The Effect of the Impact of the Recent Recall of Toyota Defective Cars - Case Study Example

Will the recent mass recall of Toyota affect the demand for these cars. Introduction This study looks at the possible effect of the impact of the recent recall of Toyota defective cars to the demand for these cars. Toyota is not a sole manufacturer of cars in the US and worldwide and there are substitutes that can easily fill in the gap brought by the vacuum in sales created by the recall of Toyota cars. Certainly, there are effects to the company’s profitability, and to the confidence of stockholders and customers. Existing data from published statements of Toyota and analysts review are gathered to form a review and analysis. A short term and long term implication will be presented to answer the question of the effect of recall to demand of Toyota cars. Background A mass recall of defective Toyota cars due to floor mats that can catch the gas pedals has been announced on January2010. The recall covers 4.45 million cars found worldwide, particularly, 2.48 million in North America,1.71 million in Europe, some 80,000 in China, and 180,000 in other regions including the Middle East. The latest recall is an addition to an earlier recall in September 2009 due to accelerator defect that brings the number of recall to 8 million cars. The recall covers best sellers of Toyota, the Camry and Corolla. Toyota recall could have large impact on sales. [Kagayana, Y. 2010] What is the effect of this recall to Toyota? The Vice President of Toyota is worried as he feared the damage of the recalls may be greater and thinks that this incident may cause huge problems for consumers as well as damage the image and profitability of the company. Huge losses The initial cost of first recall of 3.8 million cars is estimated at $US2billion; and the latest recall of 4.4 million cars would result to an above US$4 billion in cost. (Kageyama, Y. 2010) The total effect to Toyota has been hard and immediate, Kageyama said that its US sales fell by nearly 20 percent in January, and its share price declined by 16 percent over the same period. Toyota Vice President Sasaki said “he didnt yet know how the recalls were going to hurt sales or earnings. He said, generally after a recall, sales drop about 20 percent in the first month and then gradually recover.” (Kageyama, Y. 2010) Declining revenues The revenues of Toyota over the periods of 2008 to the first quarter of 2010 are shown to be declining; reasons however are not definite if these are due to recession or recall. Revenue for 2009 declined by 22 percent as compared to 2008 as for 2009, revenue is 20,529,570.0 while that for 2008 is 26.289,24.0 (in millions) Revenue for the 1st quarter of 2010, (in million) is US$ 147,231.7 s compared for the same quarter of 2009, of US$221,103.5. (msn) As a result of declining revenue, which is also a source for loss of confidence of stakeholders to the company, the return on equity is negative -6.4, which is slightly lower than the industry’s negative -6.5. (msn) Competitive price Toyota and Honda manufacture many models, but only two models will be compared in the study. Toyota Corolla is among the top selling model of the company, but is subject to defect recall. Among the Japanese made small cars, Honda comes next to preference of customers. Source: Carsales.com.au.toyota & Consumer car reviews Sales of Toyota From among the top 20 car manufacturers, Toyota still maintains the second and fourth position in terms of car sales in first quarter of 2010. For comparison, the top model of Toyota and that of Honda are matched up. Toyota Corolla has 29,623 sales for March, and YTD of 63.240. representing a 6.9% change from 2009. Its closest rival, Honda Civic, ranks 8th in sales position, has a 6.1% change from 2009. Toyota sales growth is 10.20% as compared with the industry growth of 2.50%. An industry comparison is done to know its relative positioning. Decision to suspend selling Toyota Corolla and Camry Models In a recent announcement of Toyota earlier this year, said that the company will suspend selling Toyota Corolla and Camry models as well as 6 other models in US until a remedy for technical problems is resolved. Toyota, report said, is being cautious not to provide further damage to their image of performance. (Welsch, D. 2010) The elasticity of demand Toyota, as a means to resolve the recall problems has offered starting March, has begun offering incentives starting on March 2, to appease customers. The effect of the subsidized leases is assumed at 10% reduction in price since competition responded with a 13% incentive discounts to match Toyota’s reduction.( Merx, K. and Naughton, K.) At this point, we recall the concept of supply and demand, that “when the price declined, the quantity demanded rises and the quantity supplied fall”. However, according to Stonebraker, R. of Winthrop University, what is important is the magnitude of change, on whether it is small or large to make an impact to the behavior of the producer or consumer. The economists described this change as price elasticity. Stonebraker said price elasticity could be measured as the percentage change in quantity demanded divided by the percentage in price and the price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. For example, if a 10 percent reduction in price causes consumers to increase their willingness to buy by 6.9%, and Toyota to increase their quantity supplied by 5 %, Then elasticity of demand is 6.9/10 = 0.69; Elasticity of supply 5/10 = 0.50 At this point, we say that demand/supply is inelastic because the number obtained is less than one. If the elasticity numbers exceed one, we say that demand and/or supply is elastic.  