BSTR/362

IBS Center for Management Research

Toyota: The Once-in-a-Century Challenge

This case was written by Syeda Maseeha Qumer, under the direction of Debapratim Purkayastha, IBS Center for
Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of a management situation.

This case was a Finalist in the 2009 John Molson MBA Case Writing Competition.

License to use for the MBA Program, Group J,

Icfai University Tripura.
Licensed to print 1000 copies, 02 August, 2011.
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 BSTR/362

Toyota: The Once-in-a-Century Challenge

Toyota faces tremendous challenges. As an organization it has not had to deal with a down cycle
before, and this is not just a cycle in one country but in virtually all of its markets.1
- Michael Smitka, Japanese auto industry expert.
Were facing a once-in-a-century crisis Ill try to make changes without being tied down by the
past. I will consider measures quickly.2
Akio Toyoda, President, Toyota Motors Corporation.
INTRODUCTION
On June 23, 2009, Akio Toyoda (Akio) took over as President of Japanese automaker Toyota
Motor Corporation (Toyota). Akios appointment came in the wake of the company reporting its
first losses since 1963, the year it began reporting business data. Analysts felt that the global
financial crisis had had its impact on the worlds largest automaker and that the company was also
trying to cope with a shift in the global automobile industry. The challenge before Akio, grandson
of the founder of Toyota, was to bring the automaker back to profits.
The business segments of Toyota mainly include automotive operations, financial services
operations, and other business operations.3 Automotive operations accounted for 89% of Toyotas
total revenues in 2008. The company manufactured vehicles at 53 production sites in 27 countries
around the globe. In the fiscal year 20084, Toyota sold approximately 8.91 million vehicles in 170
countries and regions under the Toyota, Lexus, Daihatsu, and Hino brands. North America was its
biggest market followed by Japan, Europe, and Asia (Refer to Exhibit I for vehicle production,
sales and exports of Toyota and Exhibit II for primary markets of Toyota).
After booming sales through 2007, which also saw the company dethrone General Motors (GM)5
as the worlds leading automaker, Toyotas sales were hit hard in 2008. The company decided to
opt for a change in leadership and appointed Akio as President. Akio immediately announced a
slew of measures in a bid to bring the company back to profits. We are talking about a once-in-a-
century transformation of the market. I believe the auto industry is now trying to face the
challenges of presenting a solution to this once-in-a-century change. And what is clear to me is
that what is going to happen will not just simply be an extension of the past. I believe it is an
important time for Toyota to present some answers for the coming 100 years,6 he said.

1
Todd Crowell, Toyoda Takes Toyota Wheel, www.atimes.com, May 8, 2009.
2
John Lippert, Alan Ohnsman and Kae Inoue, Toyoda Asks How Many Times Toyota Errs Emulating
GM Failures, www.bloomberg.com, June 22, 2009.
3
Other business operations of Toyota include intelligent transport systems, IT and telecommunications,
housing, motorboat manufacturing, and biotechnology and afforestation businesses.
4
Toyotas financial year ends on March 31.
5
General Motors Company, LLC (earlier General Motors Corporation) based in Detroit, is the second-
largest automaker in the world. In June 2009, the company filed for Chapter 11 bankruptcy protection.
The bankruptcy filing was a dramatic downfall for GM, which was founded in 1908 by William C.
Durant. For the year ended 2008, the company reported revenues of US$ 148.979 billion.
6
Alex Taylor III, Toyotas New Man at the Wheel, http://money.cnn.com, June 26, 2009.
1 License to use for the MBA Program, Group J,
Icfai University Tripura.
Licensed to print 1000 copies, 02 August, 2011.
License valid upto 01 November, 2011.
 Toyota: The Once-in-a-Century Challenge

Shortly after, Toyota announced that its net revenues for the first quarter ending June 30, 2009,
totaled 73.836 trillion, a decrease of 38.3% compared to 2008.8 The quarterly loss was estimated
to be around 77.82 billion (US$ 819 million). It was the companys third quarterly loss in a row 9.
Although we were able to make certain improvements in fixed cost and cost reduction efforts, the
decline in vehicle sales and the appreciation of the Japanese yen had a severe impact on our
earnings,10 said Takahiko Ijichi, Senior MD of Toyota.
While many analysts felt that Toyota would bounce back, some analysts expressed doubts over
whether Akio would be able to manage a turnaround and pull the company out of the crisis. Some
insiders were also worried that the selection of a member of the founding family as President
might lead to disunity within the company. In this scenario, analysts felt that Akio had his task cut
out for him. It will be interesting to see whether Akio Toyoda will be able to bring about the
change in mentality and imagination that the company seems to need,11 said Ian Fletcher,
automotive analyst at IHS Global Insight12.

