Toyota Motor Corporation - A Success Story

A Study by Economist Intelligence Unit

Overview

Toyota Motor Corporation embodies the success of Japanese auto makers in the global market. A perennial leader in
customer satisfaction, the company has lent its name to the Toyota Production System, a manufacturing process
which it credits with reducing production costs, eliminating defects and improving the overall quality of its vehicles.
Toyota also pioneered the hybrid petrol/electric technology, and has been reaping the rewards in an environment of
record-high petroleum prices.

The company's success is all the more impressive because the Japanese producers are latecomers in the auto
industry. Kiichiro Toyoda didn't found Toyota Motor until 1937, when the company grew out of the textile firm set up
by his father two decades earlier. Headquartered in Toyota City in central Japan, the company still maintains family
continuity. Akio Toyoda, Kiichiro's grandson, is the company's executive vice president, well positioned to assume the
helm in the future.

Toyota Yr ended Yr ended Yr ended Yr ended

31-Mar-06 31-Mar-05 31-Mar-04 31-Mar-03

JPY (m)*

Revenue/sales 21,036,909 18,551,526 17,294,760 16,054,290

Operating/trading income 1,878,242 1,672,187 1,666,890 1,363,679

Net Income 1,372,180 1,171,260 1,162,098 944,671

Shareholders' equity 10,560,449 9,044,950 8,178,567 7,460,267

Long-term debt 5,640,490 5,014,925 4,247,266 4,094,111

Market capitalisation 22,422,000 13,039,635 12,920,094 9,095,012

Employees (number) 265,753 265,753 264,410 264,096

Ratios (%)

Operating profit margin 8.9 9.0 9.6 8.5

Return on equity 13.0 12.9 14.2 12.7

Debt to equity 53.4 55.4 51.9 54.9

 
However, it is Katsuaki Watanabe, appointed president in 2005, who will lead Toyota to the coveted No. 1 spot among
world's automakers, overtaking General Motors of the US. Toyota sold over 8mn vehicles in fiscal 2006 (year-end
March 31st), and will continue to grow sales this year while GM is retrenching. In a highly symbolic transaction, Toyota
bought GM's 8.7% stake in Fuji Heavy Industries, a Japanese maker of Subaru cars, in 2005. Toyota has long been
the world's largest carmaker in terms of market capitalisation. At over USD 200bn, it is nearly 10 times as large as GM
and Ford combined.

Market position

Toyota's main line of business is the design, production and sales of passenger cars and trucks. It markets its cars
under the Toyota, Lexus and (in the US) Scion marques. Toyota's automotive operations account for over 90% of
revenues - unlike at most of the big Detroit firms - with financial services and other businesses contributing only a
small portion.

During the last fiscal year, Toyota continued to benefit from strong sales and market share growth in the North
American market, which accounts for around 30% of its global sales. The company sold 2.6mn vehicles in the US,
marking yet another year of two-digit growth. It benefited from strong sales of new models such as the Avalon and
Tacoma, as well as a rush to buy its Prius hybrid in an environment of rising gasoline prices. Its market share in the
US measured 15.2% in April, neck-to-neck with Chrysler, while the dominance of the two Detroit automakers
continues to dwindle.

Nevertheless, intense competition and a focus on sales incentives have been pushing down Toyota's profit margins in
the US. In Japan, which accounts for 30% of the carmaker's sales, operating margins are still robust at around 8.2%.
Unfortunately, the company's Japanese sales have been declining, falling by 17,000 in the last fiscal year to 2.4mn.

Still, Toyota has been the world's most profitable automaker, as well as profitability record-holder among Japanese
companies. It broke through the ¥20,000bn barrier in revenues for the first time in fiscal 2006, while net income
increased to a record for the fourth straight year. After a flat fiscal 2005, profits rocketed 17%, to ¥1,370bn
(USD12.3bn).

Corporate strategy

Toyota's top management has periodically talked about extending a helping hand to GM and Ford, in particular by
raising prices in the US market. But the company's ambition is to make Toyota the world's largest automotive
company. The firm intends to continue gaining market share, to reach 15% of the global market over the next decade,
and it continues to be the largest investor in the industry. Its capital expenditures are slated to reach ¥1,550bn in the
current fiscal year.