If the numbers are less than one, we say that demand or supply is inelastic. If elasticity equals one, we say that demand or supply is unit elastic. In this example, demand is inelastic and supply is inelastic. Inelastic demand is a situation that /supply demand for the product does not increase or decrease correspondingly with the fall or rise in its price. (Business Dictionary) Competition There are 47 top car manufactures in the world, details are listed blow.. Out of these, the twenty top car manufacturers are listed below. General Motors Co., Toyota Motor Corp. and Ford Motor Co. posted U.S. sales gains in March as incentives and improving consumer confidence created the industry’s strongest demand in seven months. According to Merx. K. and Naughton, K., for the first time since 1998, GM is able to land the first top spot of car manufacturers in the US, overtaking Ford, in February this year. This report stated a jump of 40% sales for Ford, while Toyota reported a 41 percent increase in sales. 4. Market structure The market structure for Toyota is a perfect competition, wherein there are many manufacturers, product is homogenous, and has no barriers to entry. In a perfect competition, the company is price taker, it always looks for profit maximization, and is characterized by economic efficiency. Shown below is a chart showing the U.S. market for cars showing the big five car manufacturers showing its sales performance from March 2000 through March 2010. Source: Wall Street Journal As seen from the chart, Toyota holds a 16% share of the US market. It is consistent with the 16% market share in 2009, but went down in the months of January to February 2010 when the recall of the cars happened. Confidence of consumers returned in the month of March. Relative to this, Honda’s share of the market remained consistent at 8%, but went up in the months of January to February, the time of Toyota’s problem. Toyota’s Vice President for US sales operation, Bob Carter, reported a 35 percent increase in US car sales that is buoyed up by consumer confidence. (Merx, K and Naughton, K.) Discussions and conclusion The short run effect of the recall based on the data presented is the loss of revenue due to costs of recalls and repairs that amounts of billions of dollars. This cost of recall has added up to the beleaguered financial position of the company that already suffered losses due to recession. There is a big decline of income of this company as it has negative net income in 2009, -436,939.0 million, as compared to its 2008 net income of 1,717,879.m. (msn Money Central) In short run, the discounts and mortgage subsidy offered by Toyota to counter global recall trims profit down. Added to this is the temporary lost of confidence of customers who are affected by the defective vehicles and the recall for repair of the vehicles. The long run effect. The price elasticity of demand shows that customers are not affected by the rise or fall of car prices, but could be affected by other factors aside from prices. This is demonstrated by our example of Toyota that has an inelastic demand for the product. As shown in the market structure graph and first quarter growth sales, confidence of customers has returned and the temporary loss of revenue in January and February has been regained in March. However, it cannot be determined yet whether this confidence will continue to drive back the profitability of the company back to its 2008 position. It is worth noting however, that Toyota is not alone in its predicament of falling sales, as Ford, GM, Chrysler, and Honda have all suffered a decline of market share in 2009 to 2010. GM, Ford and Toyota hold the same 16% market share. Based on the data presented, it is fair to conclude that demand for Toyota cars has been affected only on a short run basis, but demand will continue in a consistent upward fashion, though in a small magnitude of change. Revenues will still be affected and decline as an aftermath of cost of recall and causes of recession. Reference list Business Dictionary. Inelastic demand definition, viewed 16 April 2010 http://www.businessdictionary.com/definition/inelastic-demand.html Car Sales.com. Toyota corolla brand new cars, Viewed 16 April 2010 http://www.carsales.com.au/new-cars-in-stock/TOYOTA/COROLLA/results.aspx?N=4294962861+4294962707&Make=TOYOTA&Model=COROLLA / Consumer car reviews , viewed 16 April 2010 http://www.savemoneyoncars.co.uk/cheap-new-cars/honda/civic/. Kageyama, Y. 2010 “Toyota Recall Could have large impact on sales.” The huffington Post. Viewed 16 April 2010 http://www.huffingtonpost.com/2010/02/02/toyota-recall-could-have_n_445531.html Kehman, H. Jan. 2009, Popular car manufacturers. Bright Hub. Viewed 16 April 2010. http://www.brighthub.com/engineering/mechanical/articles/24056.aspx Merx, K. and Naughton, K., 2010, GM, Toyota, Ford Add Sales as Incentives Buoy ‘Rough’ Market. Business Week, Bloomberg. Viewed 16 April 2010 http://www.businessweek.com/news/2010-04-01/gm-u-s-sales-rise-21-ford-gains-40-in-rough-auto-market.html Messenger of the World Socialist Website (Feb. 12, 2010) Welsch,D. 2010, Toyota suspends sales of 8 models., viewed 16 April 2010 http://www.businessweek.com/autos/autobeat/archives/2010/01/toyota_suspends.html Stonebreaker, R. Elasticity of Demand and Supply. The joy of economics, making sense out of life. Winthrop University, viewed 16 April 2010 http://faculty.winthrop.edu/stonebrakerr/book/elasticity.htm Msn Money. Toyota Motor ADR: Key Ratios. Viewed 16 April 2010 http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=ManagementEfficiency&Symbol=US%3aTM The top 20 car manufacturers are liste below together with their sales Year-to-date % change or YTD % CHG – This means how much the stock price changed since the beginning of the year.  