Toyota’s Global Investments To Drive The Future Growth

It is common knowledge that the global auto giants see the next wave of growth coming from the emerging markets of Asia and South America. The world’s largest automaker, Toyota Motors (NYSE:TM), has a two thronged approach to boost sales in emerging markets:  1) develop new cars catered to the needs of customers in emerging markets; and, 2) increase the local production in order to escape excise duties so as to offer vehicles at competitive prices. Below we elaborate what Toyota is doing to step up its presence in emerging markets.

We have a $123 price estimate for Toyota, which is slightly lower than the current market price.

See our complete analysis for Toyota Motors here

Developing New Models

With a greater focus on developing cars suited to the needs of the customers in emerging economies, Toyota hopes to generate 50% of its total vehicle sales from developing markets by 2015, up from 45% in 2011. ^[1] The figure stood at 35% back in 2008.

To ensure that this trend is continued, Toyota plans to introduce eight new subcompact cars by 2015, designed specifically for emerging markets. The Etios and its variants are examples of cars already launched specifically for countries such as Brazil and India. The automaker is also in the process of introducing subcompact cars or multi-utility vehicles (MUV) to fill in the gap between the lower priced Etios and the more expensive Corolla.

In China, Toyota announced that it is tying up with two local automakers to develop new hybrids. More than 20 million vehicles are being sold in China annually and it is no wonder that air pollution is a growing problem in the country. The Chinese government wants the unit sales of electric vehicles and hybrids to touch at least 5 million units annually by 2020 and is providing incentives to automakers who are developing such vehicles. ^[2]

In addition, another thing that works in Toyota’s favor is that its global best sellers such as the Corolla or the Camry are fuel efficient and low maintenance cars that resonate well with the needs of the customers in developing markets. Customers who are looking to upgrade from their entry level cars see the Corolla as a viable option.

Increasing Localization

Although the current currency rates favor exporting vehicles from Japan, governments around the world want the automakers to manufacture vehicles in their countries in order to create jobs. As a result, automakers face high excise duties for vehicles imported from foreign markets. Toyota already has huge production facilities set up in developing markets – more than 3 million cars are manufactured in the developing countries of Asia (excluding Japan) and South America.

Furthermore, it is stepping up investments to increase the degree of localization. Earlier this year, Toyota opened its fourth auto plant in Indonesia at an investment of $340 million. The facility, which took Toyota’s annual capacity to 180,000, is part of the automaker’s plans to make Indonesia an export hub. The plant is being used to manufacture Etios Valco, the model that was launched this year in the country. ^[3]

Similarly, in February this year, Toyota opened a new plant in India which saw the automaker’s capacity in the country rising 50% to 310,000 units. The plant, which cost Toyota $100 million, will be used primarily to manufacture the Etios and Innova models. In addition, Toyota is looking to boost its production in Thailand to 1.2 million units annually within the next five years as the country aims to become one of the top 10 auto producing nations. ^[4]

The production gains could represent investment of nearly $700 million by Toyota. In Brazil, Toyota opened its third plant last year and another one is due to begin production 2015 onward. The fourth plant, which will have an annual capacity of 200,000 units, will come with an investment of $500 million. ^[5]

Margin Deterioration To Follow ?

Toyota’s rising sales from developing markets may come at a slight cost. As the contribution of sales from developing markets increases, there could be some deterioration in the margins. This is because the product mix in developing markets will tend to have a greater proportion of the lower priced products, which generally have lower margins.

Right now, the yen devaluation is pushing up the margins on a year-over-year basis. However, once the year-over-year impact of currency depreciation is offset, there could some margin erosion. A single percent decline in the long-term gross margins of Toyota’s international markers could impact the stock price by more than 5%.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Toyota Investor Relations [↩]
2. Toyota to build hybrid car with China, November 21, 2013, bangkokpost.com [↩]
3. Toyota’s new plant makes Indonesia production hub, March 18, 2013, chinadaily.com.cn [↩]
4. Toyota investing on big things in Thailand, January 25, 2013, nationmultimedia.com [↩]
5. Toyota plans investment of $500 mn in Brazil, August 9, 2012, foxnews.com [↩]