Can Toyota Survive the Thai Crisis?

Toyota maintained its global dominance for the second consecutive year in 2013, but Thailand could be a deterrent to its growth prospects in 2014

Feb 14, 2014 at 7:19PM

Thailand is known as the "Detroit of the East" for a reason. The country churns out 2.5 million vehicles every year for major global automakers. Due to geographical proximity, free trade agreements, and low-cost structure, Japanese automakers have built big manufacturing hubs in the country. But political protests coupled with diminishing demand in the auto industry are crippling future growth.

The dual impact is not only leading to local sales declines, but there is also a possibility of production cut that can affect exports. While most players are finding the situation worrisome, it's doubly difficult for Toyota Motors (NYSE:TM). The company has won the global sales crown for two years in a row, and has to maintain its edge if it is to retain the top spot over the coming years.

Toyota Picture
Toyota's Ban Pho Plant in Thailand. Image: Toyota

Toyota was banking on Thailand
Every 20th car that Toyota sells is bought in Thailand, which makes it an important sales destination for the Japanese auto giant. Its importance also lies in the fact that Thai-made vehicles comprise a big portion of exports to countries like Australia. Roughly 20% of the cars sold in Australia are made in Thailand. Toyota, the top car seller Down Under, has been taking advantage of the free trade agreement between the two nations and sourcing more and more units from Thailand. The latest to drive out of Thailand will be Toyota's Corolla sedans, which were earlier being made in Japan.

In 2013, Toyota made around 850,000 cars in Thailand -- it sold 445,000 to local residents and exported about 430,000  vehicles. Over the next three to four years, it is planning to boost its production capacity by another 200,000 units. This would mean that the country alone would account for 10% of the company's total installed capacity, and the growing export sales would help Toyota achieve its ambitious sales targets. The company is gunning for an unprecedented 10 million vehicles sold in 2014.

The demand downturn
The Thai auto industry is facing a severe slump in demand, and Toyota's Thailand chief Kyoichi Tanada has predicted a 14% industry-wide sales drop in 2014.

The immediate reason for the fall in demand is possibly the withdrawal of the rebate to first-time car buyers -- this scheme had helped the auto industry record 80% sales growth when it was introduced in 2012.

However, there is also the issue of the slowing economy that could have far-reaching consequences. The Thai economy has suffered a severe blow from the anti-government protests. The persistent unrest could bring down the economic growth rate to a paltry 3% -- a sharp decline from the 6.4% recorded in 2012. This will invariably hit business growth prospects and dampen consumer spending.

Toyota's sales in Thailand could decline 10% in fiscal 2014, which ends in March. This would be its second annual slump in a row. Through the current calendar year, the company expects to sell 400,000 cars locally and export 445,000 units.

Toyota's Japanese rivals Honda (NYSE:HMC) and Nissan (NASDAQOTH:NSANY) are facing similar challenges in Thailand and both companies witnessed a decline in sales in 2013. Honda expects its sales to fall 23% in fiscal 2014 (ends in March). This has prompted the company to lower its global sales forecast for the fiscal year by 1% to 4.385 million units. Nissan's sales fell 20.7% in its 2013 fiscal that ended in December, but unlike Toyota, it's more optimistic about the Thai economy in 2014. It expects conditions to stabilize and has set a target of selling more than 100,000 units in 2014.

Time to think about Plan B
Toyota may reassess its plans in Thailand should the political unrest continue to pull the economy down. The company may abandon its current plan to invest 20 billion baht (approximately $609 million) to boost its capacity by 200,000 vehicles over the next three to four years. If the situation worsens, the Japanese carmaker could even cut production to maintain a balance between supply and demand. This strategy is a part of Toyota's production system and is largely known as the "just in time" approach.

But Toyota's Japanese rivals have not yet voiced anything about abandoning their investment plans in Thailand. Nissan will be investing 11 billion baht ($335 million) to build its second manufacturing plant, while Honda's next facility will involve investments of 17.2 billion baht (roughly $560 million).

So we need to wait and watch the turn of events. If Toyota's strategy does not work out as it hoped in Thailand, perhaps it could fall back on Indonesia. The company already has a production base in Indonesia, which has a low-cost structure as well.

Parting thoughts
Thailand offers great opportunities on account of the free trade agreement, cheap labor, and low manufacturing costs. Toyota was quick to spot the advantages and has reaped rich benefits. Falling demand and political disruptions dampen the company's future prospects in the country. Maybe the time has come for Toyota to explore other markets, like Indonesia?

You probably spent $1000’s more than you should have on your vehicle
In fact, the auto industry can be such a dangerous place for consumers that our top auto experts are determined to even the playing field. That's why they created a a brand-new free report: "The Car-Buying Secrets You Must Know." The advice inside could save you thousands of dollars on your next car, so be sure to read this report while it lasts. Your conscience, and your wallet, will thank you. Click here now for instant access.

Fool contributor ICRA Online has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers