Toyota's Financial Overview and Recent Challenges

TOYOTA

By Aleida Rodriguez, Monica Taylor, Maria Papakanakis

College of Westchester

Critical Issues in Business September 4, 2010

Toyota Motor Corporation 2

Automotive Industry History

The history of the automotive industry can be traced back to the late 1700’s. The first self-

propelled car, which needed a steam engine to run, was built in 1769 by Nicolas Cugnot, a French

engineer. In 1801, the first horseless carriage which was known as “the Puffing Devil” was able to

transport people. By 1886 German engineers, Gottlieb Daimler and Karl Benz had manufactured a

vehicle that was able to operate similarly to today’s technology. With every passing century,

technology expanded and vehicles that suited every type of consumer were invented.

In North America, the first automotive company Ford Motors was established in 1903 by

Henry Ford. Henry Ford was the creator of the first assembly line in manufacturing and by 1913

Ford became the world’s largest car company. In 1908, General Motors started to produce cars and

in 1925, General Motors joined the ranks. These automobile companies are known as the “Big

Three”. They are the biggest automobile producing entities in the United States. The automotive

commerce is a vital part of the economic force in the United States because it produces jobs and

contributes to our nation’s GDP.

With the alliance of many European countries that have entered the European Union, the

automotive industry in Europe is also considered one of the largest in the world. As a whole, they

produce and have a joint output that surpasses the United States and Japan. Germany on its own is

considered to be the largest producer of automobiles with France and Spain closely following.

The Asian markets consist of Japan, South Korea and China. At this time Japan is leading

the automotive industry in Asia. Currently the Japanese economy is fairly dependent on the

automotive industry. It makes up for 13 percent of their total manufacturing output and 10 percent

of all employment. Japan is also the third largest producer of automobiles after the U.S. and


Europe. South Korea has seven vehicle manufacturers and is the third largest automobile exporter.

As of now, China’s market is growing rapidly. The automobile industry in China is made up of 120

vehicle manufacturers and employs about 2 million people.

Toyota History

Kiichiro Toyoda is the founder of the Toyota Motor Company. Kiichiro was born in Japan

in 1894 and like his father, who was also an inventor, had a passion to create new things. He

entered the automotive industry in 1933 by creating a sub-division of this father’s company which

was called Toyoda Loom Works. In 1935, Kiichiro’s, very first automobile was released and by

1937, the Toyota Motor Company was underway. Kiichiro changed the name of the company from

Toyoda to Toyota because he believed that the new name was luckier and easier to spell (The

History Channel website. (2010). Toyota founder dies).

Toyota entered the American market in 1957 and opened their first dealership in

Hollywood, California. Their sales for the first year consisted of 288 vehicles which was

disappointing to the company. In 1965, Toyota introduced the Corona to the American consumers.

This vehicle included many new features, like air conditioning and an automatic transmission. It

sold over 20, 000 units in just one year and in 1966, Toyota launched the Corolla. The Toyota

Corolla has been purchased by more than 27 million consumers in 140 counties.

Toyota was slowly gaining the markets of the United States. In 1972, they sold their one-

millionth car, and by 1975 Toyota had surpassed its competitors to take the top spot for importer.

Toyota was now being recognized as a leader in the industry and was also awarded the “Import

Triple Crown” in 1978.


Toyota introduced consumers to their primary luxury line of cars, Lexus in 1989. The first

models that Toyota launched under the Lexus name were the LS 400 and the ES 250. Sales and

customer satisfaction for these vehicles were unsurpassed. The Toyota name was associated with

quality and this assisted the company to achieve top ranks again. Toyota continued to be a

trendsetter in its industry and in 2001, introduced the Prius to the world. This vehicle is a hybrid,

which uses gas and electricity to operate. Toyota also marketed their products to younger

consumers, and in 2003 started producing vehicles under the Scion name. These cars were

equipped and styled with many features that younger generation consumers admire. Again

Toyota’s decision to expand into this market proved correct because in 2004, Toyota’s car sales hit

another record high, reaching over two million in one year.

