Toyota’s Emerging Markets Strategy Promises Longevity
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Over the past several months, a lot of media attention has been given to the impressive sales figures in the automobile industry. In the thick of the bullish headlines, there has been keen comparison between the automobile bigwigs. However, with major improvements across the board, investors can’t really put a finger on the real winners. With this challenge on investors’ hands, it is critical to look for the automobile player that is not merely riding on an industry-wide rally, but that rather promises solid returns in the long term.
Industry-wide rallies always play out
Across the board, the industry is doing well. Sales in the U.S increased 9.2% in June on an uptick in truck and pick-up sales. The increased demand for trucks and pick-ups was largely attributable to the boom in the energy and construction sectors. Toyota (NYSE: TM) managed to come out ahead of the market’s 9.2% gain to record a 9.8% year-over-year upswing in U.S auto sales. Ford (NYSE: F) also was among the key players that best capitalized on the bulging demand for trucks and pick-ups. In addition to a 13% year-over-year improvement in overall sales, its F-series trended upward 24% during the June time frame, the best improvement since 2006. And to further stir sales, Ford is noted to have cut prices on its electric vehicles. Its Focus EV, which was earlier priced at $39,200 saw a tremendous $4,000 price cut and now retails at $35,200. Through this price incentive, Ford is hoping to gnaw into Tesla's numbers as well as improve its own top line.
General Motors (NYSE: GM) also managed to cut back on its older model Silverado inventory glut, recording a 29% gain in sales of the model during the June time frame. This is critically important for General Motors as it clears its inventories for the newly launched Chevrolet Silverado and GMC Sierra. These two new entries are poised to be great contenders, considering that they are General Motor's first launches since the infamous 2009 bankruptcy.
The improved sales have been reflected in the stock market as General Motors, Ford and Toyota are all trading intimately close to their 52-week highs. However, with this kind of uptrend comes great uncertainty. A lot of risks are gathering on the horizon; particularly if you look at trends in the sector. Consumers are taking a slow-but-progressive stance toward electric cars. In fact, General Motors and Honda are working together to produce a mass fuel-cell system by 2020 that chemically burns hydrogen to generate electricity without the emission of toxic gases. With this, they hope to slow Tesla’s aggressive rise.
Amid the fierce competition and constant innovation, Toyota is making notable inroads in the background. Unlike most of its peers, Toyota is making some fundamental changes in its emerging-markets strategy. Unlike developed markets, emerging markets always grow; even in the face of extreme geopolitical and economic meltdowns. As such, improvements in emerging markets is a next-to-certain assurance of sustained growth.
Toyota’s stance in Kenya sets it up for greater dominance in emerging markets
Hino, Toyota’s subsidiary that is run from Tokyo, has set foot in Africa for the first time. Through the construction of a $5.76 million vehicle assembly plant in Kenya, Hino will partner with Associated Vehicle Assemblers, the largest assembler in Kenya, to assemble heavy trucks and buses.
Typically, Toyota sticks to small trucks and cars. However, venturing into the heavy-truck and bus segment means that Toyota will have to square off with General Motors’ Isuzu truck, which commands a considerably large market share in Kenya.
There are so many questions to ask. Why did Toyota choose Kenya? And more importantly, why did Toyota choose to directly compete with General Motors in a segment where the latter pulls the strings?
Kenya was a top choice because of the legislation regarding automobile imports. While traders importing completely built-up vehicle units (CBU) pay 25% import duty, there is absolutely no duty on the importation of completely knocked-down vehicle parts. This will considerably drive down Toyota’s costs in the assembly plant; which will in turn allow the company to revise its price points downward and rope in more customers relative to its competitors – particularly General Motors.
Second, Kenya, like many other African countries is currently emphatic on the development agenda. Kenya has a flagship Vision 2030 program that seeks to push the country into a full middle-income economy by the year 2030. In view of this, the construction industry has tracked upward amid bulging needs for infrastructure, housing and corporate buildings. Demand for heavy trucks, buses and other commercial vehicles is therefore expected to increase moving forward. Current market statistics in Kenya show that sales of commercial vehicles accounted for about 70% of all new vehicles bought in the country. The assembly of trucks and buses will secure a huge payday for Toyota going forward.
Considering that this enabling environment is not limited to Kenya, Toyota could greatly benefit if it took a similar approach in other emerging markets in Africa, Asia and Latin America.
A stock that has a Plan B is always a better long-term pick when compared to those that bask in the present glory. Toyota’s emerging-markets stance is a guarantee of sustained long-term growth. This, in turn, promises longevity. The stock is a strong long-term buy.
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Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!