THE NUMBER ONE AUTOMAKER

Over the years, Toyota had made a name for itself for its innovations, financial soundness, and
global competitiveness (Refer to Exhibit III for worlds most admired companies and Exhibit IV
for Toyotas industry rank on key attributes). Toyota was founded by Kiichiro Toyoda in 1937. In
its initial years, it focused on adapting the Ford Production System to suit the Japanese market.
However, it later adopted its famed Toyota Production System13 (TPS, also referred to as lean
manufacturing system), which took the automobile industry by storm and enabled the company to
come out with many innovative models in a cost-efficient way.
Following World War II, international manufacturers were concentrating on medium-sized and
larger cars but Toyota kept its focus on small cars. Kiichiro resigned from Toyota in 1950 and the
company saw a series of Presidents in subsequent years. The company started its globalization in
the 1950s and entered the US market in 1957. It established its first overseas production unit in
Brazil in 1959. It entered the European market in 1963. Besides manufacturing, the company
started a global network of design and R&D facilities covering the three major car markets of
Japan, North America, and Europe. The company underwent rapid expansion in the 1960s and
1970s and exported fuel-efficient small cars to many foreign markets. It focused on lowering its
production costs and on developing more sophisticated cars. The Toyota Corolla, which went on
sale in 1966, became Japans most popular family car.
By the early 1970s, Toyotas production was behind that of only GM and Ford Motor Company. It
also began to tap the markets in the Middle East. By 1974, Toyota Corolla had become the largest
selling car in the world, and a decade later, Toyota ranked second only to GM in the total number
of cars produced. By the end of the 1980s, Toyota began to build new brands and the luxury
division, Lexus, was launched. During this period, Toyota continued to strive for improvements
and its manufacturing processes served as a model for other companies.

7
As of September 2009, US$1 approximately equals 90.
8
www.toyota.co.jp/en/news/09/0804_1.html.
9
Hiroko Tabuchi, Toyota Posts $819 Million Loss, www.nytimes.com, August 4, 2009.
10
Toyota Reports $819 million Quarterly Loss, http://news.moneycentral.msn.com, August 4, 2009.
11
Jorn Madslien, Toyota Scion to Revive Prudent Culture, http://news.bbc.co.uk, June 23, 2009.
12
Founded in 2001, IHS Global Insight provides economic, financial, and industry analysis, data and
software solutions and consulting services.
13
The first principle of TPS was called jidoka which means that when a problem occurred, the equipment
stopped immediately, thus preventing defective products from being produced. The second was the Just-
in-Time (JIT) concept in which each process produced only what was required by the next process in a
continuous flow.

2
 Toyota: The Once-in-a-Century Challenge

After some setbacks in the early 1990s, the company began to grow further under the leadership of
Hiroshi Okuda, who focused on international expansion and localization of production. He also
developed a strong dealership network and increased advertising. This resulted in a significant
increase in sales. One of Toyotas major innovations was the Prius, a gasoline-electric car and the
worlds first mass-produced hybrid car. The car was launched in 1997. Prius and all the subsequent
models launched by Toyota were successful in the US and further consolidated the companys
position in the country. The companys overseas production increased from 1.22 million units per
year in 1994 to 1.54 million units per year in 1998.
In 1999, Fujio Cho became the President of Toyota. Besides increasing manufacturing centers and
expanding sales networks worldwide, Cho focused on localizing design, development, and
purchasing in every country. Toyota propagated the TPS and its unique corporate culture, The
Toyota Way throughout its global manufacturing units. Toyota employees world over practiced
philosophies such as Kaizen (continuous improvement), PDCA (plan, do, check, action), Pokayoke
(mistake-proofing), and Just-in-Time (JIT).
During the 2000s, Toyota registered strong sales in the US and Japan. In 2000, for the first time
ever, Toyotas total worldwide production exceeded five million vehicles. In 2001, Toyota started
two new plants in Europe and in 2002 it established Toyota Motor Manufacturing Turkey to
manufacture Corolla sedans for export markets. In April 2002, Toyota announced a new corporate
strategy 2010 Global Vision to achieve a 15% market share of the global automobile market by
early 2010. By mid-2003, Toyota had a presence in almost all the major segments of the
automobile market that included small cars, luxury sedans, full-sized pickup trucks, SUVs, small
trucks, and crossover vehicles.
In 2005, Katsuaki Watanabe14(Watanabe) was appointed President of the company. In the first
quarter of 2007, Toyota replaced GM as the worlds leading automaker, breaking the latters 77-
year reign. The company sold about 2.35 million vehicles compared to GMs 2.26 million. Based
on the market capitalization, Toyota was valued at almost 12 times GMs value.

PROBLEMS

In the new millennium, automakers had to contend with many challenges including high gas
prices. As the global financial crisis deepened in 2008, the consumer demand for cars and other
goods plummeted, especially in the US and European markets. Because of the credit crunch,
automobile sales dropped significantly as consumers stopped buying new cars. This led to a fall in
vehicle sales of auto companies. Automakers reacted by cutting back production and slashing jobs.
In 2008, though Toyotas sales were down 4% from 2007, the company sold about 8.97 million
vehicles compared to GMs 8.35 million.15 Toyotas hybrid technology car Prius became popular
due to the increase in gas prices. But eventually the company too was affected and its global sales
fell 32.3% in October 2008.16 In North America, which accounted for a third of Toyotas
worldwide revenues, US sales fell 15.4% to 2,217,660 vehicles in 2008. The sales of large pickups
were down about 25% and the sales of SUVs fell by 30%.17 The companys sales were also
affected in Europe and Japan.