The sixth-generation Camry, the company's flagship vehicle and the best seller in the US market in eight of the past
nine years, exemplifies Toyota's global reach. Its first example of a globally designed vehicle, 2007 Camry is
scheduled to be produced at two US plants, in Georgetown, Kentucky and at the former Subaru plant in Lafayette,
Indiana, as well as in Japan, Taiwan, Thailand, Australia, China, Russia and Vietnam.

North America remains a key market, where Toyota plans to open its sixth plant in the second half of 2006, which will
be located in Texas. Another plant will open in Canada in 2008. Toyota has lagged behind other leading automakers in
China, which has emerged as the world's second largest car market. However, it is working toward a goal of raising its
vehicle sales in China to 1mn by 2010. As part of this strategy, it intends to triple its local production to around
900,000 vehicles.

Toyota maintains its lead by watching its costs, designing attractive new vehicles which consumers actually want,
providing high quality products and maintaining production efficiency. Its investment in fuel-saving technology has
paid off with the success of its Prius petrol/electric midsize. The company contends that the car gets as much as 60
miles per gallon, though that is probably only true in city centres. In 2006, a Camry hybrid has been introduced.

Strategic Risks/Opportunities

Toyota's spectacular profitability and a stellar AAA credit rating underpin its drive for the global No.1 position.
However, conditions may start to get more difficult. The weakening of the yen during the 2006 fiscal year contributed
nearly 20% to company's operating income, as dollar-denominated sales translated into higher yen revenues. The yen
has strengthened in early 2006, and the US dollar is likely to be undermined further in the second half. This, combined
with tougher competition and rising prices of oil and non-oil commodities, has prompted the management to forecast a
4.5% decline in net profit in the current fiscal year.

Toyota will aim to maintain an operating profit-to-sales ratio of about 9%, in line with an 8.9% margin in fiscal 2006.
However, some analysts are starting to question its ability to post consistently high revenue growth from an increasing
higher base and to achieve similarly high returns on its massive investment.

Competition has been getting tougher, as everyone is gunning for the leader. The global auto industry is still suffering
from overcapacity, and the pace of consolidation has slowed. At home, Toyota is facing a resurgent Nissan; Chrysler is
making a comeback in North America; and Fiat is doing the same in Europe. The Detroit Big Two are also determined
to sort out their problems in coming years, giving Toyota a run for its money.

Business Success Story: Toyota Motor Corporation: From Brink of Bankruptcy to

World’s No.2 Auto Maker

The story of Toyota Motor Corporation is a complete lesson to business owners on how to
grow their business, take it out of difficult times, and establish it as a global company. It is a
story of focus, resilience, and passion to succeed against all odds.

It will inspire, motivate, and fill you with ideas to take your business to a higher level. Enjoy
it

In 1933, a Japanese man by name Kiichiro Toyota traveled to the United States, where he
visited a number of automobile production plants. Upon his return to Japan, the young man
established an automobile division within his father’s loom factory, and in May 1935
produced his first prototype vehicle.

General Motors and Ford already were operating assembly plants in Japan, but U.S.
preeminence in the worldwide automotive industry did not deter Toyota.

Since Japan had very few natural resources, the company was naturally drawn to developing
engines and vehicles that were highly fuel efficient. In 1939, the company established a
research center to begin work on battery powered vehicles.

This was followed in 1940 by the establishment of the Toyota Science Research Center (the
nucleus of the Toyota Central Research and Development Laboratories, Inc.) and the Toyota
Works (later Aichi Steel Works, Ltd). The next year, Toyota Machine Works, Ltd was
founded for the production of both machine tools and auto parts.

When World War II ended in August 1945, most of Japan’s industrial facilities had been
wrecked, and the Toyoda (or Toyota as it became known after the war) production plats had
suffered extensively. The company had 3,000 employees but no working facilities, and the
economic situation in Japan was really bad.

But the Japanese tradition of dedication and perseverance proved to be Toyota’s most
powerful tool in the difficult task of reconstruction.

Just as the Japanese motor industry as a whole was beginning to recover, there were fears that
American and European auto manufacturers would take control of the Japanese market with
their economic and technically superior automobiles.

Japan’s auto marker knew that they no longer count on government protection in the form of
high import duties or other barriers as they had before the war.

Since American manufacturers were concentrating their efforts on medium-sized and larger
cars, Toyota’s executives thought that by focusing on small cars, the company could avoid
head-on market confrontation.

