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Tuesday, January 29, 2013

Toyota as Number One

...remember Japan as Number One?...
I'm just back from a meeting of the Japan Foundation American Advisory Board, where part of the discussion was on the ups and downs of the field, such as high enrollments into the mid-1990s from those approaching the region in an instrumental way. Do you remember a prominent book of that era, Ezra Vogel's Japan as Number One. [mea culpa: he was the advisor for my undergraduate senior paper]
So what of Toyota as Number One? Is this a similar transitory phenomenon? – in many ways, yes. Despite all the doom-and-gloom reportage, though, Japan remains the 3rd largest economy [ahead of Germany, behind China and the US in absolute size] and overall a prosperous place. No, Japan never was going to take over the world. It remains important. Similarly, neither Toyota nor any other single firm will dominate the global auto industry, but Toyota is here to stay.
The metric that is in the headlines is total unit sales. That's not the only such metric; total revenue is another one. As an economist, I look to profits relative to assets. We could also look at quality measures, at the volume of top products (segment leadership), at "car of the year" and similar awards, and at positioning in growth markets. These give different answers – even if we can agree to an objective standard for how product in the industry's shifting array of joint ventures ought to be counted.
Total sales matters to Toyota in several ways. First, the impetus for this post, regaining the lead generates free (and favorable) publicity. After a period of supply disruptions (the 3/11 quake/tsunami followed by the floods in Thailand) and demand shocks (consequent to the US unintended acceleration incidents), this also is an important morale booster at Toyota and its dealers. Gloomy sales staff and gloomy sales go together, though which causes which may be ambiguous. In the US, what Toyota has done though is recover partway (14% of the market, down from 17% a few years back), while it's lower post-bankruptcy fixed costs allow GM to pursue profits rather than volume (18% of the market, rather than 21%). Only VW is picking up market share in North America.
In terms of total revenue, however, it is Volkswagen that has the lead by a hair. Yes, Toyota has Lexus and Hino, but VW has Audi and Porsche and its own truck division; VW has the Golf and other small cars; Toyota has its minicar subsidiary Daihatsu. GM is more focused on cars and light trucks. So in the 3 months ending September 30, 2012 VW had revenue of €48,848 million, Toyota had ¥5,406 billion and GM US$37,567 million. Using end-September 2012 exchange rates (US$1.00 = ¥78 = €0.78) gives revenue of $62.6 for VW and $69.3 for Toyota. At todays rates (US$1.00 = ¥90.5 = €0.74) the ranking shifts: $66 billion for VW and $60 billion for Toyota. So while Toyota may outsell GM and VW this year in unit terms, current exchange rates suggest VW is #1 in revenue. (GM is a distant #3.)
Then there's profits. Here the ranking is slightly different. VW earned a 4.2% return on €309 billion in assets; Toyota earned 0.9% on its ¥30 trillion in assets; GM earned 1.2% on its US$155 billion in assets. Here Toyota is third, not first. Now these companies are different in their structure; in particular, GM has only a very small finance unit, contributing only 7% to its profits. Similarly, VW gets about 11% of its profits from financial activities. It survives on vehicle sales. In contrast, 25% of Toyota's profits come from finance. So if we think of vehicles as the core of these firms, looking at the recent past we find Toyota trails in profitability.
How about quality? In the eyes of Consumer Reports and others, Toyota is no longer an automatic safe choice. Indeed, this past year they've recalled 4.5 million vehicles, more than their rivals. JDPowers ranks everyone very close to each other (look at the absolute numbers, not the rank order!). No one goes to the service bays of the big multibrand dealers but hearsay is that Toyota does not stand out from the standpoint of mechanics and warranty costs. (I don't know of any hard data.) That doesn't mean Toyota's vehicles aren't good; basically, everyone's vehicles are good, and compared to two decades ago, they're very good. No one is ahead in quality – thanks in part to Toyota's leadership in that area and the competitive pressure it exerted.
Similarly, in "xxx of the year" metrics Toyota is present but no single firm is dominant. Toyota doesn't appear in Ward's "best engines" list, while GM appears only once (Cadillac) and VW once (Audi). Honda, Ford and BMW lead their three regions. Another best car list – sorry, I deleted the email! – had a wide variety of makers as tops in specific segments; my recollection is that Toyota did well in minivans and entry luxury, but had no "winner" in regular cars. No one is outstanding in the sense of capturing a majority of "best" ratings.
Now going forward Toyota's profitability has headwinds and tailwinds. It continues to suffer from the political tensions between Japan and China that affect its sales in the latter market, where VW and particularly GM continue to forge ahead. Its domestic market is weak; as the number of licensed drivers falls, firms producing inside Japan will struggle to match capacity with sales.
In contrast, at an exchange rate of ¥90/$1.00 exports will be much more attractive. In particular, most of Toyota's Lexus brand are exported from Japan, so even without better volume, revenue and profits will rebound. They won't make money in Europe, but GM will lose a small fortune. So far VW seems to have come through well amidst the Euro crisis, but we'll see whether that persists. My hunch is that VW will remain at the top of the global Big Three in profitability, while Toyota will pull ahead of GM. But in terms of sheer volume, over the next few years growth in China and Brazil will benefit GM and VW relative to Toyota, while the US market is unlikely to improve much for anyone. So the #1 sales slot will shift back and forth.
...mike smitka...