International commerce has rapidly increased as the internet has provided a new and more transparent marketplace for people and entities alike to conduct international business and trading activities. Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of foreign exchange rates.
Business has become increasingly international, and companies cannot ignore the impact of currency changes on cash flows, profitability, and their asset and liability position. No company is completely immune—the cash received from exporting is affected by the relationship between the currency used by the customer to pay and the currency in which the cost of providing the product or service is denominated. Prices of most commodities have been volatile and rising and falling dramatically in recent years.This uncertainty leads to volatility and the need for an effective vehicle to hedge foreign exchange rate risk and/or interest rate changes while, at the same time, ensuring effective future financial position.
“There are no right decisions here, just decisions that are associated with different levels of risk and reward”. Business is about rewards at its best. To conduct a best rewarding business one takes a step forward from domestic to global. There are two factors triggering superior globalisation. The first is the decline in barriers to services, free flow goods, and capital which has cropped up since the end of World War II. The second aspect is technological change, predominantly the striking improvement in topical years in communication, information, processing, and transportation technologies. And with globalisation, comes foreign exchange of currencies.
Foreign exchange is a kind of economic transaction. An economic transaction is an exchange of value, which typically involves a transfer of title to an economic good from one party to another. Normally, an economic transaction involves a payment and a receipt of money in exchange for an economic good, service or asset. d
http://kline.house.gov/images/user_images/BurningMoney.jpgIn the foreign exchange market, for anybody wanting to sell dollars to get British pound, there must be someone else wanting to sell the pound for the dollar at the same exchange rate (like in barter exchange). The Foreign Exchange market performs an international clearing function by bringing two parties wishing to trade currencies at agreeable exchange rates.
The full force of the Global Economic Crisis is having impact on all the flamboyant strategies and decisions of the world's automakers, in the course slicing them to bit.
A positive pointer of how calamitous the state of affairs are for the universal automobile industry is the performance of Toyota, which is without a doubt the most vital and healthy car manufacturer on the planet. It has now united with Detroit and auto producers in Europe in soliciting bailout from their governments. Toyota has officially asked from Tokyo to offer a “bridge loan” of $2 billion, this demand following sales figures recently indicates that the Japanese behemoth experienced a decline of 40% in sales of motor vehicles in its largest market, the United States. Toyota is in hitch; still it is in fact in far superior state than nearly every other auto manufacturer.
Currently, the pooled capability of all the carmakers throughout the world amounts to more than 90 million cars annually. The deadly demand demolition being caused by the Global Economic Crisis has reduced purchases to about 50 million units per years, meaning that the world's auto companies have nearly doubled the productive capacity that can be absorbed by current consumer demand.
The automobile business is one of the most expensive and multifaceted to run. The industry produces a consumer product annually in the tens of millions of units that is costly, complex and customized. The productive infrastructure required is both vast and exceedingly expensive. Before the onset of the Global Economic Crisis, the world's carmakers bet heavily on a rising global marketplace that could annually absorb up to 100 million cars annually, and leveraged themselves to the maximum extent to finance the creation of the global network of assembly plants, parts manufacturing factories and distribution networks. The business model became far more globalized, adding another layer of complexity. For example, a U.S. customer who purchases a certain VW model will end up owning a car assembled in Germany, but equipped with an engine built in Mexico. In other words, a Mexican VW plant builds an engine, sends it across the Atlantic Ocean to Germany, which in turn sends it back across the Ocean in the form of an assembled car, to be purchased at an American dealership. This global supply chain is expensive, fragile, and only makes economic sense if all the manufacturing components of the business are operating at full capacity. What I just described has all the characteristics of a Rube Goldberg business model, yet virtually every major automobile company in the world conducts their business according to the pattern I have just described.
