Toyota on Silk Roads

By Peter Pham - June 22, 2012 | Tickers: F, GM, HMC, TM, VLKAY | 0 Comments

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After a couple of years that can only be described as horrific, Toyota Motor Company (NYSE: TM) is looking to get back to the standard of supply chain excellence that is the hallmark of their 80+ year history.  Regardless of what the future holds for Toyota, like Ford (NYSE: F) is famous for creating the assembly line Toyota will be remembered for their evolution of production techniques that proved so disruptive to the automotive industry that they drove the American auto manufacturers to the brink of and into bankruptcy.  Moreover, that system has grown beyond Toyota to be the industry standard in manufacturing the world over. 

Toyota’s production system is the company’s legacy, the importance of which cannot be overstated and has forever changed the way manufacturing is done in the 21^st century.  Before Apple was the Apple we know today dominating the supply chain to the point where their competitors cannot get access to production to build competing products, there was Toyota.  The spillover from their near maniacal commitment to quality drove itself up and down the supply chain, improving their competitors and the overall quality of automobiles.

So, if any company is capable of recovering from the PR debacle of the recalls in the U.S. in 2009 to the tragedy at Fukishima and the flooding in Thailand, it is Toyota.

The Road to Recovery

In 2011 Toyota sold just 7.9 million vehicles, down 7% over 2010 and 17.3% from the 2007 peak.  They also lost out in the sales war to Volkwagen (NASDAQOTH: VLKAY) who, for the first time in their history, cracked the 8 million sales mark. 

Supply disruptions which plagued not only Toyota but Honda due to the flooding in Thailand last year, saw November’s production drop 67.5%.  2011 was shaping up to be a record year for production in Thailand before the flooding.

In 2010 Toyota produced 630,000 vehicles there and sold 296,000 locally while exporting the rest.  In 2011, through November they produced nearly 740,000.  Toyota is the market leader there, which is the biggest automobile market among ASEAN nations, with 15.8% of total sales.   The flooding has not deterred Toyota, either.  They announced a new $257 million production facility for Thailand in January.  2013 production in Thailand is set to increase from 700,000 to 790,000 vehicles in 2013.

Thailand’s automotive industry is the most advanced in Southeast Asia, producing 25 cars per 1000 people in 2011 which translates to 1 vehicle per $365,000 in GDP, versus $828,000 for the next closest producer Malaysia. 

Taking the Southeast Road

In the first quarter of 2012, Thais bought 279,000 vehicles up 17% over 2011. 56% of them were 1 tonne pickup trucks.  The nigh-indestructible (for fans of Top Gear) Toyota Hilux is their best seller, with 36% of total sales.  Production numbers are up through April to match sales, 17% projected over the rest of 2012.  So, any effects of the flooding have been overcome.    Conversely, vehicles sales in Malaysia are down 15% year over year.  GM (NYSE: GM)  has identified Thailand as the potential marquee ASEAN market as well having developed the new Trailblazer specifically for the Thai market and introducing both it and the new Colorado there at the 2011 Bangkok International Motor Show last fall.  But, even the newly redesigned Colorado has not been enough for the automaker to crack the top 3 in pickup truck sales.  GM remains the best of the rest in that category. 

Overall, in Thailand GM has a 6% share of the market while Ford’s is closer to 3% combined, but sales are up 54% year over year.  Ford’s Asia-Pacific region posted a 14% gain in sales in in March 2012. 

Indonesia is rising up the sales charts quickly.  In 2011 registrations were 894,000 up 17% over 2010 to make it the 16^th biggest market in the world, just behind Mexico.  Toyota owns that market with Toyota and its Daihatsu brand making up 6 of the top 10 models sold there in 2011.  Japanese auto makers dominate this area of the world.  They account for more than 86% of all auto sales. 

For this reason companies like Toyota, Honda (NYSE: HMC) and Suzuki are spending a lot of money in the region as the need for transportation continues to grow at a rapid pace, both of the 2 and 4 wheel variety.  Honda’s motorcycle and scooter business in Southeast Asia is booming.  Asian motorcycle sales account for 79% of Honda’s revenues.  In Vietnam they sold more than 2.2 million 2-wheelers in 2011, 40% of which were scooters, up from 10% of sales in 2006.  They are investing heavily in India, where they project to generate 30% of their motorcycle sales by 2020.  

Volkswagen and GM are aggressively courting China, the strength of their sales there are propelling them past Toyota in total worldwide car sales.  Toyota and Honda, conversely, are deploying assets in India.  Toyota’s production in India in 2011 was 210,000 vehicles and with significant investment, the company is looking to increase that by 100,000 for 2013.   To achieve that goal they are investing $300 million in a Camry production facility and adding capital to their financing division. 

This highlights a growing trend in these emerging markets.  The strong Yen affords Japan tremendous investment leverage overseas, especially in countries with especially weak currencies.  Japan has gone from contributing 0.3% of FDI into India in 2007 to 8% in 2011.  They have accounted for more than 70% of the FDI into Vietnam in 2012 through April. 

The flip side to the strong Yen is the currency arbitrage shipping cars built in Japan overseas.  It is important to remember that Japan is also a large importer of the very parts that make up most of a car: steel, aluminum, oil etc.  A strong Yen offsets input costs as much as it hurts export units.  This is one of the fatal flaws in the mercantilist mindset.  Currency effects are largely chimaeras that create political fallout and which lead to trade and currency wars; very real effects to be sure.  Toyota’s rise in sales volume in the U.S. during the 2001-07 period plainly shows why this line of thinking is irrelevant.  Sales since then have more to do with the trend of car sales in America than any effects of the strong Yen.  And 2012’s sales are up 25% year over year while the average Yen exchange rate has been flat.

Climbing the Steep Grade

The sales trends for Toyota are clear, as a percentage of their sales the U.S. and Japan are becoming less important.  While U.S. sales this year are up more than 23% through May, that number is up from the lowest level in the past 11 years.  Growth is not coming from low interest rate, high debt markets.  They will be able to maintain sales, but if they are to grow it will have to come from where car ownership is rising.  Toyota’s production through the end of April was 3.596 million vehicles, which projects out to 10.5 million for 2012.   This is far above their initial target of 9.58 million vehicles sold across all brands to start the year.   

The quarter 1 results for Toyota reflect this resurgence in sales, with operating margins rising to 2.2%.  Revenues were up 23% year over year and profits up 476% to 121 billion Yen ($1.53 billion).  Sequentially, margins have risen 5 quarters in a row and sales are returning as the newly refreshed Prius and Camry are a hit with consumers.  With a current P/E of 33 and a forward P/E of 11, Toyota looks undervalued at $76 per share for the ADR.  The question is how much of their sales may be more insulated if a potential global recession comes to pass.  Honda’s dominance in the 2 wheel market where Toyota’s presence is nil, will see them benefit from the substitution effect of sub-compacts for cheaper motorcycles.

With the Nikkei closing above 8650 this week, that would signal a reversal of a trend that should take Toyota along with it. 

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