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MC12_Eiteman_85652_14_MC12.pptx

Toyota’s European Operating Structure

Chapter 12

Mini Case

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Mini-Case: Chapter 12

How did Toyota’s European operations structure create operating exposure?

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Toyota’s European Exposure

It was January 2002, and Toyota Motor Europe Manufacturing (TMEM) had a problem

Mr. Toyoda Shuhei, the new President of TMEM was on his way to Toyota Motor Company’s (Japan) corporate offices outside Tokyo to explain the continuing losses of European manufacturing and sales operations

The CEO of Toyota Motor Company, Mr. Hiroshi Okuda, was expecting a proposal from Mr. Shuhei to reduce and eventually eliminate the European losses. The situation was intense given that TMEM was the only major Toyota subsidiary suffering losses

Toyota Motor Company

Was the number one automobile manufacturer in Japan, the third largest manufacturer in the world by unit sales (5.5 million units or one auto every six seconds), but number eight in sales in Continental Europe.

The global automobile manufacturing industry had been experiencing, like many industries, continued consolidation in recent years as margins were squeezed, economies of scale and scope pursued, and global sales slowed

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Toyota’s European Exposure

It was January 2002, and Toyota Motor Europe Manufacturing (TMEM) had a problem. More specifically, Mr. Toyoda Shuhei, the new President of TMEM, had a problem. He was on his way to Toyota Motor Company's (Japan) corporate offices outside Tokyo to explain the continuing losses of the European manufacturing and sales operations. The CEO of Toyota Motor Company, Mr. Hiroshi Okuda, was expecting a proposal from Mr. Shuhei to reduce and eventually eliminate the European losses. The situation was intense given that TMEM was the only major Toyota subsidiary suffering losses.

Toyota and Auto Manufacturing

Toyota Motor Company was the number one automobile manufacturer in Japan, the third largest manufacturer in the world by unit sales (5.5 million units or one auto every six seconds), but number eight in sales in Continental Europe. The global automobile manufacturing industry had been experiencing, like many industries, continued consolidation in recent years as margins were squeezed, economies of scale and scope pursued, and global sales slowed.

Toyota was no different. It had continued to rationalize its manufacturing along regional lines. Toyota had continued to increase the amount of local manufacturing in North America. In 2001, over 60% of Toyota's North American sales were locally manufactured. But Toyota's European sales were nowhere close to this yet. Most of Toyota's automobile and truck manufacturing for Europe was still done in Japan. In 2001, only 24% of the autos sold in Europe were manufactured in Europe (including the United Kingdom).The remainder were imported from Japan (see Exhibit A).

Toyota Motor Europe sold 634,000 automobiles in 2000. This was the second largest foreign market for Toyota, second only to North America. TMEM expected significant growth in European sales, and was planning to expand European manufacturing and sales to 800,000 units by 2005. But for fiscal 2001, the unit reported operating losses of ¥9.897 billion ($82.5 million at ¥120/$). TMEM had three assembly plants in the United Kingdom, one plant in Turkey, and one plant in Portugal. In November 2000, Toyota Motor Europe announced publicly that it would not generate positive profits for the next two years due to the weakness of the euro.

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Exhibit A Toyota’s European Currency Operating Structure

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Toyota’s European Exposure

Toyota had recently introduced a new model to the European market, the Yaris, which was proving very successful. The Yaris, a super-small vehicle with a 1,000cc engine, had sold more than 180,000 units in 2000. Although the Yaris had been specifically designed for the European market, the decision had been made early on to manufacture it in Japan.

Currency Exposure

The primary source of the continuing operating losses suffered by TMEM was the falling value of the euro. Over the recent two-year period, the euro had fallen in value against both the Japanese yen and the British pound. As demonstrated in Exhibit A, the cost base for most of the autos sold within the Continental European market was the Japanese yen. Exhibit B illustrates the slide of the euro against the Japanese yen.

As the yen rose against the euro, costs increased significantly when measured in euros.

If Toyota wished to preserve its price competitiveness in the European market, it had to absorb most of the exchange rate changes and suffer reduced margins on both completed cars and key subcomponents shipped to its European manufacturing centers. Deciding to manufacture the Yaris in Japan had only exacerbated the situation.

