Economic analysis of automobile industry with the example of Toyota Motor Corporation

1. Title: End term Assignment for project report groups
Subject: Managerial Economics
Prepared by:
Nimisha Agarwal
2013173
Section-D
Total words in assignment: 2000
Automobile Industry: Toyota Motor Corporation

2. 1. Brief Background of the Firm:
Toyota Motor Corporation is a Japanese multinational automaker headquartered in Toyota,
Aichi, Japan. In 2010, Toyota employed 325,905 people worldwide, and was the third-largest
manufacturer in 2011 by production behind General Motors and Volkswagen
Group. Toyota is the eleventh-largest company in the world by revenue. In July 2012, the
company reported it had manufactured its 200-millionth vehicle. The company was founded
by Kiichiro Toyoda in 1937 as a spinoff from his father's company Toyota Industries to
create automobiles. Three years earlier, in 1934, while still a department of Toyota Industries,
it created its first product, the Type A engine, and, in 1936, its first passenger car, the Toyota.
Toyota Motor Corporation group companies are Toyota (including
the Scion brand), Lexus, Daihatsu, and Hino Motors, along with several "nonautomotive"
companies. TMC is part of the Toyota Group, one of the largest conglomerates in the
world. The thrifty Corolla was introduced in 1968 and, like the Corona, was a huge success
with American drivers. Corolla has since become the world’s all-time best-selling passenger
car, with over 30 million sold in more than 140 countries. In 1972 Toyota sold its one-millionth
vehicle. By the end of 1975, Toyota surpassed Volkswagen to become the No. 1
import brand in the United States. Three years later, in 1978, Toyota won the "Import Triple
Crown" by leading all import brands in sales of cars, trucks and total vehicles.
As Toyota celebrated its 25th anniversary in America during 1982, it opened a new national
sales headquarters complex that it occupies today in Torrance, Calif. May 2001 marked the
incorporation of Toyota Motor Sales de Mexico, Toyota's new sales and marketing subsidiary
in Mexico. By the end of the year, Toyota had grown to become the third-best-selling
automotive brand in the United States, surpassing Dodge with best-ever sales of 1,741,254
vehicles. In December of 2002, Toyota delivered its first two zero-emission, market-ready
hydrogen fuel cell vehicles to customers in California for real-world testing. The next year,
Toyota's new, breakthrough hybrid technology, "Hybrid Synergy Drive," debuted in the all-new
2004 Prius. Toyota's growth in America continued in 2003 when Toyota launched Scion
as its third line of vehicles. In 2005, Toyota continued expanding its environmentally
advanced line-up with the introduction of the world’s first luxury hybrid, the Lexus RX 400h,
and a hybrid option for the Toyota Highlander. Toyota added a hybrid option to its popular
Camry sedan in 2006 and began building it in the United States at its massive Kentucky
plant. The company also opened up its 10th U.S. plant in San Antonio, Texas, to build
pickups. During 2007, its 50th year in America, Toyota introduced its largest pickup truck
ever as well as the second-generation of its iconic Scion xB urban utility vehicle and the
world’s first V8 hybrid, the Lexus LS 600h.As a result of an economic recession, Toyota’s
sales were down in 2008. In 2009, Toyota launched two all-new gas/electric hybrids. During
2010; Toyota began production of the third-generation Sienna at its Indiana plant. Toyota has
factories in most parts of the world, manufacturing or assembling vehicles for local markets.
Toyota has manufacturing or assembly plants in Japan, Australia, India, Sri Lanka, Canada,
Indonesia, Poland, South Africa, Turkey, Colombia, the United Kingdom, the United States,
France, Brazil, Portugal, and more recently, Argentina, Czech Republic, Mexico, Malaysia,
Thailand, Pakistan, Egypt, China, Vietnam, Venezuela, the Philippines, and Russia. Toyota's
management philosophy has evolved from the company's origins and has been reflected in
the terms "Lean Manufacturing" and Just in Time Production, which it was instrumental in
developing. Toyota's managerial values and business methods are known collectively as the
Toyota Way. In April 2001, Toyota adopted the "Toyota Way 2001", an expression of values
and conduct guidelines that all Toyota employees should embrace.