Our Approach towards
For Question 1:
1. Facts about Toyota
2. Brief Description of Toyota in different regions.
3. Analysis of Multinational aspects of the company in terms of revenues, costs, financing and the use of foreign currencies
INTRODUCTION TO TOYOTA MOTOR CORPORATION:
Toyota Motor Corporation, commonly known simply as TOYOTA is World's third largest automaker.
Toyota's history is history of hardships. Even though Toyota faces many obstacles it always paces up with rest of the crowd through innovation, imagination and creativity. Toyota is a company which truly work for customer satisfaction.
Toyota's way out from hardships…
Facts about the TOYOTA:
Public(TYO:7203) & (NYSE:TM)
Toyota City, Aichi, Japan;
Automotive, Robotics, Biotechnology and Financial Services
Automobiles & Financial Services
US$208.995 billion (2009)
US$-4.69 billion (2009)
US$-4.45 billion (2009)
US$295.86 billion (2009)
US$102.425 billion (2009)
1. Including Hino and Daihatsu; 2. As published in 2006 edition of fortune magazine
2. As published in 2006 edition of fortune magazine; 4. (Toyota: Annual Report 2009)
TOYOTA MOTOR CORPORATION is not only one of the world's most leading manufacturer but also a company which offers full variety and range of models from small commuter vehicles to trucks. Toyota has 52 manufacturing companies in 27 countries and regions excluding Japan. It vends vehicles in more than 170 countries, sustained by fortified personnel of over 316,121 workers.
PRESENCE OF TOYOTA IN DIFFERENT REGIONS:
This is the expanded distribution of regions, but on the basis of market share and importance, the regions are broadly categorised in 5 divisions, which are : Japan, Europe, Asia, North America and Central and South America, Oceania, Middle East, etc.
PENETRATION OF TOYOTA IN GLOBAL MARKET
In 2009, vehicle sales of Toyota reduced 1.35 million units, or 15.1%, to 7.57 million units owing to the sharp depression in the global economy. Consolidated vehicle production also decreased 1.50 million units, or 17.5%, to 7.05 million units. 2009 was also impacted by heavy operating expenses and currency exchange fluctuations. As a consequence, net revenues declined 23.2% to ¥18.6 trillion and operating income chopped down ¥2.6 trillion to a loss of ¥394.8 billion.
EUROPE: A sturdy existence Defined by a distinctive uniqueness
The presence of Toyota in Europe is since 1960's
Down from 222,000 Vehicles or 17.3% to 1.06 million units
Decreased 32.2% to 482,000 units.
Down from ¥980.3 billion to ¥3.0 trillion.
Down from ¥284.8 billion to a loss of ¥143.3 billion.
Regional market share
Currency dealt with
Euro, Swiss Francs and Pounds
Overall Impact in year 2009:
North America: Encouraging independence in expansion and fabrication
Overall Impact in year 2009:
Declined 746,000 Vehicles or 25.2% to 2.21 Millions
Declined to 919,000 Units i.e by 27.5%
Decreased from ¥3.2 trillion, or 34.0%, to ¥6.2 trillion
Fell from ¥695.5 billion to a loss of ¥390.2 billion
Regional Market Share
16.7% (In US)
Currency dealt with
Japan: Customer-Oriented Product Characteristics and Variations
There are about 75 million registered vehicles in Japan; there are visibly still significant opportunities for expansion. Growing customer environmental awareness and government vehicle scrappage programs to replace older vehicles are helping to raise demand for environmentally friendly models. And with the entire Japanese automobile industry placing greater emphasis on the environment and energy, Toyota will carry on promoting the Prius and other hybrid models that fit in Toyota core technologies.