Management Response

Toyota management was not sitting passively by. In 2001, they had initiated some assembly operations in Valenciennes, France. Although accounting for a relatively small percentage of total European sales as of January 2002, Toyota planned to continue to expand its European capacity and capabilities and to source about 25% of European sales by 2004.

Assembly of the Yaris was scheduled to be relocated to Valenciennes in 2002. The continuing problem, however, was that it was an assembly facility, meaning that many of the expensive value-added components of the autos being assembled were still based in either Japan or the United Kingdom.

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Toyota’s European Exposure

Mr. Shuhei, with the approval of Mr. Okuda, had also initiated a local sourcing and procurement program for the United Kingdom manufacturing operations.

TMEM wished to decrease the number of key components imported from Toyota Japan in order to reduce the currency exposure of the U.K. unit. But again, the continuing problem of the British pound's value against the euro, as shown in Exhibit C, reduced the effectiveness of even this solution.

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Exhibit B Japanese yen per Euro Spot Rate (weekly, 1999–2001)

The Japanese yen had risen in value against the Euro through 1999 and through much of 2000 before “correcting” – and staying at roughly ¥110/€ throughout 2001.

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… while the British pound strengthened against the Euro, then stabilized in a narrow trading band.

Exhibit C British Pounds per Euro Spot Rate (weekly, 1999–2001)

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Toyota Europe: Case Questions

Why do you think Toyota had waited so long to move much of its manufacturing for European sales to Europe?

If the British pound were to join the European Monetary Union would the problem be resolved? How likely do you think this is?

What measures would you recommend Toyota Europe take to resolve the continuing operating losses?

What measures would you recommend Toyota Europe take to resolve the continuing operating losses?

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Toyota Europe: Case Questions

Why do you think Toyota had waited so long to move much of its manufacturing for European sales to Europe?

Automobile manufacturing is a very complex and capital intensive industry. New manufacturing facilities are costly.

Toyota, like most manufacturers, wished to continue to enjoy the benefits of scale and scope in manufacturing as long as possible, and had resisted the movement of more and more of its manufacturing into the local and regional markets.

If the British pound were to join the European Monetary Union would the problem be resolved? How likely do you think this is?

The British joining the EMU would eliminate the currency risk between the UK and Europe, but not between Japan and Europe. The UK joining the EMU would eliminate the deviations in currency value between the pound and the euro only.

Although there has been continuing and heated debate over the possibility of Britain joining the EMU, there is at present no specific plan to do so.

In many ways the UK believes itself to be somewhat the beneficiary of being the single large “European” country which is not euro-based.

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What measures would you recommend Toyota Europe take to resolve the continuing operating losses?

The problems, at least on the basis of the data presented, appear to be primarily exchange rate-induced pricing problems.

The fall in the value of the euro against the yen throughout 1999 and early 2000 was significant (for example calculate the percentage change in the value of the euro between January 1999 and July 2000).

For some unknown reason most of Toyota’s North American operations had moved to manufacturing bases in North America, while Toyota had continued to try and service European sales via exports from Japan. The recent decision to manufacture a new European-targeted product, the Yaris, from production in Japan was in the continuing strategy. It did not appear to be a good strategy given the recent direction of exchange rate movements.

The primary short-term solution was to continue to absorb yen-based cost increases in lower margins on European sales – assuming that the market would not bear passing-through the exchange rate changes. In the medium-to-long-term, Toyota must inevitably move more of the automobile’s content into manufacturing operations within the EMU (and not the United Kingdom).

Toyota Europe: Case Questions

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What measures would you recommend Toyota Europe take to resolve the continuing operating losses?

If Toyota was willing to continue incurring the operating losses in Europe, and put market share goals above profit goals, then continuing the current operating and pricing policy would be in order. The euro had regained some of its weakness against the yen in the recent year.

The fact that significant Toyota operations existed in the United Kingdom would be a continuing dilemma as long as the UK stayed out of the EMU.

The strength of the pound against the euro – and the new-found stability in that rate seen in 2000 and 2001 – did not bode well for UK-based operations for European sales.

In the longer-term, Toyota, like many other multinationals, would have to consider moving more of its manufacturing and cost structure to within the EMU, not in Japan and not in the UK.

Toyota Europe: Case Questions

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