN countries and other trade agreements, Toyota has entered the third stage. In doing so, Toyota is attempting to continue its growth by reengineering more efficient production and supply frameworks on a global scale. The figure below shows the stages of production in the past and a perspective for the future of Toyota.

24 Kae Inoue. Toyota Raises Capital Spending 12% to Record 1.4 Trillion Yen. Bloomberg News.

25 Toyota Motor Corporation. Toyota’s Vehicle Supply Network. www.toyota.co.jp

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INB 300 – Discovery Project 2 3 Figure 3.4: Toyota Motors’ St ages of Production Development

Figure 3.4: Toyota Motors’ Stages of Production Development 26

The components for the IMV project vehicles are manufactured mostly outside of Japan. This demonstrates Toyota’s confidence in delivering quality vehicles no matter where manufacturing takes place. It also indicates that international countries support the expansion for Toyota’s long-term market. The IMV project will create the biggest manufacture network the corporation has ever seen. Toyota’s BPOO strategy consists of vehicle assembly. For example, Toyota will use plants in Thailand, Indonesia, Argentina and South Africa. These four main IMV production and export bases will supply to Asia, Europe, Africa, Oceania, Latin America and the Middle East with five all-new IMV vehicles. 27

3.3.1. Japanese and International Divisions

Toyota’s 12 original manufacturing and marketing plants are located in or around Toyota City, Japan. The 12 different plants and 11 different subsidiary plants manufacture either different components or different vehicles depending on the location and strategic positioning of Toyota’s marketing schemes. There is conflict between North America and Japanese divisions in that, Toyota’s production volume in Japan is almost three times larger than its next largest production plant located in North America. There has been a significant measure made by Toyota’s subsidiaries to produce vehicles throughout the world. The market in Japan and Europe is much bigger and less risky than the United States therefore it is much easier to have so many subsidiaries. The North American market and the Japanese market differ by these economic trends that govern their conflict.

4. Phase IV – Synthesis

4.1. Toyota’s Competitive Strategies

4.1.1. Overview

The negative economic trend in the automotive industry makes us question Toyota’s continued growth in a market where all its competitors are falling by the

26 Toyota Motor Corporation. Production Development

27 Toyota Motor Corporation. IMV Project Shifts into Production Gear. www.toyota.co.jp

www.toyota.co.jp

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wayside. It is the only company in the top five to experience continued growth in sales, and increase its global market share. What positive actions has Toyota taken to maintain profits in this seemingly volatile market? What could Toyota further do to become the largest automaker in the world market and pass General Motors in terms of market share? A brief examination of its internal structure and strategies reveals why Toyota is striving during this period of economic stagnation, and how it can further increase its presence in the global automotive market.

4.1.2. SWOT Analysis

 

+

-

Internal

Diversified Product Innovative Technology Marketing Strategy Manufacturing Capabilities Internal Hedging

Production Recalls Dealerships and Customer Service Adapting to Economic Fluctuation

Figure 4.1: Strengths and Weaknesses

In order to identify the internal strengths and weaknesses of Toyota, it is only necessary to examine the SW aspect of SWAT. In a later phase, we will explore the opportunities and threats of the automotive industry as a whole.

4.1.3. Diversified Products and Innovative Technology

As with any company in retail, the quality, general appeal and cost of a product is optimal. The company’s ability to identify the tastes and preferences of the global consumer reflects his ability to sell product effectively and increase market share. While certain companies choose to market a good that targets a specific consumer base, Toyota diversifies its products to attract consumers with different needs, preferences, as well as financial position. Its vehicles range from tiny two-door coupes to large cargo trucks, from large luxury sedans to small fuel efficient hatchbacks. Based on what Toyota’s marketing division deems to be attractive in a particular market, none or all of these products can be sold. The fact that Toyota produces a model for everyone reflects an ability to target large markets with varied tastes and financial classes. A large part of Toyota’s success in developing new models to adapt to evolving trends lies in its technological innovation. Toyota’s unparalleled capital investment in 2004 resulted in a 6.9% decrease in profit, with sales and revenues constantly on the rise. This reflects its desire to constantly be a first-mover into new high technology product markets, and lead the way in setting global trends and introducing new concepts. Of late, Toyota has established itself as a leader in developing new hybrid models to deal with rising oil prices and a heightened desire to purchase fuel-efficient automobiles. While Toyota must deal with competition from the likes of General Motors and Ford Motors, it has already established itself as a pioneer of this technology, drawing many consumers to purchase its new, albeit “reliable” product.