14
Katsuaki Watnabe served as the president of Toyota from 2005 to mid 2009. He led Toyota on an
aggressive and a largely successful growth track. He joined Toyota in 1964 and gained experience
primarily in corporate planning and administrative affairs. In 1999, Watanabe was appointed as senior
managing director, after which he assumed the position of executive vice-president in 2001. In June 2005
he was appointed as the president of Toyota.
15
Nick Bunkley, Toyota Ahead of G.M. in 2008 Sales, www.nytimes.com, January 21, 2009.
16
http://topics.nytimes.com/top/news/business/companies/toyota_motor_corporation/index.html.
17
Bill Vlasic and Nick Bunkley, Toyota Scales Back Production of Big Vehicles, www.nytimes.com, July
11, 2008.

3
 Toyota: The Once-in-a-Century Challenge

In early 2009, Toyota projected a loss of 450 billion (US$5 billion) for the fiscal year 2009 in its
vehicle-manufacturing operations. It also applied for an emergency loan of about US$2 billion
funded by the Japanese government to make up for car loans in the US.18 In April 2009, Toyota
sold about 126,540 cars in the US, a 42% drop compared to the corresponding period of 2008. The
company slipped behind Ford, which sold almost 130,000 cars during the same period. Unsold
Toyotas lay piled up on storage lots. Toyota also witnessed a drop in sales in Japan and China,
where it lost out to rivals who were coming up with a wider lineup of smaller cars at reasonable
prices.
In May 2009, Toyota reported its first annual net loss in six decades as net revenues for the fiscal
year 2009 totaled 20.53 trillion, a decrease of 21.9% compared to the previous year. Net income
decreased from 1.72 trillion to a loss of 437 billion. Consolidated sales totaled 7.57 million
units, a decrease of 1.34 million units compared to 200819 (Refer to Exhibit V, VI, and VII for
balance sheet, income statement and five-year stock chart of Toyota respectively). Analysts felt
that this was a dramatic turnabout for an automaker whose steady expansion and record profits had
seemed unstoppable.

WHAT WENT WRONG?

Analysts felt that Toyotas bad performance was due to the fact that it had expanded its global
production facilities in the mid-2000s to meet brisk demand, particularly for its fuel-efficient cars,
leaving it vulnerable to the current slump in worldwide sales. Toyotas drive into the American big
truck market also contributed to its troubles. The damage was great at Toyota because it was
heading toward aggressive expansion with its foot slammed on the accelerator, 20 said Tatsuo
Yoshida auto analyst at UBS Securities Japan Ltd.21
Some analysts opined that Toyotas troubles had started in 2006. In November 2006, Toyota
opened a new plant in San Antonio, Texas, to manufacture the largest pickup the company had
ever built, the Tundra, just before cracks emerged in the US subprime-mortgage market. Usually
Toyota designed each assembly line to accommodate many models, but in San Antonio, it broke
the rule, dedicating a whole plant to the production of a single vehicle. Watanabe invested about
US$ 3 billion in the plant and launched the Tundra in 2008. Analysts pointed out that the pickup
had been launched at a time when the global auto industry was witnessing a slump. The relatively
high-priced Tundra failed to make a dent in the market and its inventory piled up. Subsequently
with sales of pickups and SUVs tumbling, Toyota had to shut down truck production at its two US
plants for about three months in 2008. In many ways, Toyotas strategy hasnt been any different
than G.M. or Ford, which was to build bigger vehicles with bigger engines and bigger profits,22
said Maryann Keller, an industry consultant.
In February 2009, Toyotas Honorary Chairman Shoichiro Toyoda (son of Toyotas founder)
summoned 400 company executives to the redbrick factory in Nagoya, Japan. During the meeting,
he confronted Watanabe about the losses incurred by the company and the threat to everything his
family had created over the years. Critics felt that Watanabe had failed miserably in predicting the
loss in sales and also in taking quick decisive corrective action. Watanabe attributed the poor
results to a fall in vehicle sales, particularly in the US and Europe, the strong appreciation of the
yen against the dollar and the euro, and the rising cost of raw materials. Toyota manufactured

18
Ian Rowley, Auto Bailout: Et Tu, Toyota? www.businessweek.com, March 3, 2009.
19
www2.toyota.co.jp/en/news/09/0508_1.html.
20
Toyota Reports $819 Million Loss, http://www.nytimes.com, August 4, 2009.
21
Based in Tokyo, UBS Securities Japan Ltd. is an investment-banking firm which provides financial
advisory services.
22
Bill Vlasic and Nick Bunkley, Toyota Scales Back Production of Big Vehicles, www.nytimes.com, July
11, 2008.

4
 Toyota: The Once-in-a-Century Challenge

about half of its vehicles in Japan and a stronger yen made exports from Japan more expensive.
Experts were of the opinion that as Toyota exported about 40% of its American sales from Japan,
the profit margins had been lowered. Talking about the problem, Nomura Securities Co., Ltd.23
analyst Shinya Naruse said, Automakers cannot profit from exported cars at current forex
conditions. There is no way to recover without restructuring.24
Toyota announced that it would lose another 550 billion (US$5.5 billion) in 2009. Experts opined
that the company, which was expected to lose US$ 5.7 billion more in the fiscal year 2010, would
not recover till 2012 even if sales rebounded. According to Christian Takushi, a portfolio manager
for Swisscanto Asset Management AG25, Toyota has overdone itself with capital spending
because they really wanted to be No. 1. Theyre paying a high price.26

