Why Is Toyota Motor Unfazed About the Waning Yen Effect and Falling Sales in Japan?

Management guru Dr. Peter Drucker said, "The business of business is to stay in business." It seems that Toyota (NYSE: TM  ) has taken this saying to its heart. The Japanese bigwig survived recessions and natural disasters only to come out stronger than before. Although the company has emerged as the global sales leader for two consecutive years, it's constantly evaluating new strategies to counter operating challenges and keep ahead of competition.

Toyota has overcome inhibitions about moving production out of Japan, and is concentrating on the U.S. as one of its main production hub and export base. Here's a low down on the cause and effect of Toyota's new strategies.


The Highlander being built in the U.S. Source: Toyota

Manufacturing in Japan is losing charm
In 2012, when yen was rising and the currency advantage was narrowing, executive chairman of Toyota U.S., Yoshimi Inaba, had told Bloomberg that the company wanted to capitalize on its North American plants. Domestic peers Honda (NYSE: HMC  ) and Nissan shared similar sentiments and started shifting the export base outside Japan to reduce dependency on the fluctuating yen that eroded profits earned from exports.

As the yen kept appreciating, Japan Prime Minister Shinzo Abe enacted economic policies that made the currency cheaper and boosted exports. Japanese automakers benefited immensely from this as it bolstered revenue and profits until last year. But the tailwind effect is waning now and most automakers -- including Toyota, Honda, and Nissan -- have made revenue and earnings forecast for their current fiscal years without factoring in more currency gains.

Also, after the sales tax hike from 5% to 8% that became effective in Japan since April 1, component parts and raw materials have become pricier, pulling up the average cost per vehicle. There could be yet another tax hike in October 2015. In this situation, automakers would either have to stay satisfied with lesser margins, or increase prices. The second situation could impact car sales including exports significantly.

To address these looming issues, Toyota with its customary foresight has started forming its next plan. Japan still accounts for almost 50% of Toyota's global manufacturing, but the company is focusing more on alternate productions bases and export hubs. 

The paradigm shift
Last year Toyota produced a record 1.86 million vehicles from its factories in the U.S., Canada, and Mexico, and Honda made 1.78 million vehicles in North America. Both of them also expanded exports to markets like South Korea and Latin America. This sent out a clear signal to the industry that the Japanese automakers are thinking about expanding production and export activities in North America.

In the recent past Toyota has made some big moves in this direction:

  • Last year it announced that for the first time it will build a Lexus in the U.S. The popular Lexus ES sedan will come out of its Georgetown, Ky., plant from 2015.
  • It started exporting Mississippi-made Corollas from April, and plans to sell 7,500 units in 18 countries during the year.
  • Toyota will shift the production base of Camry -- exported to South Korea -- from the Subaru plant to its own plant in Kentucky in the latter half of 2016. The U.S. and South Korea share a free trade agreement that reduces tariffs. Toyota plans to produce additional 100,000 units.
  • The company has announced that it will shift its U.S. sales headquarters from Torrance, Calif., to Plano, Texas, where it will unify sales, engineering and finance. Industry experts think that this is Toyota's master plan to be close to where it builds. Toyota makes Tundra and Tacoma trucks in Texas. Its Kentucky plant cranks out Camry and Avalon; its Mississippi plant, Corollas; and there's an engine plant in Alabama


Source: Toyota

Big plans
Toyota's U.S. exports touched record numbers for the second consecutive year in 2013 after it sent 130,000 cars overseas of the 1.29 million produced, 5% higher from the previous year. The company exported nine models assembled in four of its existing U.S. assembly facilities to 32 countries. Vehicles ranging from the Venza, Highlander SUV, Camry, Avalon, and Sienna were sent to Russia, South Korea, Australia, New Zealand, and Eastern Europe.

In 2014, Toyota wants to export 160,000 units, 23% higher than last year. Honda and Nissan are also stepping up their overall exports from the U.S. that were pretty close to those of Toyota's in the past year. Honda exported 108,705 units overseas, while Nissan closed at 100,608 units in 2013. 

Apart from the U.S., Toyota has its eyes set on Mexico, which is emerging as another big auto export hub and could overshadow Japan as early as 2015. Mexico has free trade pact with 44 countries and offers skilled labor at cheaper rates. According to IHS Automotive, exports from Mexico to the U.S. are expected to touch 1.69 million this year, which is more than the estimated exports of 1.51 million from Japan. Toyota has an assembly plant in Tijuana, and a joint venture with Mazda.

Parting thoughts
North America is likely to become the second auto-hub for the Japanese honcho. Toyota has made forays aggressively into the continent with the goal of generating firm profits by shielding the yen effect as well as avoiding higher manufacturing cost in the domestic market. Though its success in this continent is still not fully tested, it has a well thought out strategy in place that could earn big rewards.


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