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4.1.4. Targeted Marketing and International Positioning

While Toyota produces an array of models that attract a diversified client-base, its marketing strategy targets the individual consumer. When a buyer purchases a commodity, one especially the size of an automobile, he does so with the intention of buying the product that best caters to his needs. This is the exact logic of Toyota’s marketing strategy, relating each product to the individual consumer’s preferences. Toyota’s ability to market only certain goods in different markets reflects its success in analyzing consumer tastes. Upon establishing the particular models that satisfy the preferences of particular populations, Toyota has the opportunity to set up manufacturing plants in those regions to reduce its transportation costs. For example, Toyota is in the process of setting up its 7 th plant in Kentucky to begin production of the hybrid Camry. The growing want for hybrid automobiles in the U.S. market presented Toyota with the opportunity to create a hub for hybrid cars in their largest market in the world.

4.1.5. Efficient Manufacturing

Toyota’s efficient manufacturing relies on its management philosophy of Total Quality Management. This theory “seeks to integrate all organizational functions (marketing, finance, design, engineering, and production, customer service, etc.) to focus on meeting customer needs and organizational objectives.” 28 This TQM strategy pertains to floor employees as well as top level managers and executives, and reflects a purpose- driven focus. Toyota has implemented TQM since its founding during the 1950s, and over the years has perfected the system to establish a quality system and quality culture.

4.1.6. Internal Hedging

Toyota’s presence in so many markets naturally protects it from currency fluctuations, by allowing it to concentrate its activities in different markets at different times. An agreed risk of both national and transnational corporations is the potential for sudden fluctuations in a country’s currency, which could result in forced price hikes to cover increased production costs. Another danger of currency fluctuation is a decreased demand due to a higher real price of a commodity, which could result in an overstocking of inventory. Toyota has not only been successful in guarding against currency fluctuations, it has actually been able to take advantage of the seemingly negative economic condition. Its ability to shift production to different plants in different countries with rapidity has allowed it to take advantage of a weak currency in those countries where it has production plants, and reduce production in those countries where the currency is actually stronger. In theory, such a practice is available to all car manufacturers; however, Toyota has been successful in speculation, as well as moving with quickness.

28 Hashmi, Khurram. “Introduction and Implementation of Total Quality Management (TQM).” Six Sigma:

2005.

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4.2. TOYOTA’S SHORTCOMINGS

4.2.1. Market concentrations

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Toyota has a particular advantage in identifying national preferences and setting up international manufacturing plants accordingly. However, much of its production and sales are still highly concentrated in only two markets: Japan and the United States. As such, Toyota leaves itself somewhat vulnerable to the political and economic conditions of these two countries. While the internal hedging strategy does protect Toyota to some extent from currency fluctuation, other economic factors leading to either recessionary periods in these countries can severely affect Toyota’s sales. Moreover, an unstable political climate in any of these countries can result in a decreased demand for their good, and ultimately less sales, revenue and profit. This very susceptibility may be the reason why Toyota is beginning to expand and develop in new markets like China. While Toyota is present in over 150 markets around the world, its percent sales in countries other than the U.S. or Japan are marginal and cannot balance out those in its two main markets.

