Monday, July 30, 2007

Toyota vs. Its Competititors - A Case Study

Akio Toyoda sat on stage as Toyota Motor Corp. president Katsuaki Watanabe introduced nine other executives. When Toyoda's turn came, he made a five-second bow to shareholders gathered in Toyota City, Japan, for the June 22 annual meeting. Two hours later, at a private board meeting, he was named head of Japanese sales.

The second event signalled that Akio, 51, had stepped closer to his apparent destiny as patriarch of a carmaking dynasty that his great-grandfather Sakichi funded and his grandfather Kiichiro started in 1937 by copying General Motors Corp.'s Chevrolets.

In seven decades, the Toyodas have driven their company to global dominance. They manufacture vehicles in 27 countries and regions and sell them in more than 170. They employed 299,394 workers and brought in $195.7 billion US in sales in the fiscal year ended on March 31, almost double a decade earlier. Through holdings in 14 Toyota Group suppliers, they oversaw another 126,638 people and $119.2 billion in revenue as of March 31.

In this year's first quarter, Toyota passed GM for the first time to become the world's biggest automaker by unit sales. Toyota sold 2.35 million vehicles -- 88,000 more than GM did. Toyota held on to the lead in the first half, although GM outsold it by 38,000 vehicles in the second quarter.

A dominant Toyota faces unfamiliar challenges. For most of their automaking history, the Toyodas were underdogs struggling against Detroit's juggernaut.

When the Toyodas, who started in business by manufacturing weaving looms, built their first prototype automobile in 1935, Ford Motor Co. had been making cars for three decades.

After the Second World War, demand for vehicles in Japan was so weak the Toyodas opened dry-cleaning stores. To thwart protectionist pressures in the U.S., Toyota joined with GM and began building cars there in 1984.

The next challenge for Toyota -- and the family that runs it -- is managing size.

Quality has been dented by recalls in the U.S. and Japan. Rivals are undercutting Toyota in the U.S. The company is offering an average of $5,083 in rebates, discounted financing and other incentives on its Tundra full-size pickup truck as gasoline prices rise.

GM lost its sales crown of 76 years after it stumbled over quality and cost issues -- and similar woes threaten to bedevil Akio. "What do you do when you pass a rabbit you've been chasing for 70 years?" says John Shook, a University of Michigan management instructor and a former Toyota engineer.

"Akio has a chance to articulate the first truly new vision for Toyota since Kiichiro. If he doesn't, you'd have to expect decline to set in at some point."

For now, Toyota is enjoying undisputed supremacy. It earned 51.2 per cent, or $14.2 billion, of the $27.7 billion US in net income the world's 17 largest carmakers made in the most recent annual reporting period, says Ashvin Chotai, an analyst at Global Insight Inc.

By 2013, Toyota will build 12.4 million vehicles a year compared with GM's 10.2 million, predicts Michael Robinet, a CSM Worldwide Inc. analyst.

"Toyota has staying power," says Wendy Trevisani, who bought 1.3 million Toyota shares in the 18 months ended in June for Thornburg Investment Management.

Toyota's growth engine is straining. Its shares fell 6.2 per cent to $62.98 this year through July 23 compared with a 14 per cent increase to $34.92 at GM as of July 20. Investors worry that Toyota's expansion will boost costs and damage profits, says Christian Takushi, an analyst at Swisscanto Asset Management AG, who disagrees with that assessment.

"Toyota shares are mispriced," says Takushi, whose company held one million of them in March. "They deserve to be trading at a premium."

Akio Toyoda's appointment to head Toyota's Japanese sales unit lands him in a troublesome spot. During the first half of 2007, Japan's industrywide vehicle sales, excluding minicars, fell 10.5 per cent to 1.8 million, their lowest since 1975.

Akio will introduce new models quickly and open megadealerships, predicts Yasuhiro Matsumoto, a senior analyst at Shinsei Securities Co. That may spark consolidation and weaken Akio's support among dealers left behind, he says.

"Toyota is not the kind of simple company that will change just because Akio becomes president," Matsumoto says. "He needs charisma, and right now, because he's been very low-key, he doesn't have it."

Referenced from Bloomberg

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