Kiichiro Toyota likened the postwar situation in Japan to that in England. In his word, “The
British motorcar industry also faces many difficulties, but its fate will be largely determined
by how strongly American automakers feel they should concentrate on small cars.”

Therefore, Toyota’s focus was placed on building small cars, and by January 1947, the
company’s engineers completed their first prototype for a small car: its chassis was of the
backbone type (never used before in Japan), its front suspension relied primarily on coil
springs, and its maximum speed was 54 miles per hour. After two years of difficulties, the
company seemed headed for success.

But this was not to be accomplished as early as expected. Two years later, in 1949, Toyota
suffered its first and only serious conflict between labor and management.

Nearly four years had passed since the end of the war, but Japan’s economy was still in bad
shape: goods and materials of all kinds were in short supply, inflation was rampant, and
people in the cities were forced to trade their clothing and home furnishing for rice or
potatoes to survive.

Japanese auto manufacturers found themselves unable to raise the funds needed to support
their recovery efforts, for the new governmental policy had discontinued all financing from
city banks and the Reconstruction Finance Corporation. Under these conditions the
company’s financial situation deteriorated.

Production dropped to 992 vehicles in March 1949, to 619 in April, and to 304 in May.
Crucial restructuring efforts included a proposal to incorporate Toyota’s sales division as a
separate company, leading eventually to the formation of Toyota Motor Sales Company Ltd.
in April 1950.

Toyota Motor Sales Company handled all domestic and worldwide marketing of Toyota’s
automotive products until July 1982, when it merged with Toyota Motor Company.

In the meantime, discussions between labor and management finally focused on whether to
admit failure, declare bankruptcy, and dissolve the company, or to agree on the dismissal of
some employees and embark upon a rebuilding program.

In the end, management and labor agreed to reduce the total workforce from 8,000 to 6,000
employees, primarily by asking for voluntary resignations.

At the management level, President Kiichiro Toyoda and all of his executive staff resigned.

Kiichiro, Toyota’s founder and a pioneer of the Japanese automotive industry, died less than
two years later.

Not long after the strike was settled in 1950, two of the company’s new executives, Eiji
Toyoda (then the new Chairman of Toyota Motor Corporation) and Shoichi Saito (later
Chairman of Toyota Motor Company), visited the United States.

Seeking new ideas for Toyota’s anticipated growth, they toured Ford Motor
Company’s factories and observed the latest automobile production technology. One
especially useful idea they brought back home from their visit to Ford resulted in Toyota’s
“Suggestion System”, whereby every employee was encouraged to make suggestions for
improvements of any kind.

On their return to Japan, the two men inaugurated an even more vital policy that remained in
force at Toyota through the 1990s: the continuing commitment to invest in only the most
modern production facilities as the key to advances in productivity and quality.

Toyota moved quickly and aggressively in the 1950s, making capital investments in new
equipment for all of the company’s production facilities. Not surprising, the company began
to benefit from the increased efficiency almost immediately.

In 1955, ten years after its defeat in World War II, Japan became a member of the General
Agreement on Tariffs and Trade (GATT), but automobiles remained one of Japan’s least
competitive industries in the international arena.
Toyota, foreseeing the coming age of the large-scale international trade and capital
liberalization in Japan, decided to focus on lowering its production costs and developing even
more sophisticated cars, while at the same time attempting to achieve the highest possible
level of quality in production.

This was a joint effort conducted with Toyota’s many independent parts suppliers and one
that proved so successful that ten years later, in 1965, Toyota was awarded the coveted
Deming Prize for its quality-control achievements. That was also the years that the Japanese
government liberalized imports of foreign passenger cars. Now Toyota was ready to compete
with its overseas competitors both in price and quality.

In 2005, Toyota, combined with its half-owned subsidiary Daihatsu Motor Company,
produced 8.54 million vehicles, about 500,000 fewer than the number produced by GM that
year. In some months in 2006, Toyota passed Ford in selling cars.

Toyota now has a large market share in the United States, Europe and Africa, and is the
market leader in Australia. It has significant market share in several fast-growing Southeast
Asian countries.

In the 2006 Fortune Global 500, Toyota Motor was the 8th largest company in the world,
outpacing Ford Motor Company in all listings in terms of revenue and growth and also in the
2006 Forbes Global 2000, it was the 12th largest company in the world with revenue of $185
billion.