CHANGE IN LEADERSHIP

Toyota expected that the global vehicle demand would eventually increase. However, for the fiscal
year 2010, the company expected its global unit sales to fall about 14% to 6.5 million vehicles.27
The projected slip forced Toyota to make changes at every level right from its plants to its
dealerships to the top management of the company. The automaker made production cuts across its
74 global assembly lines, laid off temporary workers in Japan, and cut pay for its managers. It
suspended production at some of its factories, implemented shorter workweeks, and offered
buyouts to American workers. Toyota did not shut down any factories and retained its production
capacity of 10 million vehicles per year but put construction of new plants on hold. Directors too
had to forego bonus pay and for the fiscal year 2009, Toyota slashed its annual dividend by 40 to
100, thereby ending a decade-long record in which the dividend had jumped six-fold.
The company began looking for a leader who would steer the company back toward profits. In
January 2009, the company announced that it had selected Akio to lead the company and manage a
turnaround. In June 2009, the Toyota board replaced Watanabe with Akio, heralding the return of a
member of the founding family as the head after 14 years. After a stint as an investment banker,
Akio had joined Toyota in 1994 as a junior manager and had worked his way up. He had assumed
various domestic and international positions and was also credited with spearheading some of
Toyotas online initiatives. He joined the Toyota board in 2000 and in 2001, he became the Chief
Officer of the Asia and China Operations Center. In 2002, he assumed the position of MD and
after a year he was made a senior MD. In 2005, he became an Executive Vice-president (EVP) of
the company and oversaw Toyotas China operations, Japan sales, and the companys Internet
business. At conservative Toyota, Akio was considered a bit of a radical and was not averse to
pushing through unpopular decisions.
Reactions to Akios appointment were mixed among analysts as well as those in the company.
Some welcomed the appointment as they felt that he had enough experience in the automobile
market and was aware of all aspects of the companys operations. However, there were also
murmurs in certain quarters that nepotism had played a role in Akios accession to the top position.
They felt that with less than a 2% stake in the company, the founding family could not make an
automatic claim to this position. Chris Richter, a senior research analyst at CLSA28, said, Good
management requires good skill and good training and doesnt necessarily follow blood lines.29
23
Nomura Securities Co., Ltd. is a brokerage firm in Japan.
24
Yuki Oda, A Rough Road Ahead for Toyotas New Chief, www.time.com, January 22, 2009.
25
Swisscanto Asset Management AG is a Switzerland based asset management company which offers
investment solutions to clients.
26
Toyotas New President Switches Gears, www.miamiherald.com, July 20, 2009.
27
Hiroko Tabuchi, Toyota Posts an Annual Loss, www.nytimes.com,May 8, 2009.
28
A Hong-Kong-based brokerage house.
29
Yuki Oda, A Rough Road Ahead for Toyotas New Chief, www.time.com, January 22, 2009.

5
 Toyota: The Once-in-a-Century Challenge

Many were surprised by the appointment as it was rare in Japans conservative corporate culture
that valued seniority, to appoint a person in his 50s as the President of the company. Some analysts
were concerned that the company had been put in the hands of a relatively young member of the
Toyoda family at such a turbulent time. James Womack, chairman, Lean Enterprise Institute,
added, I dont think anybody sees Akio as a highly original kind of guy, but hes really earnest.
Hes been in the Toyota system all his life. He doesnt know anything else but to go back to the
basics.30
As part of the management reshuffle, five new EVPs and eight board members were appointed,
while two key company members, Shoichiro and Senior Adviser Okuda, resigned from the board.
Former Toyota executives Yoshimi Inaba and Yasumori Ihara were called back, while Watanabe
was appointed Vice-chairman.

BACK TO BASICS

Akio planned to adopt a back to basics approach to revive the company. The global automobile
industry has been facing extreme hardships since the latter half of last year We expect our losses
to deepen this fiscal year, and so all of us in the new management team at Toyota feel like we are
setting sail during a storm. Unfortunately, we are currently losing money So, we must start again
from the very bottom up.31 He planned to produce small, fuel-efficient and competitively priced
cars that people could afford, cut costs, and establish a strong presence in emerging markets. Akio
wanted to re-instill dedication to one of the pillars of TPS genchi genbutsu32 (go and see for
yourself). If I am going to be at the top of the car company, I want to be the owner-chef. I taste
my car, and if it tastes good, I provide it to the customer,33 he said. He added that he would follow
the corporate traditions of the company, embrace change, and at the same time, maintain his own
individuality.
Akio intended to squeeze costs from the companys already lean operations so that the company
would be profitable using just 70% of its production capacity and use the downtime to train
workers. He had no plans to close plants or cut full-time jobs as he was banking on customers and
the rank-and-file to steer the automaker out of its worst crisis. Akio volunteered to take a 30% pay
cut for one year and other top managers too accepted pay cuts. The aim of the company was to
save extra US$ 8.5 billion in costs in 2009.
According to Akio, the companys entire product lineup would be reviewed to ensure a better
focus on its offerings to every region in the world. Toyota would concentrate on building more
small cars and fewer large cars. Rather than asking, How many cars will we sell? or, How
much money will we make by selling these cars? we need to ask ourselves, What kind of cars
will make people happy? as well as, What pricing will attract them in each region?34 he said.
Toyota was also to focus on green technology like hybrids and plug-in electric vehicles. Akio
slashed the price of the third-generation Prius to a reasonable US$ 21,000, almost US$ 11,000 less
than the fully equipped models. The company said that it would begin making its Prius gas-electric
hybrids at a new plant in Mississippi by late 2010.

