Global Economics

Toyota Hits the BRICs


Can anybody stop Toyota (TM)? The company's status as an astounding auto industry profit machine was reconfirmed on Aug. 4. Toyota posted yet another set of stellar quarterly numbers. Defying slumping auto markets in Japan and the U.S. during the three months through June, the Japanese carmaker's operating profits rose 26%, to $4.5 billion, compared with a year earlier. The operating margin for the quarter touched 9%. Net earnings increased 39%, to $3.2 billion, as sales rocketed 13.2%, to $49 billion.

Toyota continues to excel in the all-important North American region, where it overtook Ford (F) in car sales for the first time in July and enjoys a 13% share of the U.S. market. Unit sales in that region increased by 106,000, to 747,000, for the quarter even though incentives per vehicle dropped from $1,090, to $759.

Even with higher gas prices, rising commodity costs, and worries over recalls, Toyota looks set to beat its target to raise U.S. sales by 10% during 2006. "In North America, sales volumes are increasing, and absolute levels of profit remains very high," Toyota's senior managing director Takeshi Suzuki said at an earnings press conference in Tokyo.

NOT THERE YET. Now Toyota is gunning for fresh growth in the so-called BRIC markets: Brazil, Russia, India, and China. While Toyota is strong in the Middle Eastern and Southeast Asian markets, such as Thailand and Indonesia, in the populous BRIC countries its performance remains mixed. Advancement there could help stoke growth for the next few years.

"Toyota has been enhancing its emerging markets business over the past couple of years, but it's still at a preparatory stage," says Tsuyoshi Mochimaru, an analyst at Deutsche Securities in Tokyo.

For sure, Toyota has some catching up to do. In China, which is expected to overtake Japan as the world's second biggest auto market this year, Toyota's market share was just 3.5% last year—making it the eighth-ranked carmaker (see BusinessWeek.com, 7/31/06, "World's Biggest Auto Markets").

SPOTTY COVERAGE. China sales of 179,000 were far behind market leader GM (GM), which sold more than 650,000 vehicles. Volkswagen sales also topped 500,000. By contrast, in Thailand, Toyota produced 416,000 vehicles last year and is ranked No. 1, selling 100,000 more autos than its nearest rival.

In India, Toyota's presence is smaller yet. Today, it has just one small plant in Bangalore, and sales were only 24,000 during the first half of the year—equivalent to just 2.4% of the market. By contrast, Japanese rival Suzuki Motor, through its decades-old partnership with local auto maker Maruti, controls more than 50% of the Indian passenger car market. "Toyota is selling some SUVs [in India], but it's still a very small number," says Koichi Sugimoto, an analyst at Nomura Securities in Tokyo.

Toyota fares better in Russia, where its share among foreign producers is 11%, but its performance in Brazil is less impressive. In Brazil, Toyota sales in the first six months of 2006 rose 13%, to 31,000, but still only account for 3.4% of the market.

CLOSING THE GAP. Why such mixed results? One reason: when Toyota first looked overseas, it focused on the mature markets of the U.S. and Europe before looking elsewhere. For a long time that made sense given the fluctuating profitability and sales associated with emerging markets—and in the case of China, frequently strained political relations with the Japanese government.

Still, few doubt it will be long before Toyota closes the gap in its weaker markets. In China, where Toyota is targeting 10% market share by 2010, the process is already well underway (see BusinessWeek.com, 3/9/06, "Toyota in China: Full Speed Ahead").

To meet that target, the company is unleashing a host of new vehicles on the mainland and is showing it isn't afraid to build its newest models in China through partnerships with locals First Auto Works and Guangzhou Automobile Group.

AGGRESSIVE IN CHINA. Last December, Toyota and FAW held a ceremony to herald local production of the Prius, which sells for about $36,000 and will be China's first hybrid. In May, a new plant in Guangzhou began producing the new Camry. That should help raise production in China this year by 60%, to 290,000. Toyota says its market share rose to 5.5% during the first five months of 2006, helping it ascend to fifth in the sales rankings.

"Relative to Indonesia and Thailand, we're lagging behind in China," Toyota's Suzuki noted at today's press conference when asked about China. "To close that gap, we're now aggressively deploying our business (see BusinessWeek.com, 12/21/05, "Toyota: King of the Car World in 06?")."

Russia is also shaping up nicely. Next year, a new Camry plant will open in St. Petersburg, while Lexus, Camry, and Corolla sales grew 37% in the first six months of this year, to 44,000 units. India, though, remains a work in progress. To date, Toyota has made few public statements on its growth plans for the country, which surpassed Russia as the 11th-biggest car market in the 12 months through March this year.

FLEXIBLE PLATFORM. However in May, the Nihon Keizai, Japan's leading business newspaper, reported that Toyota is planning a one-liter global car by 2010 that will cost around $7,500 and be developed alongside Daihatsu, Toyota's mini-car subsidiary. The paper noted that the car is being planned with the Indian market in mind but would later be sold in Central and South America as well as Central and Eastern Europe.

Toyota currently builds and manufacturers a number of pickups and midsize vehicles, called Innovative International Multi-purpose Vehicles (IMV), just for emerging markets, selling 410,000 last year. However, the low-cost car would be a smaller and cheaper complement and, say analysts, very flexible. "The new platform is likely to be suitable for gasoline, diesel, and maybe hybrids," says Nomura's Sugimoto.

HELP WANTED. One concern: that scarce resources may put a brake on growth in emerging markets. For one thing, Toyota's U.S. expansion is far from over. A brand-new $850 million factory opening next fall in San Antonio that will eventually churn out 200,000 Tundra pickups a year. In 2007, Toyota will begin using Fuji Heavy Industries' Subaru plant in Indiana to build Camrys, and in 2008 Canada will be capable of building an additional 100,000.

Meanwhile, a shortage of engineers could also slow things down. "Lack of human resources and engineers is a big issue," says Deutsche's Mochimaru. "I'm concerned that the growth of Toyota's emerging business may be slightly delayed." Still, given the investment opportunities brought about by annual earnings exceeding $12.5 billion, it's hard to see Toyota lagging behind for long.


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