4.3. COMPANY PERFORMANCE

The following bar charts highlight the performance of Toyota relative to its industry average and best performing company for selected criteria. The following criteria selected cover two corporate sustainability dimensions:

selected cover two cor porate sustainability dimensions: Figure 4.2: Company performance vs. industry average 2 9

Figure 4.2: Company performance vs. industry average 29

29 SAM Research Inc. Sustainability Leader Toyota Motor. 2004. www.sustainability-index.com/

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5. EMERGING MARKET EXPANSION

5.1. CHINA

5.1.1. Overview

With China’s population sitting at just over 1.3 billion in July 2005, and consistently growing at 0.58% per year, its consumer base is the largest in the world. From its previous communist form of government, China has only recently begun to make the transition to a more capitalistic economy, meaning more openness to foreign enterprise and competition. Not only does this transition translate into opportunities for foreign investors, but it also means more prosperity for the people of China. The gross domestic product per capita in China rose more than 600% from 2001 to 2004, from just over 900 USD to just under 6 thousand USD. This increase in purchasing power parity means an increased ability to purchase high-priced goods such as automobiles. 30 Analyst predictions show that in 2005, about 42 million households will be able to afford the purchase of an automobile. 31

5.1.2. Current state of the auto industry

China is leading the world in terms of its auto industry’s growth rates. Since 2003, the industry has grown to become the third largest in the world, with a sales growth of 44.4%. 32 By joining the World Trade Organization in 2001, sales volume and percentages rose drastically, up 50% in 2002 alone. This can be attributed to large foreign investment and a growing demand for vehicles. This booming market has drawn the attention of many Chinese entrepreneurs, and over one hundred car manufacturers are already in existence. However, only six hold a considerable market share in the industry, and are partnerships with European and American automakers. The government is attempting to protect its domestic producers by solely allowing joint-ventures. The position of these enterprises and joint venture partners can be seen in the following figure:

30 CIA World Factbook. www.cia.gov

31 “The China Stock Blog.” http://chinastockblog.com

32 China Automobile Industry, Research and Consultancy Outsourcing Systems. http://www.marketresearch.com

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INB 300 – Discovery Project 2 8 Figure 5.1: China’s automakers and joint ventures, as of

Figure 5.1: China’s automakers and joint ventures, as of 2002 33

5.1.3. Toyota’s current presence

Despite Toyota entering the Chinese automotive industry after the initial boom in October 2002, it has nonetheless drawn many benefits from its joint venture with one of China’s largest automakers, China First Automotive Works Group Corporation (FAW). This joint venture was undertaken for several strategic economic reasons: First, there was not a risky proposition, and secondly, historic tensions still make purchasing Japanese products uncommon in China. Currently, Toyota provides FAW with financing and technical assistance in their production activity; however, no concrete share figures have yet been disclosed. The FAW-Toyota partnership currently sits in 4 th place in the auto market, with gross sales of almost 100 thousand units in 2002. Toyota more recently used their joint venture to produce their own parts and materials, to be exported back into Japan and Philippines. They have 12 plants in China for reasons of cost-reduction, taking advantage of low labor and land costs. 34 This move into China keeps it on a level playing field with Japanese competitors like Honda who have pursued similar joint ventures. In the very near future, as early as the end of this year, Toyota has plans of beginning to release its own Toyota models, in conjunction with FAW, beginning with its “crown” model and potential SUV line.

5.1.4. Potential for a subsidiary?

Although the automotive industry in China slowed down in 2004, its growth rates were still hovering around10%. This “slowdown” came from weaker earnings in China, according to John Devine, the General Motors Chief Financial Officer. 35 At this time, competition in the market is also at an all-time high, with large foreign automakers vying