30
John Lippert, Alan Ohnsman and Kae Inoue, Toyoda Asks How Many Times Toyota Errs Emulating
GM Failures, www.bloomberg.com, June 22, 2009.
31
Toyota Clings to World Number-One Sales Spot Despite First-Half Decline, www.edmunds.com,
July 30, 2009.
32
Genchi Genbutsu means Go and see the problem first hand The Company believed that practical
experience is valued over theoretical knowledge.
33
Martin Fackler and Bettina Wassener, Grandson of Toyota Founder Will Lead, www.nytimes.com,
January 20, 2009.
34
www2.toyota.co.jp/en/about_toyota/message/index.html.

6
 Toyota: The Once-in-a-Century Challenge

Toyota also planned to take advantage of government incentives around the world, such as the
cash-for-clunkers35 schemes, promoting more environmentally-friendly cars in Japan, Europe, and
the US.

REGIONAL AUTONOMY
The companys management was to place a priority on meeting the needs of regional markets by
closely watching consumers and markets and noticing changes. In order to respond to consumer
needs, each of the EVPs was to oversee a global region North America, Europe, Japan, and
emerging markets. Depending on the region, the company would then come out with an
appropriate product strategy. Akio added that a more regionally-oriented management structure
would help the company provide cars that met specific local tastes rather than offering a full lineup
of vehicles in all markets. Together, we will create clear Regional Vision plans by determining
what role Toyota should play and what we want to achieve in each region. We will also consider
our capacity and the market situation in those regions, in order to identify areas where we want to
advance, and areas where we need to take a step back. These decisions will allow us to better
prioritize the allocation of our resources,36 he said. On July 31, 2009, Toyota announced that it
was setting up two marketing companies, one to operate within Japan and one for the global
market to handle marketing and focus on customer-centered activities. The companies would start
operating on January 1, 2010.
In Japan, the size of the overall market was estimated at about 12 million vehicles. In 2009, the
market size for new cars was expected to be less than 3 million units. In the Japanese market,
Toyotas sales were stable mainly because of the incentives offered by the Japanese government
such as the eco-car tax deduction and the scrap incentive for buying eco-cars. Akio did not
foresee any problems in sales but felt that its capacity in Japan was a problem area and the
company needed to right-size.37
Though Toyotas sales in the North American market had dropped sharply because of the
economic downturn, Akio was confident that the market would recover gradually. Toyotas US
sales declined 38% in 2009.38 As North America was one of the important markets for Toyota,
Akio aimed to build more autonomous operations in this region and shift its focus to marketing a
region-specific vehicle line-up. The company aimed to revamp its image in North America with
the restructuring of the Lexus and the Scion. Toyota had a strong desire to become a U.S. car
company. I believe that decision was correct, and we will try to strengthen even more. Of course,
looking at the current situation, I would say our production capacity may be a little bit too
much,39 he said.
Akio said that the company would discontinue building pickups in Indiana and move all of its
Tundra production to San Antonio and devote the new Mississippi facility to the Prius, which had
earlier been built exclusively in Japan. As a cost-cutting measure, Toyota decided to suspend truck
production at its plants in Princeton and San Antonio from August 2009 until November 2009. In
July 2009, the company announced that it might end production at the NUMMI40 plant in Fremont
as its partner in the joint venture, GM, had decided to quit the facility.

35
In April 2009, US officials introduced the cash-for-clunkers program under which car owners who
upgraded to cleaner, fuel-efficient vehicles from cars that were at least 13 years old received government
subsidies.
36
http://www2.toyota.co.jp/en/about_toyota/message/index.html.
37
http://www2.toyota.co.jp/en/about_toyota/message/index.html.
38
Ken Thomas, Toyota Executive: Automaker Hoping to Make Quick Decision on California Joint
Venture Plant, http://gadgetophilia.com, July 20, 2009.
39
Alex Taylor III, Toyotas New Man at the Wheel, http://money.cnn.com, June 26, 2009.
40
GM and Toyota resurrected the plant after GM had closed it down in 1982. The NUMMI venture began
production in 1984. In addition to the Vibe, the plant was making the Toyota Tacoma and Toyota Corolla
in 2009.

7
 Toyota: The Once-in-a-Century Challenge

Toyota also planned to bolster its presence in Europe by developing a distinctive Toyota business
model in the region. Its presence had been rather weak in this region and the company wanted to
change this by focusing on its hybrid technology. [A]s stricter environmental regulations come
into place, we are gradually shifting our focus to the hybrid segment. We are confident that this
will create a stronger position for Toyota in Europe. Europe is also a place where Toyota can learn
about automotive culture. I have always admired the fact that cars play a major role in the lives
of Europeans and that they love the experience of driving. Hopefully, we can find ways to transfer
that excitement to other regions around the world,41 said Akio. Toyota would start making hybrid
cars in Europe from 2010 onwards.
Akio also gave more importance to emerging markets such as China, Asia, and South America as
he felt that these regions had very good potential. These markets have amazing growth potential,
and I can see that China will someday stand alongside the United States as a giant single market.
In order to meet customers needs, we will as always take straightforward steps Expanding
our reach in these markets will help increase our overall sales volume and profits, so I am
determined to establish proactive business plans in these areas,42 he said.