For example, we have been tracking MCD stock since the beginning of the year and the % change in the stock price is over +28% year to date as of this week ending October 5th, 2007. top 20 Vehicles GO TO: Overview Charts | Whats Hot Off the Lots | The U.S. Market | Sales and Share of Total Market by Manufacturer Thursday, April 01, 2010 Top 20 vehicles, current months sales Structure & Presentation The content and layout of the esay must present the analysis in a clear and logical manner. Well labelled relevant diagrams, good use of English and clear referencing will add to the mark total. Socioeconomic analysis A short outline of the End-of-Unit question is required here. An introductory paragraph or two is sufficient. A brief analysis of the difficulties facing Toyota as a result of the recent mass recall is required - a detailed history of the history of the firm is not relevant and will lose marks. Identification & explanation of relevant economic concepts The economic concepts you introduce must be relevant to the analysis in the essay. For this essay that means that you should explian the parts of supply & demand theory, price elasticity theory, competation and market structure you intend to use in analysing the problem. Application of concepts You should apply the economic concepts you have introduced above to the analysis of the ‘Toyota recall’ question. You might want to use relevant diagrams here which add explanatory detail to your analysis Conclusion Your conclusion (your answers to both part a and part b of the question) must be firmly based on your analysis in the previous sections. Your conclusions must be clearly stated. Harvard style Instructions files attached: 10 pages, 7 sources. 1.Impact of supply and demand to Toyota Toyota’s Forecast Toyota sales rose 35 percent on an adjusted basis. Bob Carter, group vice president of U.S. sales operations, said yesterday in an interview that deliveries had increased by at least that amount. The industrywide results underscored the market’s contraction in the recession. Annual U.S. deliveries averaged 16.8 million last decade through 2007. The 2008 total was 13.2 million, and 2009’s tally of 10.4 million was the fewest in 27 years, according to Woodcliff Lake, New Jersey-based Autodata. Automakers were buoyed in March by rising consumer confidence and spring weather after February blizzards in the U.S. Northeast. The Conference Board’s confidence index rose to 52.5 from 46.4 a month earlier as gloom over job prospects began to lift. Toyota began offering incentives on March 2 such as subsidized leases after the Toyota City, Japan-based automaker began worldwide recalls of more than 8 million vehicles to fix defects linked to unintended acceleration and to adjust brakes. Competitors responded with their own discounts, while avoiding the spending levels the industry rang up a year earlier as GM and Chrysler added incentives ahead of their bankruptcy filings. Incentives were down 13 percent from March 2009, Santa Monica, California-based Edmunds.com said today. Toyota’s Forecast Toyota sales rose 35 percent on an adjusted basis. Bob Carter, group vice president of U.S. sales operations, said yesterday in an interview that deliveries had increased by at least that amount. The industry wide results underscored the market’s contraction in the recession. Annual U.S. deliveries averaged 16.8 million last decade through 2007. The 2008 total was 13.2 million, and 2009’s tally of 10.4 million was the fewest in 27 years, according to Woodcliff Lake, New Jersey-based Autodata. Automakers were buoyed in March by rising consumer confidence and spring weather after February blizzards in the U.S. Northeast. The Conference Board’s confidence index rose to 52.5 from 46.4 a month earlier as gloom over job prospects began to lift. Toyota began offering incentives on March 2 such as subsidized leases after the Toyota City, Japan-based automaker began worldwide recalls of more than 8 million vehicles to fix defects linked to unintended acceleration and to adjust brakes. Competitors responded with their own discounts, while avoiding the spending levels the industry rang up a year earlier as GM and Chrysler added incentives ahead of their bankruptcy filings. Incentives were down 13 percent from March 2009, Santa Monica, California-based Edmunds.com said today. [Katie Merx and Keith Naughton] GM, Toyota, Ford Add Sales as Incentives Buoy ‘Rough’ Market http://www.businessweek.com/news/2010-04-01/gm-u-s-sales-rise-21-ford-gains-40-in-rough-auto-market.html. business week. April 01, 2010, 4:35 PM EDT 4. Market structure The market structure for Toyota is a perfect competition, wherein there are many manufacturers, product is homogenous, and has no barriers to entry. In a perfect competition, the company is price taker, always looks for profit maximization, and is characterized by economic efficiency. There are 47 car manufacturers, and the top big five in the US are GM, Ford, Chrysler LLC, Toyota and Honda. Toyota ranks fourth among the top manufacturers with a US market share of 8% as of 2010. Its share in the market in 2009 to 2010 remains almost consistent at 8%, while the US manufacturers holds 18% market share, while Japanese made cars have an 8% market share. Market share: source: Wall Street Journal. [Auto Sales] Market Data Center. http://online.wsj.com/mdc/public/page/2_3022-autosales.htmlRead more: http://www.brighthub.com/engineering/mechanical/articles/24056.aspx#ixzz0lJIrtW71 Source: Wall Street Journal Read More