Toyota is market leader in JAPAN, There are 12 Manufacturing Plants. Global Headquarters: Toyota City, Japan
Overall Impact in year 2009:
Declined 51,000 Vehicles or 5.3% to 905,000 units
Decrease from 1.5% to 947 thousand units
Decrease from ¥401.5 billion, or 12.9%, to ¥2.7 trillion
Decrease from ¥80.3 billion, or 31.3%, to ¥176.1 billion
National Market Share
Currency Dealt with
Emerging Markets: High-Quality Vehicles at an Affordable Price that Meet Regional Needs
China and other emerging markets in Asia and Central and South America promise to become a strong engine for Toyota's future growth. China's market, in particular, is potentially as large as the U.S. market, and needs to be addressed in a straightforward manner. In the rest of Asia, South America, and other areas, there are still regions where Toyota's share is low, and further growth in demand is anticipated.
Overall Impact in year 2009:
Declined 84,000 units or 5.5% to 1.44 million units.
decreased ¥411.2 billion, or 17.9%, to ¥1.9 trillion
decreased ¥56.3 billion, or 39.1%, to ¥87.6 billion
Financial Services Operations
Toyota Financial Services Corporation
Internationally, TFS is rapidly expanding its financial services operations in emerging markets such as Russia and China. In the chief markets of Europe and the United States, TFS aims to additionally increase earnings growth amid severe business conditions. Priorities comprise holding up for vehicle sales while striking the proper balance among business risks. The first TFS operation commenced inSydney, Australiain 1982 as Toyota Finance Australia Limited and was soon followed by operations in the USA, Canada, Europe, Asia andOceania.
PRESENCE OF TFS AROUND THE WORLD
¥ 13.6 trillion
¥ 1.4 trillion
¥ 72.0 billion
33 countries and regions worldwide
No of employees
Other Business Operations:
Other business operations include the intelligent transport systems, information technology and telecommunications, e-TOYOTA, housing, marine, and biotechnology and afforestation businesses. The main highlight of all these operations is fostering a workplace culture that encourages creativity and entrepreneurship.
Declined ¥162.0 Billion or 12% to ¥1.2 Trillion
Decreased ¥23.1 Billion or 70.0% to ¥9.9 Billion*
* sales decreases in the information technology and telecommunications business and other businesses, although the number of home sales in the housing business—a core business in this segment—remained at the same level as the previous year.
Analysis of Multinational aspects of the company in terms of revenues, costs, financing and the use of foreign currencies.
LINE OF ACTION:
- Introduction to Business Segment of Toyota in terms of production, sales and revenue.
- Detailed analysis on revenues
- Detailed analysis on costs and expenses
- Detailed analysis on financing
- Use of foreign currencies
Toyota is open to the elements of risk of fluctuation in foreign exchange as it operates majorly in America, Continental Europe and Britain. For that reason, it is influenced by the variation in the value of US Dollar, Euro and lesser level to British Pound. Toyota's financial statements are presented in the Japanese Yen, so it gets affected by the fluctuation in foreign exchange as all the various currencies dealt with, has to be converted in Japanese Yen.
The business segments of Toyota include automotive operations, financial services operations and all other operations. Automotive operations are Toyota's most important business segment, comprising 88% of Toyota's total revenues before. Toyota's key markets for vehicle unit sales in 2009 were: Japan (26%), North America (29%), Europe (14%) and Asia (12%).
Automotive Market Environment
Automotive market around the World is very aggressive and impulsive. Factors like social, political and general economic conditions affect the requirement for automobiles; Development of new vehicles and technologies; and expenditure pattern by customers to buy and operate vehicles. Consumer demands vary dramatically year to year in different regions due to these factors. The automotive industry faced quick contraction of sales globally due to downturn in the economy, and resulted in an extremely severe condition. Particularly in Japan, the United States, and Europe, the sales decreased badly. The markets in resource-rich countries and emerging countries, which were growing constantly, bumped into a sudden deceleration in growth.
In 2009, overseas vehicle unit sales decreased during 2009. It reduced particularly in North America and Europe, where the reduction of automotive markets was especially prominent. Toyota's share of total vehicle unit sales in each market is subjective to quality, price, design, performance, safety, reliability, economy and utility of Toyota's vehicles in compared with one's offered by other manufacturers.