CHALLENGES AHEAD

Akio expressed confidence that Toyota would bounce back but he added that it would take at least
two more years for the company to turn a profit. Some analysts too echoed this view. According to
CLSAs Richter, Toyota has a history of rising to overcome crises. I think it will be quite a few
years before anyone could challenge Toyotas No. 1 spot.43 Despite the drop in sales by 26% in
the first half of 2009, Toyota was still the worlds top-selling automaker (Refer to Exhibit VIII for
worlds top 10 auto groups by 2009 H1 sales). Analysts also felt that the companys strong
financial position would help it withstand even a situation in which sales continued to decline for
another two years. They noted that Toyota was in a much better position than its major competitors
whose very survival was at stake.
According to the company, Toyota was witnessing signs of recovery as its global production in
June 2009 decreased by a modest 23.7% to 636,307 units from the same period in 2008.44 The
company forecast a smaller annual loss in 2009 due to deep cost reductions and predicted vehicle
sales of 6.6 million units in 2009. The sales boost was expected from Japan where production had
picked up due to incentives and tax breaks on environmentally-friendly vehicles. Toyota said that
it expected a 450 billion (US$4.7 billion) loss for the fiscal 2010, less than the 550 billion loss
that had been initially projected. Toyota might be able to boost its American market share to
21.3% by 2011 as GM and Chrysler shut plants and dealerships, analysts said. According to James
Hunt, an investor at Tocqueville Asset Management LP,45 Toyota should emerge from the
downturn in an even stronger position relative to competitors.46
Toyota was optimistic that sales would improve gradually in all its major markets driven by the
popularity of some of its models like the Prius. Commenting on how the company would respond
to the challenges it faced, Akio said, We may have to slightly change some of the ways of doing

41
www2.toyota.co.jp/en/about_toyota/message/index.html.
42
www2.toyota.co.jp/en/about_toyota/message/index.html.
43
Yuki Oda, A Rough Road Ahead for Toyotas New Chief, www.time.com, January 22, 2009.
44
Toyota Clings to World Number-One Sales Spot Despite First-Half Decline, Sets Up New Marketing
Companies, www.edmunds.com, July 29, 2009.
45
Tocqueville Asset Management LP (TAM) is a US-based privately owned investment management firm.
46
John Lippert, Alan Ohnsman and Kae Inoue, Toyoda Asks How Many Times Toyota Errs Emulating
GM Failures, www.bloomberg.com, June 22, 2009.

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 Toyota: The Once-in-a-Century Challenge

business, depending on the changes of the market. Some of the good things we did, and also not-
so-good things we did, may not completely fit the situation. So while preserving our good DNA, I
would like to have the courage to change some things if those things have to be changed.47
Economists warned that the economic situation would not bottom out until the second half of 2009
and that the sales trend in major markets such as the US and Japan indicated that the demand for
automobiles had not yet improved. Experts felt that Toyota would have to adjust to this new
paradigm of lower sales growth and higher technology spending.48 But some analysts felt that a
cyclical recovery was underway in the industry. In June, purchases had started improving led by
China in the emerging markets and Germany in the developed markets (Refer to Exhibit IX for
international car sales outlook and Exhibit X for car sales in developing nations).
Some analysts were, however, apprehensive about Toyotas future performance and said that the
company faced an identity crisis and might take time to adjust to the changes made by the new
President. Some felt that Akio might not be able to take key decisions independently because at
Toyota, major decisions were traditionally taken through consensus. In the US, its key market, the
company would have to also closely analyze the changing political climate with President Barack
Obama urging consumers to buy an American car. Some analysts were also concerned that
Toyotas focus on smaller vehicles might reduce its earnings.
Analysts felt that Akio had been handed over the reins of the company at a critical time and as
such, every decision he took would be under scrutiny. In addition, there was pressure on him to
prove his detractors wrong. According to Dirk Gibson of DCJAutoParts.com49, The billion yen
question is whether Akio Toyoda can pull it off? Can you imagine coming into a more difficult
situation than the 2009 auto market? He seems ready for the task with his first step being to cut his
own salary by 30 percent. While a good PR move, his decisions over the next two years will be far
more telling when it comes to the restoration of the reputation of Toyota.50

47
Alex Taylor III, Toyotas New Man at the Wheel, http://money.cnn.com, June 26, 2009.
48
Toyotas New Boss Vows Changes amid Stormy Start, www.businessworld.in, June 25, 2009.
49
DCJAutoParts.com is an online retailer of auto parts and accessories.
50
Dirk Gibson, Toyota : A Look at the New CEO, www.articlealley.com, July 21, 2009.

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 Toyota: The Once-in-a-Century Challenge

Exhibit I
Vehicle Production, Sales and Exports of Toyota*: 2008

Toyota Daihatsu Hino Total

Japanese Production 4,012 793 106 4,912
Overseas Production 4,198 115 - 4,313
Total Global Production 8,211 908 106 9,225
Sales in Japan 1,470 642 41 2,153
Overseas Sales 6,526 224 69 6,819
Total Global Sales 7,996 866 110 8,972
Exports 2,586 130 67 2,783
*In units, 1 unit=1000 vehicles (Figures rounded to the nearest hundred)
Source: Toyota in the world 2009

Exhibit II
Toyotas Primary Markets*: 2008

*Based on Vehicle Unit Sales for fiscal 2008.