3. 2. Market Structure and Pricing Policies of the Firm:
1. Destinations of the firm’s products or services:
Toyota as an automobile firm serves both local and global market.
2. Competitors
a) National Level
The Japanese automotive industry has been one of the most important and largest industry in
the world. Japan has been able to maintain its position as the top automobile manufacturer
since last 50 years. Japan is now placed at 3rd position in the list of automotive producer in
the world with an annual production of 9.9 million automobiles in 2012.
Major competitors of Toyota in Japanese market include:
 Nissan
 Mazda
 Suzuki
 Honda.
http://www.jama-english.jp/index.html
b) International Level:
Toyota is one of the top 5 large firms that dominate global industry. The annual production of
automobiles has reached to 81.5 million in 2012.
Major competitors in international arena are:
 Ford
 General Motors
 Honda

4. Direct Competitor Comparison
Toyota Ford GM Honda Industry
Market Cap: 196.93B 64.37B 47.25B 65.77B 21.50B
Employees: 333,498 171,000 213,000 190,338 62.72K
Qtrly Rev
0.14 0.15 0.04 0.16 0.42
Growth (yoy):
Revenue (ttm): 289.95B 142.50B 152.84B 130.58B 65.16B
Gross Margin
(ttm):
0.17 0.14 0.09 0.25 0.19
EBITDA
(ttm):
36.35B 11.99B 7.90B 11.86B 5.59B
Operating
Margin (ttm):
0.08 0.05 0.01 0.05 0.07
Net Income
(ttm):
15.68B 6.07B 4.53B 4.55B N/A
EPS (ttm): 9.90 1.52 2.79 2.52 2.90
P/E (ttm): 12.56 10.76 12.23 14.46 13.87
PEG (5 yr
0.32 0.77 0.57 0.58 1.05
expected):
P/S (ttm): 0.68 0.45 0.31 0.50 0.61
http://finance.yahoo.com/;_ylt=An_OhXZ9NTXkqISYTK_Oov_p8rcF
3. Demand and cost curves:
The reaction of rivals to a price change depends on whether price is increased or decreased.
The demand curve will be kinked, at the current price.

5. 4. Market structure:
An oligopoly is a market structure in which a few firms dominate. When a market is shared
between a few firms, it is said to be highly concentrated. Although only a few firms
dominate, it is possible that many small firms may also operate in the market.
Now if we analyse global automobile industry we find following facts:
Market share by manufacturer:
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-http://www.edmunds.com/industry-center/data/
On calculating total concentration ratio of top 5 firms we find that top 5 firms control 67.86
% of the market share and even though there are many other small firms operating as well,
these five firms dominate the market.
As we stated earlier this is how an oligopoly market operates so we can clearly say that
Toyota has been operating in an oligopoly market.

6. 5. Pricing policies
1) Toyota Motor Corp is most willing to compensate suppliers for rising raw material
costs, according to a survey by IRN Inc. The Grand Rapids, Mich., consulting firm
polled 92 suppliers in May and June about the raw material pricing policies of nine
automakers that assemble vehicles in North America. Sixty percent of respondents
said Toyota was very likely to "satisfactorily offset raw material price increases.
Toyota leads the pack
Toyota: 60% BMW: 33
Ford: 51 GM: 31
Honda: 43 Nissan: 28
Chrysler: 37 Mercedes: 14
Hyundai: 13
Source: IRN Inc.
2) Although prices in the automobile market are traditionally negotiated, Toyota are
selling their vehicles at a "no-haggle" or fixed price.
3) As the demand of hybrid cars is elastic in nature so it is best in favour of Toyota to
have a penetration pricing strategy instead of skimming pricing strategy.
a) The most important reason is that because hybrid cars is a relatively new venture,
people are just a bit cautious while going for it.
b) The market penetration pricing strategy would allow the company to get into the
masses with the label of low price.
c) The auto luxury segment demand analysis suggested an almost perfect strategy for
Toyota marketing high performance cars presumably equal in quality to Mercedes and
BMW, but priced somewhere between those and such luxury U.S. models Cadillac and
Lincoln.
d) Although Lexus started approximately in the same price range, they used different
approaches when promoting their models. Toyota also allowed for more price variation,
using price haggling deals and equipping the models with additional luxury accessories

