Global Business and Marketing
1. Why do you think Toyota had waited so long to move much of its manufacturing for European sales to Europe?
Europe is the largest automotive production continent in the world with the European Union boasting of producing 34% of the global production. Venturing into international markets supports a global strategy which in turn prioritizes which international markets to target investments. The strategy also covers a broad range of issues including logistics, strategy and policies. Having a global strategy is advantageous in the implementation stage of a Multinational Corporation like Toyota through the alignment and integration of capital and managerial units. In specific terms, benefits will include reduced costs o f transport, avoiding trade barriers in terms of tariffs and non-tariffs barriers, low costs of factors of production, proximity to local and international markets, and economies of scale.
The top management of Toyota is committed to develop a business strategy that would enable the company establish its operations in oversee markets with Europe being the main target market. The analysis mainly involves an understanding of the company’s competitiveness in terms of products, markets, policies and channels of distribution to identify a market niche. The company then aligns its strengths with the market gaps to enable it gain a competitive advantage over other producers, before deciding on how to venture into the foreign market.
Generally, the main objective of a manufacturing strategy is to meet defined standards of performance which includes four dimensions of price, value, delivery, and flexibility. The objective leads to specific decisions on the range of products and innovations to follow, what to make and what to buy, the number of plants to run and their capacities, their locations, choice of technology, how to exercise management control, and an appropriate organizational structure. There exist different reasons as to why Toyota put up production facilities in foreign markets beside production costs. They can supply the regional market, especially distant markets in Europe and North America. Another important reason is to avoid trade restrictions and legal hurdles imposed by some international trade partners. The success of such a company greatly relies on low wages and production costs. Toyota had experienced significant growth in sales due to its increased local production and learning to cater for the European market.
Based on the above global strategies, we are able to understand the main reasons as to why Toyota was able to delay the establishment of its production plants in Europe. European Union trade restrictions on the importation of Japanese cars were one of the main reasons why Toyota had historically been unsuccessful in the European market. In 2000, Toyota Motor Europe sold 634,000 automobiles behind North America which was the first foreign market in terms of sales volumes. The Asian economies had been in slump since 1990s, and Europe had been growing slowly. This led to the reason why the North American market posted significant sales for Toyota. Toyota started to manufacture in the United States, the largest market in North America in order to protect themselves from import restrictions. European countries alleged that Japanese automobile makers had led to increased dumping of motor vehicles in the European market. This led to the subsequent trade restrictions imposed on their export volumes. For instance, the French car market limited the importation of cars from Japan to five manufacturers.
The Automobile industry majorly uses the capital intensive approach in its production and has a lengthy growth phase. The firms engage in production processes that require huge amounts of money and other financial resources to produce automobiles. The firms also have a large ratio of capital required to the amount of labor required in the process of production. In such a case, Toyota had inadequate access to capital mainly because it did not rely on foreign aid. This proved to be a hard task because of difficulty in producing units with limited capital. The firm took a longer period of time to accumulate a substantial amount of capital for its operations in Europe. In recent times, only a handful of the world population enjoys access to automobiles. However, the industry is enjoying positive growth as depicted in the case study. Sales in Europe increased significantly from 634,000 units to 800,000 units in a span of five years from the year 2000 to 2005. The establishment of plants in the United Kingdom, Portugal and Turkey had to be progressive in line with its strategies.
The market for automobiles is extremely aggressive and prices are driven by forces of demand and supply in the market due to the increased globalization of manufacturing operations. Toyota was the third largest manufacturer of automobiles in terms of unit sales and was ranked eighth in the European market. Different players in the industry ensured the production of new car models in large and multiple lines. They produced larger utility vehicles while ensuring that they charged competitive prices to the consumers. European producers such as Volkswagen, PSA, FORD and GM provide stiff competition in the European market with their production of cost friendly cars and relatively bigger cars. In addition the companies had a long presence in the European market making it hard for Toyota to penetrate the European market.
The number of units manufactured is a vital issue considered by Toyota. In order to be competitive and ensure an easy entry and exit, the company had to reduce costs to minimal levels. The firm decided to assemble parts in Europe while producing them in Japan in order to save on costs of establishing a manufacturing plant. This would also make it easier to exit the market in the occurrence of losses. Japan further wanted to benefit from economies of large scale production in its domestic market. The firm had large manufacturing industries in Japan which enabled them acquire discounts on large purchases of input, access financing due to the availability of collateral, and employing highly skilled staff.
2. If the British pound were to join the European Monetary Union would the problem be resolved? How likely do you think this is?
Toyota has experienced operating losses in Europe due to numerous reasons. Top among the reasons for its failure is the continued fall in value of the Euro against the Japanese Yen. This leads to a weak foreign exchange rate. Manufacturing costs incurred in Japan were in Japanese Yen while assembling costs and prices to the end consumers were in the Euro currency. As the Japanese Yen become stronger against the Euro, fixed and variable costs increased radically. At the consumer end, the firm charged prices in Euro and had to set them at competitive levels. This translated into high costs of production with low costs of assemblies and prices. The company eventually incurred losses. The company had to absorb all the losses that were incurred on both completed cars and in the assembling units due to the exchange rate. The company would record profit margins from its European operations when the Euro becomes significantly stronger against the Yen.
The joining of the British pound in the European Monetary Union will not reduce the risk of Toyota recording operating losses in Europe. This is mainly because the British pound will not be in a good position to eliminate currency risks between the Japanese economy and the European economy since Japan will not be part of the European Monetary Union which will use the Euro currency. It will however get rid of deviations in currency involving the British Pound and the Euro only. Toyota faces the risk of losing money when it converts its revenues earned in Euros into Pounds when paying for machines made in Britain.
Britain has used the Pound as its currency both in domestic and international trade for an extensive time period spanning over approximately two hundred years. The country further enjoys a monetary policy which gives it benefits of being the largest European economy that is not dependent on the Euro currency. In comparison, the Euro entered the European market with the main purpose as a unified currency to serve the interests of all the member states of the European Monetary Union. It is still uncertain when Britain will join the European Monetary Union, but there are great possibilities that it may join when the Euro will be dominant in the global trade market than the Pound.
3. What measures would you recommend Toyota Europe take to resolve the continuing operating losses?
The management team at Toyota Company focuses deeply on gaining from its operations in Europe. The company has established its operations in Europe in order to ensure its clients in Europe had access to its products. However there were negative results since the company incurred losses in its operations. The losses are mainly attributed to currency fluctuations attributed by a strong Japanese Yen against the euro. A single increase in the value of the Yen leads to millions of losses. The company also faces the challenge of overproducing its units in the European market. The company’s supply exceeds the demand from its customers.
I would recommend that the company should urge its local suppliers to set prices of its automobiles in Euros for any new business. This would enable the company to pay expense bills in Europe in Euros as it expands in the region. Invoice should be used in soft currency as opposed to hard currency in any transaction involving two parties. If both parties involved in a transaction are use the soft currency, then a third currency should be considered as an alternative. However, if both parties use hard currencies, then the buyer’s or the seller’s currency may be employed to effect the transaction. The strategy also applies to Toyota’s subsidiaries that may be trading with each other.
The company should also consider moving its cost structure within the European Monetary Union as opposed to the United Kingdom and Japan. This will ensure that the Japanese Yen is not exposed the economy of the United Kingdom. This will also recovered operating losses because the Euro has i9n recent times strengthened against the Yen. The company can realize reduced costs by reducing excess capacity emphasize more on Total Quality Management. This will ensure an efficient system of production that will translate to reduced operating expenses and high quality products. Their products of high quality will create a competitive edge over its competitors because they will offer products meet customer needs.