Source: Toyota Motors 2008 Annual Report

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 Toyota: The Once-in-a-Century Challenge

Exhibit III
Worlds Most Admired Companies
2009 Company name 2008 Company name
Rank Rank
1 Apple 1 Apple
2 Berkashire Hathaway 2 General Electric
3 Toyota Motors 3 Toyota Motors
4 Google 4 Berkashire Hathaway
5 Johnson &Johnson 5 Procter & Gamble
6 Procter & Gamble 6 FedEx
7 FedEx 7 Johnson &Johnson
7 Southwest Airlines 8 Target
9 General Electric 9 BMW
10 Microsoft 10 Microsoft
Source: http://money.cnn.com

Exhibit IV
Toyotas Industry Rank on Key Attributes: 2009

Attributes Industry Rank

Innovation 3
People management 3
Use of corporate assets 2
Social responsibility 1
Quality of management 2
Financial soundness 1
Long-term investment 2
Quality of products/services 2
Global competitiveness 2
Source: http://money.cnn.com

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 Toyota: The Once-in-a-Century Challenge

Exhibit V
Toyotas Balance Sheet

(All amounts in US$ millions 2009 2008 2007

except per share data)
Current Assets
Cash 25,093.7 16,401.1 16,115.2
Net Receivables 56,618.1 63,864.0 55,513.1
Inventories 14,710.7 18,386.8 15,297.5
Other Current Assets 17,470.7 23,068.5 13,003.5
Total Current Assets 113,893.2 121,720.4 99,929.4
Net Fixed Assets 74,608.9 78,674.7 68,353.2
Other Noncurrent Assets 104,443.2 126,492.7 107,951.6
Total Assets 292,945.3 326,887.8 276,234.1
Current Liabilities
Accounts Payable 13,098.5 22,284.8 18,754.3
Short-Term Debt 63,677.2 62,723.7 49,739.5
Other Current Liabilities 29,964.4 35,246.7 31,291.9
Total Current Liabilities 106,740.1 120,255.2 99,785.6
Long-Term Debt 63,518.8 60,244.0 53,115.2
Other Noncurrent Liabilities 21,269.5 26,850.5 22,963.3
Total Liabilities 191,528.4 207,349.7 175,864.1
Shareholders Equity
Preferred Stock Equity -- -- --
Common Stock Equity 101,417.0 119,538.0 100,370.1
Total Equity 101,417.0 119,538.0 100,370.1
Shares Outstanding (millions) 1,567.9 1,567.9 1,567.9
*Toyota Motors financial year ends on March 31.
Source: www.hoovers.com

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 Toyota: The Once-in-a-Century Challenge

Exhibit VI
Toyotas Income Statement

(All amounts in US$ millions except per share data) 2009 2008 2007
Revenue 206,938.1 264,758.9 203,079.8
Cost of Goods Sold 186,034.5 205,975.5 163,056.8
Gross Profit 20,903.6 58,783.4 40,023.0
Gross Profit Margin 10.1% 22.2% 19.7%
SG&A Expense 25,550.6 25,162.5 21,039.0
Depreciation & Amortization 15,071.3 15,017.2 11,724.4
Operating Income (5,176.1) 25,009.7 20,622.0
Operating Margin -- 9.4% 10.2%
Nonoperating Income (1,906.5) 2,144.7 519.1
Nonoperating Expenses 923.2 (464.4) --
Income Before Taxes (5,648.6) 24,545.3 20,203.7
Income Taxes (568.9) 9,179.7 7,617.7
Net Income After Taxes (5,079.7) 15,365.6 12,586.1
Continuing Operations (4,404.3) 17,300.8 13,941.4
Discontinued Operations -- -- --
Total Operations (4,404.3) 17,300.8 13,941.4
Total Net Income (4,404.3) 17,300.8 13,941.4
Net Profit Margin -- 6.5% 6.9%
Diluted EPS from Total Net Income (US$) (2.80) 10.89 8.68
Dividends per Share 2.07 2.84 1.91
*Toyota Motors financial year ends on March 31.
Source: www.hoovers.com

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 Toyota: The Once-in-a-Century Challenge

Exhibit VII
Five-Year Stock Chart of Toyota

Source: http://bigcharts.marketwatch.com.

Exhibit VIII
Worlds Top 10 Auto Groups by 2009 H1 Sales

Rank Company Sales (US$ million)

1 Toyota Motor Corp 3.564
2 General Motors Co 3.553
3 *Volkswagen AG 3.265
4 #Hyundai Motor Co 2.153
5 **Ford Motor Co 2.145
6 PSA Peugeot Citroen 1.587
7 Honda Motor Co 1.586
8 Nissan Motor Co 1.546
9 Suzuki Motor Corp 1.15
10 Renault SA 1.107
*Excludes Scania ** Ford publishes wholesale, not retail, figures
# Including Kia Motors Corp (000270.KS)
Source: www.reuters.com

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 Toyota: The Once-in-a-Century Challenge

Exhibit IX
International Car Sales Outlook
(Millions of units)