The profitability of Toyota's automotive operations is affected by many factors. These factors include:
• Vehicle unit sales volumes,
• The mix of vehicle models and options sold,
• The level of parts and service sales,
• The levels of price discounts and other sales incentives,
• Cost of customer warranty claims & customer satisfaction actions
• The cost of research and development and other fixed costs,
• The prices of raw materials,
• The ability to control costs,
• The efficient use of production capacity, and
• Changes in the value of the Japanese yen and other currencies in which Toyota does business.
Financial Services Operations
Toyota believes that, margins on profits may decline and share in the market may also decline as customers will go for financing for Toyota vehicles from other sources. Toyota's financial services operations mostly contain loans and leasing programs for customers and dealers. Providing finance to customers is an important value added service. Therefore, Toyota has expanded its network of finance subsidiaries in order to offer financial services in many countries. Toyota faces competitions from commercial banks, credit unions and other finance companies. Toyota's financial assets decreased in 2009 primarily due to the impact of fluctuations in foreign currency translation rates.
Toyota's finance receivables are subject to collectability risks. These risks include consumer and dealer insolvencies and insufficient Collateral values (less costs to sell) to realize the full carrying values of these receivables. Toyota continues to originate leases to finance new Toyota vehicles. These leasing activities are subject to residual value risk. Residual value risk could arise when the lessee of a vehicle does not exercise the option to purchase the vehicle at the end of the lease term.
Comparative analysis of Assets, Production, Sales and Revenue:
Net revenues of Toyota in 2009 were ¥20,529.5 billion, a decrease of ¥5,759.7 billion, or 21.9%, compared with the prior year. This principally replicates the impact of:
1. Decrease in sales and changes in sales mix,
2. The adverse impact of foreign currency translation rates,
3. Decreased parts sales during fiscal 2009.
If fluctuations in currency exchange will be eliminated, then net revenues would have been approximately ¥22,560.7 billion, a 14.2% decline since 2008.
Total Net Revenues includes:
If currency fluctuation is eliminated
Revenues from sale of products
Declined by 22.8% to ¥19,173.7 billion
¥21,011.3 billion, a 15.3% decrease
Revenues from financial services operations
declined by 7.7% to ¥1,355.8 billion
¥1,549.4 billion, a 5.5% increase
Regionally, net revenues for 2009 declined by 11.2% in Japan, 34.1% in North America, 24.0% in Europe, 12.2% in Asia and 20.1% in other. Eliminating translation of exchange rates would have decreased by 11.2% in Japan, 24.9% in North America, 13.1% in Europe, and 0.4% in other and increased by 0.9% in Asia.
Reason for Decline
If currency fluctuation is eliminated
- Decrease in sales
- Change in sales mix
- Fluctuations in foreign currency
Decline by ¥5,612.6 billion, or 23.2%
¥20,398.5 billion during fiscal 2009, a 15.6% decrease
Fluctuations in foreign currency.
by ¥120.8 billion, or 8.1%
¥1,572.5 billion during, a 5.0% increase
Analysis of reason for decline in revenue, its impact on revenues.
Cost and expenses
Operating costs and expenses decreased by ¥3,028.4 billion, or 12.6%, to ¥20,990.5 billion in 2009 compared. This decrease resulted primarily from the approximate ¥2,100 billion impact on costs of products attributable to the decrease in vehicle unit sales and the changes in sales mix, the ¥2,062.1 billion impact of fluctuations in foreign currency translation rates, decreased costs corresponding to the decrease in parts sales, and the ¥54.8 billion decrease in research and development expenses, partially offset by increases in expenses.
Cost reduction efforts were offset by increases in the prices of steel, precious metals, non-ferrous alloys including aluminium, plastic parts and other production materials and parts. These cost reduction efforts related to ongoing value engineering and value analysis activities, the use of common parts that result in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production.