Recently, the company has encountered a decrease in sales due to the economic crisis of our

country. They have also voluntary recalled several of their vehicles over the past two years due to

various safety issues that customers have experienced while driving Toyota vehicles.

Toyota’s Financial Overview:

Economic Climate

Towards the end of 2008, Toyota suffered a reduction of its unsecured debt credit rating.

After nearly 10 years, Fitch has downgraded Toyota from a rating of AAA to AA. The greatest

contributing factor for this reduction is due to the automotive industry’s overall slump. Luckily, the

industry is slowly turning around and Toyota is a beneficiary of this despite problematic recalls.

As noted before, the economic climate surrounding Toyota’s 2010 fiscal year was difficult

for the automotive industry in general. Japan, like many other nations are in the midst of an


economic recovery that is slowed by high unemployment rates. That said, Toyota’s financial

performance is reflective of those conditions.

Sales:

In Japan and markets overseas markets, vehicle sales dropped by 330 thousand units to

7,237 thousand units. This represents a 4.4% decrease compared to the fiscal year of 2009 (Toyota,

2010). Yet Toyota experienced an 11.2% increase of vehicle sales within its home market over the

last fiscal year. Vehicle sales were raised by 218 thousand units to 2,163 thousand units (Toyota,

2010). Despite expansion in emerging markets in Asia, international sales have experienced a

9.7% reduction. A decrease of 548 thousand units amounted to a current total of 5,074 units sold.

Net Revenues:

When compared to fiscal year 2009, the results for net revenues in fiscal year 2010 are as
follows:

By Business Segment:

Automotive: 7.4% drop to 17,197 billion yen

Financial services: 9.6% decline to 1,245.4 billion yen

Other: 20% decreased to 947.6 billion yen.

By Geographic Location:

Japan: 7.9% reduction to 11,220.3 billion yen

North America: 8.9% decrease to 5,670.5 billion yen

Europe: 28.7% decline to 2,147.0 billion yen

Asia: 2.4% drop to 2,655.4 billion yen

Central and South America, Africa, Oceania: 11.1% reduction to 1,673.8 billion yen

(Toyota, 2010).


Yet despite the results, Toyota remains in the black. In light of a series of recalls amounting to 10

million vehicles, the firm has remained financially stable. They have experienced a 2,558.5 billion

yen rise in cash flows from fiscal year 2009 to 2010.

Toyota’s Income Statement for fiscal year 2010:

Total revenues: 18,950,973 million yen

Gross profits: 2,267,176 million yen

Operating Income: 147,516 million yen

Net income: 209,456 million yen

Toyota’s Balance Sheet for fiscal year 2010:

Total assets: 30,349,287 million yen

Total Liabilities: 19,989,564 million yen

Total Share Holders’ Equity 10,359,723 million yen

Toyota’s standing on the New York Stock Exchange:

Toyota’s trading symbol is TM. As of market close on September 1, 2010, their stock was

trading at $68.83 per share. The 52 week high is reported at $91.97 per share and a 52 week low

of $67.66 per share.

Key Ratios:

 Sales ratio of 27 beats industry’s 25.10 and out performs the S&P 500’s

15.00.


 Sales ratio based on a 5 year annual average finds Toyota outperforming the

industry with a .43 compared to the industry -.99 but behind S&P 500’s

whopping 8.77,

 Net income based on a 5 year annual average 0f -29.13 leaves Toyota more

than twice behind the industry’s -12.38 and the S&P 500’s 8.44,

 Dividend ratio of -7.09 is behind the industry’s 1.07 and S&P’s 5.03,

 Net profit margins of 2.2 is better than the industry’s 1.7 and lower than

S&P’s 12.0,

 Debt to Equity ratio indicates that Toyota (1.21) is slightly below the industry

(1.32) and higher than the S&P 500 (1.13).