Toyota Motor Corporation’s Business Success Strategies

Here are the strategies by which the management of Toyota Motor Corporation successfully
built their business from start-up to becoming one of the biggest companies in the world, in
spite of the huge competition and difficult economic environment the company operated.

Difficult Times Bring Out the Best in You

In any situation that your business might face, however tough it might seem, there always lie
an opportunity for you to actually unleash your creativity and find the needed solution for
your business.

As long as you don’t yield to the challenge, your mind would begin to work on possible
solutions to them. And before long, you would come up with solid ideas that would crush the
challenge to dust.
The fact that Japan was not much naturally endowed with resources did not discourage
Toyota; rather, it was seen as a boost to create engines and vehicles that could efficiently use
fuel, a position that became one of its strongest competitive advantages worldwide.

Research and Development – The Engine Room to Success

Whatever business you are in, to remain effectively in competition or to move to the top of
your industry, you need to constantly develop products or services that consumers will gladly
accept. That means you will need to have it as part of your operational activities to study your
market and product offering constantly.

It is more rewarding if you have a unit or department in your organization to be responsible

for research and development.

Toyota’s “engine room” for success has always been its belief in the importance of research
and continual product development. This is reflected in it setting up research and
development centers only four years after the company was formed.

Avoid Head-on Competition with Market Leaders

This is a warning you must register firmly in your heart if you do not wish to publish your
business’ obituary sooner than it began. Even if you are coming with a higher quality
product, the market leaders have already captured the hearts of consumers of that product
type.

No matter the size of your advertising and promotional budget, you will only get a crumb,
which will not be enough to sustain your business. Worse still, they may just decide to drive
you completely out of business – they have the means and they know exactly what to do!

The wise thing to do when coming into a new market, which Toyota did, was to find a niche,
a virgin land to plough.

Toyota skillfully avoided confronting the established American manufacturers by taking on

the production of small cars.

Give Priority to Your Marketing

Being able to roll out top quality products without a complementary marketing effort will not
give you the desired success. It is when you are able to make sales that money can flow in,
and of course you need money to keep your operation going.

Therefore, adequate attention should be given to marketing your products. You must have a
full-fledged sales/marketing department to be solely responsible for ensuring sales targets are
met.

One of the smartest decisions Toyota made when faced with mounting debt from its inability
to make enough sales was to incorporate Toyota Motor Sales Company Ltd to perform the
function of marketing Toyota’s automotive products.

Do What Is Needed To Save Your Business

Especially at times of severe difficulty, entrepreneurs or business owners must have the
courage to take tough decisions that might not be popular, but are the only way out of saving
the company from collapsing. However, the reason(s) for such decisions should be
communicated to the stakeholders, including employees.

To prevent the imminent liquidation of Toyota in 1950, Toyota’s management had to take the
unsavory decision of laying off two thousand employees while the company’s President,
Toyoda himself and all his executive staff resigned.

Get Fresh Insight

Remaining abreast with industry trend is surely a smart thing to do to be top in your industry.
The importance of this is especially obvious in the present era of rapid technological
innovations that can easily leave you behind to continue grapping with inefficient and less
effective operational processes, while your competitors are achieving huge results.

Ways by which you can keep in touch with your industry include reading industry journals,
going on excursions, and researching the Internet.

The visit of two of Toyota’s executives to Ford Motor Company’s factory, without mincing
words, birthed great ideas that sky-rocketed the company’s fortune.

One of them, the “Suggestion System” that encouraged every employee to give their
suggestions for the company’s improvement, helped the company to find solutions to its
problems.

Another was the realization by Toyota of the need to continually invest in only the best
modern technology for their operation.

Reducing Cost of Production and Increasing Product Quality

All over the world, people love to buy things of high quality at the cheapest possible price.
This is basic human nature that is not faulted by race, creed, or even financial status of
individuals. I haven’t seen or heard a rich man asking for the price of an item he wants to buy
to be increased before he buys it, or have you? If you have, please let me know.

In the light of this, you will be on your way to great success if you strive to give your
customers this desire.

Toyota’s relentless efforts at reducing its cost of production while stepping up its products’
quality did not only endeared it to its local customers, it also made it to be devastatingly
competitive in foreign market.

Read Toyota Motor Corporation’s success story here: From Brink of Bankruptcy to
World’s No.2 Auto Maker