Detailed analysis of cost and expenses.
Reason for Decrease
Cost of Products
- Decrease in sales
- The changes in sales mix,
- The impact of fluctuations in foreign currency translation rates,
- the impact of the decrease in parts sales, and
- The decrease in research and development expenses,
Decreased by ¥2,984.0 billion,
or 14.6%, to ¥17,468.4 billion
Partially offset by increases in expenses.
Cost of financing operations
The impact of fluctuations in foreign currency translation rates
decreased by ¥80.6 billion, or 7.5%, to ¥987.4
Partially offset by an increase in allowance for residual value losses and an increase in valuation losses on interest rate swaps stated at fair value.
Selling, general and administrative expenses
Reflects an increase for the financial services operations
increased by ¥36.2 billion, or 1.5%, to ¥2,534.7 billion
The increase for the financial services operations is primarily due to an increase in provision for credit losses, net charge-offs.
Research and development expenses (included in cost of products sold and selling, general and administrative expenses)
decrease in expenditures while maintaining a focus on the development of environmentally conscious technologies including hybrid and fuel-cell technology, and the developments in advanced technologies relating to collision safety and vehicle stability controls to further build up competitive strength in the future.
decreased by ¥54.8 billion, or 5.7%, to ¥904.0 billion
In this section we will have an insight on how Toyota finance its operational activities, what is the mix of External and internal sources of funds and how does it maximise shareholders wealth.
Toyota always prefers to fund capital expenditures and research and development activities initially through cash generated by operations. In 2009, there was decline in cash generated by operations due to a decrease in sales which was due to to the speedy narrowing of the automotive market. Consequently, Toyota financed cash moderately by providing additional loans and issuance of notes.
Toyota provides finances for its customers and dealers, together with loans and leasing programs, from both cash generated by operations and borrowings by its finance subsidiaries. Toyota looks forward to expand to raise funds locally in markets all over the world by increasing its network of finance subsidiaries.
Net Income and ROEThe basic strategy of Toyota's financial policy is to maintain a sturdy financial position which can help Toyota to finance its research and development initiatives, capital expenditures and financing operations on a cost effective basis even if earnings experience short-term fluctuations. Toyota maintains high credit ratings, which will help in accessing funds from outside sources in big amounts and at reasonably low costs.
Following Statistic shows, return on equity of Toyota, which is negative in 2009. Majorly due to contraction in automotive industry which affected the sales of Toyota.
Detailed analysis OF FINANCING Activities
Cash provided by operating activities
Decreased to ¥1,476.9 billion from ¥2,981.6 billion.
- Decrease in cash collection received from sale of products due to a decrease in net revenue for the automotive operations
Partially offset by a decrease in cash payments for cost of products sold within the automotive operations and a decrease in cash payments for income taxes.
Net cash used in investing activities
Decreased to ¥1,230.2 billion from ¥3,874.8 billion
- Decrease in additions to finance receivables,
- Decrease in purchases of marketable securities and security investments, and
- Increase in proceeds from sales of marketable securities and security investments.
Net cash provided by financing activities
Decreased to ¥698.8 billion from ¥706.1 billion
Increase in payments of long-term debt
Partially offset by a decrease in repurchase of common stock.
Cash and cash equivalents
Decreased by ¥251.8 billion, or 5.6%, to ¥4,229.1 billion.
Defines as cash and cash equivalents, time deposits, marketable debt securities and its investment in monetary trust funds,
Toyota's cash and cash equivalents are held in Japanese yen and in U.S. dollars
marketable securities were ¥495.3 billion, , time deposits were ¥45.1 billion
Trade accounts and notes receivable
decreased by ¥647.5 billion, or 31.7%, to ¥1,392.7 billion.
Decreased revenues and fluctuations in foreign currency translation rates.
decreased by ¥728.9 billion, or 7.1%, to ¥9,546.9 billion.