Looking Ahead

Initially, Toyota (in American currency terms) expected an operating loss of $3.85 billion

dollars for the remainder of their 2011 fiscal ending in March. In August 2010, Toyota announced

yet another round of recalls due to engine stall problems in its Corolla and Corolla Matrix lines. In

preparation, Toyota has earmarked $1.1 billion dollars for recall related expenses and should not

negatively affect financial projections. Due to a previously strong third quarter, projected operating

costs for the fiscal year 2011 have been reduced to $220 million. Overall, Toyota expects a net

revenue increase of at least 1.3% for the 2011 fiscal year.

Recalls

Toyota always had a great reputation. When you think of the name Toyota you instantly

think “quality, safety, and reliability.” Unfortunately, this was not the case on August 28, 2009.

There was an accident in San Diego, CA involving a 2009 Lexus ES 350 which suddenly


accelerated to over 120mph and the brakes malfunctioned. This accident resulted in four family

members losing their lives. As other complaints began to be reported, Toyota decided it was time to

recall 3.8 million vehicles. The problem was due to floor mats that did not fit properly and moved

out of place. This caused the mat to hit the accelerator causing it to jam. According to Welch, D

(Sept. 29, 2009), this problem was found on various models such as:

• 2007-2010 Toyota Camry

• 2005-2010 Avalon

• 2004-2009 Prius

• 2005-2010 Tacoma

• 2007-2010 Tundra

• 2007-2010 Lexus ES350

• 2006-2010 Lexus IS250 and IS350

In 2007 Toyota had other large recalls which were on 533,000 Tundra pickups and Sequoia SUVs

due to faulty ball joints. There were also problems with the cam shaft on the Tundras and grime

building up in the engines of some models. Toyota had a bad tendency to wait too long before

repairing faulty parts. Toyota was concentrating so much on growth that they didn’t put enough

attention towards safety.

This recall was Toyota’s first step towards gaining their reputation back. Owners were asked

to remove the floor mats until the issue was repaired. According to National Highway Traffic

Safety Administration (NHTSA), Toyota also agreed to a $16.374 million fine because they did not


inform NHTSA immediately regarding the acceleration problem that put drivers at risk. According

to Thomas, K. (November, 25, 2009), there have been over 2,000 incidents of which 16 deaths and

243 injuries may be linked to the gas pedal issue. Although these floor mats were only sold in the

U.S. this recall in addition to the previous recalls, was a clear indication that Toyota needed to

revise the quality control process. This lead to another recall for 2000-2003 Tundra truck models

because of frame rust. The fact that the quality of their vehicles are the reasons for these recalls is a

high concern because Toyota is supposed to be among the best quality vehicles.

In an effort to fix the gas pedal problem Toyota shortened gas pedal and removed foam

beneath carpeting to increase the space under the pedal. Thomas states that Toyota will also be

installing a brake override system which will activate when the gas and brakes are applied at the

same time. This should be a standard feature on Toyota and Lexus vehicles by the end of 2010.

On August 11, 2010, NHTSA released preliminary results on Toyota’s acceleration

investigation. Although, the final causes have not been determined it seem they have not found any

evidence that the accidents were due to floor mats or sticky gas pedals, instead it was driver’s error.

According to Valdes-Dapena, P. (August 11, 2010)

“In 35 of the cases, data recorders showed the brakes were never used. In 14 other

cases, the brakes were only partially applied and, in one instance, both the gas and brake

pedals were applied together. In five of the cases, the event data recorder was not triggered

by an impact, so no data was recorded.”

Toyota immediately changed the way they handle complaints and repairs, recalls are never a

good vibe for consumers. Mr. Toyoda realizes has made it top priority to improve quality. He

realizes that quantity is not important because people’s lives were at stake. In a speech by Akio


Toyoda, he mentions that the principles followed at Toyota are “respect for people” and

“continuous improvement”. He acknowledged that they didn’t listen as carefully as they should

have and they took too long to respond.