33 Economics and Business Group Centre for Automotive Research. www.cargroup.org/

34 Toyota Motor Corporation. Toyota in the World 2005. www.toyota.co.jp

35 “Chinese Auto Industry Slowed in ’04.” www.thecarconnection.com

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for a large stake in the booming market. In response to GM China offering 11% discounts, Volkswagen cut prices by just under 12%; both have seen sales grow at rates around 25%. Competition and foreign interest in the Chinese auto market will continue to be high, at least until the industry matures, but Toyota must not shy away from the challenge. When they decided to undertake the United States market several decades ago, it was unheard of that anyone would crack the Big Three; however, Toyota now stands in 3 rd . It must apply a similar competitive strategy to its China expansion, and explore all the new ways of cost reduction, as well as appealing to local tastes. The concept of building a Toyota manufacturing facility in China is still an uncertain idea, and it not only dependent on internal decision-making, but also on Chinese policy making. Currently, the government has joint-venture requirements on foreign entrants in hopes of protecting domestic producers; however, if it hopes to lower costs for consumers, it must open its borders completely and allow more healthy competition. This is likely to be the case in coming years, and if barriers in fact do begin to drop, it must use its FAW partnership as a trial run for the potential construction of its own subsidiary. If the partnership witnesses success in the industry, and can compete with the low-priced Chinese automakers, it is a sign to further penetrate the market. Currently, foreign companies are already leading the industry, with Volkswagen and GM occupying the top spots.

5.1.5. A Toyota Brand

According to McKinsey analysts, in a “rapidly evolving car market”, consumers will place a greater importance on the “intangible assets” like branding than on the technical characteristics of the vehicle. 36 Nonetheless, if Toyota hopes to develop gain market share in the industry, it must begin to understand the local tastes and produce models accordingly. It is very difficult to speculate as to the future of Toyota’s name in China, and only time will tell whether the Chinese will be more tolerant towards their Japanese brand. What we do know is that there is still resentment towards Japan in some demographics of the population. Japanese car manufacturers were victim to protests before the 2005 Shanghai auto show, when “some Japanese model cars were overturned and damaged during the demonstrations, which drew crowds of 20,000 people, many of them university students.” 37 If such actions continue, it will be difficult for Toyota, and any other Japanese automaker to penetrate the market. Toyota’s success in the Chinese market thus not only depends on its internal strategy to developing in China, which was already outlined in its “three-stage plan,” but more importantly, coping to the changing Chinese attitudes towards Japan. From our perspective, if these historical wounds can be repaired, it is a no-brainer whether to enter this lucrative market that is expected to become the largest by 2025. 38

36 The McKinsey Quarterly. “Shaping the future of China’s auto industry.” www.mckinseyquarterly.com

37 “Japanese Automakers say Sales Not Yet Affected by Protests.” www.detnews.com

38 “The China Stock Blog.” http://chinastockblog.com

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FINAL THOUGHTS

Toyota Motor Corporation has set high standards for its company’s future. It is confident in its continued foreign expansion, and by extension its rise in the ranks of the automotive industry. Toyota’s Chairman Hiroshi Okuda is attempting to promote his belief that “Toyota will realize sustainable growth while contributing to the development of the automobile industry worldwide guided by an overriding belief in the value of competition.” 39 In other words, Toyota will strive on the development of other global automakers through the increased need to be efficient and reduce costs; they will however not overlook their values of global responsibility. The company feels strongly about maintaining order between technology and the earth, and although this approach may result in short-term profit reduction, the long-term benefits for society clearly outweigh them. Recent environmental catastrophes and global economics have put pressure on automakers to seek more fuel efficient vehicle development. While the sharp increase in oil prices has put strain on many global automakers, Toyota has used this as an opportunity to get ahead. The demand for Toyota’s top of the line fuel efficient vehicles is thriving, and the executives have no intention of looking back. The management feels that new markets and new products with the creative ingenuity of Toyota will help fuel this expansion, as is apparent by the substantial increase in the research and development budget. The success of its new hybrid models will contribute to its branding as a global company. Toyota’s product differentiation strategy for their wide array of markets has proved to be a success, and they intend to build upon the knowledge they have already acquired throughout the years. This strategy reflects the seven guiding principles of Toyota, and the need to understand culture in order to cater to specific peoples’ needs. Toyota feels their way of car making is of equal or higher quality to their global competitors. The president, Katsuaki Watanabe, expressed this sentiment with the following assertion: “We will step up growth through further innovation inspired by the Toyota Way tradition.” 40 This message is posted on their global website as a sign of an optimistic future for Toyota Motor Corporation. Despite this inherent belief of their leading efficiency in production, it should nonetheless be noted that Toyota still believes in room for improvement.

39 Toyota Motor Corporation. Message from Management. www.toyota.co.jp

40 Toyota Motor Corporation. Message from Management. www.toyota.co.jp

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