7. 3. Present Challenges Faced By the Company:
 North American Pressure
Toyota’s Prius accounts for about 12% of the carmaker’s total American sales, however its
dominance could fade as rival automakers introduce new and improved hybrids and electrics.
Toyota’s star seller, Camry, is under considerable pressure now that the refreshed models of
Honda Accord and Ford Fusion have been introduced. North America accounts for about a
fourth of Toyota’s global sales so any disruptions here will have a significant impact on its
total sales.
 Negative Japanese Market
Japan’s economy suffered in 2011 due to natural disasters like earthquakes and a tsunami. To
help lift the automobile market, the government provided tax incentives to encourage people
to buy cars. The buyers rushed to purchase new vehicles before the subsidies ended in
September, and now with its expiry the market is expected to decline next year.
 Tensions between China & Japan
Sales of Japanese automakers have suffered due to an anti-Japanese backlash in China. As a
result, Korean and German automakers are benefiting at the expense of Japanese automakers
in this region. Sales figures are getting back to normal and Toyota had earlier targeted sales of
1 million vehicles, but now has lowered it to 800,000. China is the world’s largest automobile
market and Toyota’s inability to capitalize on this huge, growing market will have a
considerable effect on its long term profitability.
 Exodus of Top Executives
In just the past three months, three senior executives in Toyota's North American business
abruptly left for rivals. These high-profile defections underline a new danger looming for the
Japanese automaker — the lure of U.S. companies wooing the best in its ranks. The executive
exodus signals Toyota Motor Corporation's growing pains overseas.

8.  ATC = Average Total Cost
 MR = Marginal Revenue
 MC = Marginal Cost
Note that where MC rises above MR, the firm would incur greater costs than it would
receive in additional revenue, which is why the firm maximizes its profit by producing
only that quantity where MR = MC, and charging the corresponding price.
1 Productive Efficiency: MC = Minimum ATC
2 Allocative Efficiency: MC = Market Price
Oligopoly Profit = (Price - ATC) x Quantity
-http://thismatter.com/economics/oligopoly-pricing-models.htm
Through above graph we can predict that the company faced the problem of allocative
efficiency i.e. due to negative Japanese market and tension between China and Japan as the
marginal cost curve never intersects the market demand curve; therefore, the company
produce less product than what the market desires.
5. Toyota Resolution & Strategies to Combat North American Pressure
o VEHICLE EFFICIENCY & EMISSIONS
Toyota engineers are continually looking for ways to increase fuel economy and
reduce emissions of pollutants from our vehicles. Vehicle weight, engine output, the
application of new technologies and other factors are all evaluated to optimize fuel
economy and tailpipe emissions, all before a vehicle is built.
O FUEL ECONOMY AND GHG EMISSIONS
The standards present a significant challenge for the engineers and they expect multiple
vehicle and powertrain technologies will be necessary to meet the challenge. Using Toyota
Way principles, they evaluate vehicle powertrains, weight, aerodynamics and other design
factors to find fuel-efficient combinations for the vehicles.

9. O CHEMICAL MANAGEMENT
Toyota uses the International Material Data System (IMDS) as the primary tool for
tracking the chemical composition of parts and accessories.
The above graph depicts that the company can go in for new technology i.e. fuel efficiency to
counter challenge which results in increase in marginal cost of the production and thus the
effect on profit maximising output and price would not be much.