Toyota’s Global Expansion
In November 2004, Hiroshi Okuda, Chairman of Toyota Motor Corp. of Japan, announced that the company was going to build another factory in North America, raising the number of factories producing parts or assembling cars and trucks in North America to 14. As of May 2004, Toyota manufactured parts and assembled cars in 51 overseas manufacturing companies in 26 countries/locations. In 1980, the company had only 11 production facilities in 9 countries, so it was essentially servicing the world market through exports from Japan. Since 1980, however, the company has committed more energy and resources into foreign production.
Toyota, the second largest auto manufacturer in the world, is moving aggressively to overtake leader General Motors in terms of volume. In 2004-2005, GM sold 7.4 million vehicles worldwide, and the company expects to increase sales to 8.5 million vehicles by 2006. Even though Toyota’s major manufacturing base is in Japan, with 12 plants located closely together around Toyota City in Aichi Prefecture, it is expanding its manufacturing capabilities to every corner of the world, including Russia. However, it is clear that Toyota is betting more on production in countries outside of Japan. Although Toyota hopes to produce 3.8 million vehicles in Japan by 2006, it plans on doubling its foreign output to 6 million vehicles sometime in the future. It currently produces more vehicles in Japan than it does in its overseas plants, and it exports more of its domestic production than is sold inside of Japan.
Toyota is known for its commitment to low cost, high quality, and just-in-time inventory, which implies that it must be close to its main suppliers. A major reason for the company’s success in Japan is its close proximity to key suppliers, such as Nippon Denso, which allows it to schedule the delivery of parts as soon as they are needed in the assembly operations.
One of Toyota’s major advantages is its strong cash position. Its cash and short-term investments totaled $30 billion in 2004, even though GM’s cash and short-term investments at the end of the 3rd quarter 2004 were nearly double that at $58.623 billion, down slightly from the same quarter a year earlier. However, Toyota’s strong earnings and cash positions are in contrast to GM, which is constrained by weak credit ratings, rising health-care and pension costs, and losses in its automotive division. Toyota expects to use its strong financial position to expand operations worldwide and increase its commitment to R&D, especially in safety, automation, and environmentally friendly vehicles, such as the Prius, one of its hybrid cars.
In spite of its strong commitment to future growth, Toyota has some challenges. Its net profits in the second quarter of 2004 dropped from ¥301.9 billion a year earlier to ¥297.4 billion. Toyota reports its financial information in yen, although it reports earnings according to U.S. generally accepted accounting principles due to its active presence on global capital markets and the universal acceptability of U.S. GAAP.
Operating in global markets is a challenge for Toyota. Since it is a Japanese company that reports financial information in Japanese yen, it is subject to exchange rate fluctuations. In particular, the yen has been strong relative to the U.S. dollar, so earnings of its U.S. operations have fallen in yen terms in recent years when translated from dollars back to yen. In addition to the strong yen, Toyota and other companies operating in the U.S. market have struggled with high gasoline prices and high competition, which have cut into profit margins. Toyota has also suffered with high raw materials costs, both inside Japan and in its other operations worldwide. It is important for the company to do well in North America, because it accounts for about two-thirds of the Japanese car industry’s profits on an operating level. Given Japan’s...