Toyota has the most top quality awards in the industry and introduced the hybrids. They

should not let such accomplishments be forgotten by disregarding these issues. Another step in

rebuilding their reputation was hiring Exponent, an engineering and scientific consulting firm, to

analyze the electronic throttle control system used by Toyota. Mr. Toyoda will also be visiting the

sales and manufacturing workplaces to make sure they are providing top quality service and

products.

An example of how quickly Toyota’s priorities have changed is the recent recall in August,

2010. They are sending letters for a voluntary recall on 1.13 million 2005-2008 models of Corolla

and Matrix. They believe the Engine Control Modules may have a defect which would lead to

harsh shifting, engine not starting, or the car stopping while being driven. There were three

accidents that may be related to this issue, so they are playing it safe by recalling the cars before

more incidents occur. They want customer to feel safe.

Social Issue

Needless to say, although Toyota began to take responsibility for their actions people were

still upset about how they handled the situation and how long they took to react. The U.S. Congress

held hearings about Toyota’s recalls. This became a conflict for some because they felt that

Congress was being bias due to November’s elections and they used the hearings to gain more

votes. Some of the Congress members represent states where the U.S. Big Three carmakers are

manufactured, and they are looking at the lives that were innocently put in danger. Other members


represent states that are “pro-Toyota lawmakers” because they employ many Americans at their

factories. The U.S. unemployment rate was steadily close to 10 percent yet Toyota continues to

employs over 170,000 people in the U.S. The governors of six states were on Toyota’s side.

Financial Issue

Mr. Zhou a senior analyst predicts the Toyota’s U.S. market share will decline by more than

one percent due to the massive recalls. This will bring new sales down to about 16.5 percent and

leading the new customers towards GM, Ford, and Honda. This will also affect Toyota dealers that

are privately owned. A survey performed by Kelly Blue Book showed that 27 percent of potential

buyers considering Toyota, 28 percent considering Scion and 23 percent considering Lexus have

changed their mind on which car brand they should buy. (Glover, M. 2/13/10) Toyota has

learned from their mistakes and has set an example to other automakers about the importance of

responding in a timely manner and listening to the customers.

Customer demands have also changed truck sales have dropped over the past couple of

years. In an effort to stay competitive and adjust to the changes in customer demands due to the

economy Toyota has invested over $600 million to reorganize the North American plants. They are

now able to build large frame vehicles and small frame vehicles on the same assembly line. This

should increase car and light truck production and should result in factories producing at full

capacity.

Prediction


Toyota went through a rough year and unexpected issues but it seems that Toyota will

bounce back. Although they recently had large recalls they only rank as 17th in consumer

complaints compared to the other auto makers. (Glover, M. 2/13/10) As long as they continue to

respond quickly to problems and concerns they should gain customers confidence again. Many

customers will always remain loyal to the brand they prefer regardless of others’ experiences.

Toyota must remember how these recalls have affected the company and people’s lives and make

sure not to let history repeat itself.


References (History)

Business and Economics Research Advisor. (2004). The Automotive Industry.

Retrieved August 28, 2010, from http://www.loc.gov/rr/business/BERA/issue2/history.html

Discovery Channel. (2010). History of Cars Timeline.

Retrieved September 2, 2010 from http://www.yourdiscovery.com/cars/timeline/

Kim, C.,(2008). TIMELINE: Milestones in Toyota's 70-year history. Toyota Motor Corp, Reuters.

Retrieved August 28, 2010, from http://www.reuters.com/article/idUST13898620080210.

The History Channel website. (2010). Toyota founder dies

Retrieved August 28, 2010, http://www.history.com/this-day-in-history/toyota-founder-dies

Toyota Inc. (2010). 50 Years in the America and Counting.

Retrieved August 28, 2010 from
http://www.toyota.com/about/our_business/our_history/u.s._history/

Toyota Inc. (2010). 50 Years in the US.

Retrieved August 28, 2010 from
http://www.toyota.com/about/our_business/our_history/timeline.html

Toyota Inc. (2010). History of Toyota.