1990-99 2000 2001-06 2007 2008 2009

Total Sales 39.20 46.64 48.63 54.92 52.17 48.19
North America* 16.36 19.77 19.45 18.83 15.85 12.44
Canada 1.27 1.55 1.60 1.65 1.64 1.42
United States 14.55 17.35 16.81 16.09 13.19 10.20
Mexico 0.54 0.87 1.04 1.09 1.02 0.82
Western Europe 13.11 14.75 14.54 14.75 13.54 12.93
Germany 3.57 3.38 3.32 3.15 3.09 3.71
Eastern Europe 1.18 2.38 2.36 3.58 4.01 3.41
Russia 0.78 1.03 1.25 2.31 2.73 2.18
Asia 6.91 7.85 10.23 14.42 15.07 15.78
China 0.33 0.61 2.26 5.15 5.04 6.30
India 0.31 0.60 0.75 1.18 1.20 1.32
South America 1.64 1.89 2.05 3.34 3.70 3.63
Brazil 0.94 1.17 1.30 1.98 2.19 2.30
*includes light trucks
Source: Global Auto Report, www.scotiacapital.com, July 31, 2009.
Exhibit X

Source: Global Auto Report, www.scotiacapital.com, July 31, 2009.

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 Toyota: The Once-in-a-Century Challenge

References & Suggested Readings:

1. Uncertainty Remains over NUMMI Plants Fate, www.tradingmarkets.com, August

5, 2009
2. Toyota Announces First Quarter Financial Results, www.toyota.co.jp, August 4,
2009.
3. Toyota Reports $819 million Quarterly Loss, http://news.moneycentral.msn.com,
August 4, 2009.
4. Yuri Kageyama, Toyota Reports $819 million Quarterly Loss, www.wtop.com,
August 4, 2009.
5. Global Auto Report, www.scotiacapital.com, July 31, 2009.
6. Toyota Clings to World Number-One Sales Spot Despite First-Half Decline, Sets Up
New Marketing Companies, www.edmunds.com, July 29, 2009.
7. Toyotas New President Switches Gears, www.miamiherald.com, July 20, 2009.
8. Ken Thomas, Toyota Executive: Automaker Hoping to Make Quick Decision on
California Joint Venture Plant, http://gadgetophilia.com, July 20, 2009.
9. Alex Taylor III, Toyotas New Man at the Wheel, http://money.cnn.com, June 26,
2009.
10. Robert Farago, New Toyota CEO: We Need Vehicles That Bring Joy to the Driving
Experience, www.thetruthaboutcars.com, June 26, 2009.
11. Ian Rowley, Japan: Toyotas New President Takes the Wheel,
www.businessweek.com, June 25, 2009.
12. New President at Toyota, http://english.ntdtv.com, June 25, 2009.
13. Toyotas New Boss Vows Changes amid Stormy Start, www.businessworld.in,
June 25, 2009.
14. Founders Grandson to Lead Toyota, http://news.bbc.co.uk, June 23, 2009.
15. Jorn Madslien, Toyota Scion to Revive Prudent Culture, http://news.bbc.co.uk, June
23, 2009.
16. Kae Inoue, Toyotas President Toyoda Takes over Amid U.S. Slump,
www.bloomberg.com, June 23, 2009.
17. Toyota, Nissan Vow to do Better; Green Cars Key, www.reuters.com, June 23, 2009.
18. John Lippert, Alan Ohnsman and Kae Inoue, Toyoda Asks How Many Times Toyota
Errs Emulating GM Failures, www.bloomberg.com, June 22, 2009.
19. Micheline Maynard, Toyota, Too, is Looking to Cut Costs, www.nytimes.com, May
12, 2009.
20. Hiroko Tabuchi, Toyota Posts an Annual Loss, www.nytimes.com,May 8, 2009.
21. Todd Crowell, Toyoda Takes Toyota Wheel, www.atimes.com, May 8, 2009.
22. Toyota Announces Year-End Financial Results, www.toyota.co.jp, May 8, 2009.
23. Toyota Motor Posts Annual Loss, Forecast Operating Loss of 850 Billion Yen for
FY2010, www.domain-b.com, May 8, 2009.

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 Toyota: The Once-in-a-Century Challenge

24. Micheline Maynard, Taking the Wheel as Toyota Skids, www.nytimes.com, February
14, 2009.
25. Martin Fackler, Toyota Forecasts First Annual Net Loss since 1950,
www.nytimes.com, February 6, 2009.
26. Toyota Predicts Net Loss in Current Fiscal, www.thaindian.com, February 6, 2009.
27. Yuki Oda, A Rough Road Ahead for Toyotas New Chief, www.time.com, January
22, 2009.
28. Martin Fackler and Bettina Wassener, Grandson of Toyota Founder Will Lead,
www.nytimes.com, January 20, 2009.
29. Toyota Names Akio Toyoda as New President, www.telegraph.co.uk, January 20,
2009.
30. Toyota Taps New President as Global Sales Slide 4%, www.usatoday.com, January
20, 2009.
31. Toyota Taps Founders Grandson as New President, www.chinadaily.com.cn,
January 20, 2009.
32. Bill Vlasic and Nick Bunkley, Toyota Scales Back Production of Big Vehicles,
www.nytimes.com, July 11, 2008.
33. Toyota Worlds Largest Carmaker, http://news.bbc.co.uk, April 24, 2007.
34. Jeff Tyler, Toyotas Number One, http://marketplace.publicradio.org, April 24, 2007.
35. www2.toyota.co.jp
36. Toyota Motors 2008 Annual Report
37. http://money.cnn.com
38. http://bigcharts.marketwatch.com
39. www.reuters.com
40. www.hoovers.com

17