- Decrease in wholesale and other dealer loans and
- The impact of fluctuations in foreign currency translation rates.
Finance receivables were geographically distributed as follows in North America 63.6%, in Japan 14.1%, in Europe 11.0%, in Asia 3.8% and in Other 7.5%
Marketable securities and other securities investments
Decreased by ¥1,373.2 billion, or 34.6%
%, primarily reflecting sales of marketable securities and security investments, and a decrease in the fair values of these securities and investments.
Toyota's total borrowings
Increased during fiscal 2009 by ¥408.5 billion, or 3.3%.
Toyota's short-term borrowings consist of loans with a weighted-average interest rate of 2.44% and commercial paper with a weighted-average interest rate of 1.52%.
Increased during fiscal 2009 by ¥64.9 billion, or 1.8%, to ¥3,617.6 billion
Toyota's long-term debt consists of unsecured and secured loans, medium-term notes, unsecured notes and long-term capital lease obligations with interest rates ranging from 0.17% to 31.50%, and maturity dates ranging from 2009 to 2047.
Current portion of long-term debt
Increased by ¥24.1 billion, or 0.9%, to ¥2,699.5 billion
The increase in total borrowings primarily resulted from funding obtained to maintain sufficient liquidity
As of March 31, 2009, approximately 28% of long-term debt was denominated in U.S. dollars, 21% in Japanese yen, 15% in euro and 36% in other currencies.
Toyota hedges fixed rate exposure by entering into interest rate swaps.
There are no material seasonal variations in Toyota's borrowings requirements.
Non-current portion of long-term debt
Increased by ¥319.5 billion, or 5.3%, to ¥6,301.4 billion
Toyota's total interest bearing debt
125.4% of total shareholders' equity, compared to 102.9% in 2008.
Decrease in availability of cash from operational activities.
long-term debt was rated “AA” by Standard & Poor's Ratings Group, “Aa1” by Moody's Investors Services and “AAA” by Rating and Investment Information,
Toyota's treasury policy is to preserve controls on all exposures, to stick to strict counterparty credit standards, and to vigorously watch marketplace exposures. Toyota continues to operate centralized, and is chasing international competence of its financial services operations with the help of Toyota Financial Services Corporation.
USE OF FOREIGN CURRENCY
Toyota is Japanese company, having global presence so sensitive to fluctuations in foreign currency exchange rates. Toyota is mainly uncovered to fluctuations in the value of the U.S. dollar and the euro and, to a lesser extent, the Australian dollar, the Canadian dollar and the British pound. Toyota makes its financial statements in Japanese yen, and so are affected by foreign currency exchange fluctuations through both translation risk and transaction risk. Toyota does not hedge against translation risk. Toyota has adopted a strategy of localisation through which it has facilitated constructing production in the major markets in which it sells its vehicles, which helps in reducing transaction exposure.
In General, if Japanese yen weakens in front of other currencies then it has a positive result on Toyota's operating income, revenues and net income. A strong yen adjacent to other currencies can have opposite result.
In 2008, Yen was on average and at the end of the year; yen was strong against U.S dollar and weak against Euro. In 2009, Yen was on average and at the end of the year, it was stronger against both U.S Dollar and Euro.
In year 2008, Toyota produced 64.1% of total production outside Japan for non-domestic sales outside Japan. In North America, 57.4% of total sales vehicles were produced locally. In Europe, 60.9% of total sales vehicles were produced locally. Localisation of production helps Toyota to purchase supplies and resources used in the production process from local market, which can result in equalisation of local currency revenues with local currency expenses. Toyota does deal into foreign currency transactions and other hedging instruments to tackle a part of its transaction risk. This risk has declined but not extinguished.
Toyota faces currency exchange exposure in certain commodities, interest rates and equity prices. It uses different derivatives instruments to take care of cash and cash equivalents, finance receivables, marketable securities long-term and short-term debt, securities investments and all derivative financial instruments.