Retrieved August 28, 2010 from http://www2.toyota.co.jp/en/history/1940.html


References (Financials)

Financial Data, (n.d.). Toyota.com. Retrieved from
http://www.toyota.co.jp/en/ir/financial/financial_data.html

Financial Results, (n.d.). Toyota.com. Retrieved from
http://www.toyota.co.jp/en/ir/financial/financial_data.html

Kitamura, M. Akiko and Komatsu, Tetsuya, (2008, November 26). Toyota Suffers First Credit Rating Cut in
10 Years Amid Slump. Bloomberg.com. Retrieved from http://www.bloomberg.com/apps/news?
pid=newsarchive&refer=home&sid=aybXO4OangM0

Langolis, Shawn, (2010, August 24). Toyota could be heading toward another recall. Market Watch.
Retrieved from http://www.marketwatch.com/story/toyota-could-be-heading-toward-another-
recall-2010-08-24

McIntyre, D. A, (2010, August 4). Toyota Financial Results: What Recall? 247wallst.com. Retrieved from
http://247wallst.com/2010/08/04/toyota-finance-results-what-recall/

Niedermeyer, Edward, (2010, February 4). Toyota: Recall To Cost $2b This Quarter, Dent Improved
Financial Outlook. The Truth About Cars.com. Retrieved from
http://www.thetruthaboutcars.com/toyota-recall-to-cost-2b-this-quarter-dent-improved-financial-
outlook/

Toyota has raised its full-year financial outlook, despite the recall, (n.d). 4wheels.com. Retrieved from
http://www.4wheelsnews.com/toyota-has-raised-its-full-year-financial-outlook-despite-the-recall/

Toyota Motor Corp, (n.d.). Moneycentral.msn.com. Retrieved from
http://moneycentral.msn.com/news/ticker/sigdev.aspx?Symbol=TM

Welsh,Jonathan, (2010, August 4). Toyota Reports Fiscal 1Q Earnings Back In The Black. The Wall Street
Journal. Retrieved from http://blogs.wsj.com/drivers-seat/2010/08/04/toyota-reports-fiscal-1q-
earnings-back-in-the-black/?


References (Critical Issues)

Glover, Mark. (2010, February 13,). AUTO RECALLS Toyotas Job Now is Rebuilding its
Reputation. The Sacramento Bee, A.1. Retrieved August 27, 2010, from ProQuest
National Newspapers. (Document ID: 1961967791).

Ikematsu, Hiroshi & Honma , Keiichi. (2010, February 24). U.S. Politics Playing Large Part in
Toyota Issue. McClatchy-Tribune Business News. Retrieved August 27, 2010, from
ABI/INFORM Dateline. (Document ID: 1970811491).

Tierney , Christine. (2010, August 24). Toyota retools for added flexibility: Automaker puts
$600M into plants to improve market share. Detroit News,p. A.8. Retrieved August 27,
2010, from ProQuest National Newspapers Premier. (Document ID: 2117921611).

Thomas, Ken (2010, November 25). Toyota Gas Pedal Replacement Details: 3.8 Million
Cars Affected. Huffington Post (online). Retrieved from http www.huffingtonpost.com/
2009/11/25/toyota-gas-pedal-replacem_n_370285.html

Toyoda, Akio (2010, February 23). Back to Basics for Toyota. The Wall Street Journal.
Retrieved from
http://online.wsj.com/article/SB10001424052748704454304575081644051321722.html

Toyota Announces Voluntary Safety Recall on Certain Toyota Corolla and Corolla Matrix
Models. Toyota Press Room. Retrieved from
http://pressroom.toyota.com/pr/tms/toyota/toyota-announces-voluntary- safety-
168488.aspx

Welch , David (2009, September 29). Toyota Recalls 3.8 Million Vehicles. NY Times (online).
Retrieved from http://www.nytimes.com/2010/08/16/business/global/16yuan.html?
sq=global economy&st=cse&scp=4&pagewanted=print

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