Toyota Motor European Manufacturing - Case Study Example

Toyota’s European operating exposure Introduction Toyota’s motor company is a Japanese automotive maker that has its headquarters in Toyota Aichi in Japan. It is a multinational corporation that has diversified its manufacturing in various parts of the world. This automotive company has about 400, 000 employees and it now manufactures more than ten million vehicles units annually. Toyota runs 75 manufacturing companies in twenty-eight countries globally; it sells its products in more than 1170 countries. Toyota was voted to be the twelfth largest corporation globally in terms of revenue and in 2012; it was the largest automobile manufacturer surpassing those of the main competitors such as general motors and Volkswagen. Moreover, it is the largest listed company in Japan’s stock exchange by capitalization. Toyota manufactures a range of products line up that ranges from subcompact luxury and sports vehicles to trucks, buses, minivans, and SUVs. It produces about five brands of vehicles; they include Lexus, Hino, Ranz, Scion and Toyota brand. The company holds stakes in various automotive companies such as Daihatsu, Isuzu, Tesla and Fuji. All of its products are manufactured red either by with combustion or hybrid engines. In addition, this company also manufactures automotive parts for its own use and for the sale purposes. Some of the popular Toyota car models include corolla, land Cruiser, Lexus and Tundra trucks. Toyota’s employee growth is about 1.61% per year while its net income growth is about 73.32%. The sales growth stands at 6.51% annually. This statistics shows that it is a company that has admirable performance. Toyota motor European manufacturing (TMEM) Europe is among the main regions around the world where Toyota has taken its roots. Toyota opened its operations in Europe in 1963 under an official distributor agreement. TMEM has its headquarters in Brussels in Belgium; this is the nerve center of all the Toyota operations in Europe. Toyota motor European manufacturing (TMEM) subsidiary is supported by a network of 31 national marketing and sales companies spread in 56 countries. This Toyota Subsidiary has over 3,000 retailers and nine manufacturing plants. TMEM employs over 80, 000 people across Europe; since 2007, this subsidiary realize sales of about one million units annually which is almost 10% of the total sales of Toyota company worldwide. The success of the operations of TMEM in Europe is attributed to certain facilities available. Some of these facilities include Toyota technical center situated in Zaventem in Belgium which is the center for research and development and purchasing and production engineering. The second facility is Toyota training center in the same place which provides training to service givers and engineers from all the European Toyota distributors. Toyota’s accessory and service center are another Toyota facility located in Brussels and houses after-sales-service to customers and stocks Toyota accessories (Toyotauk.com 2013: p. 1). Finally, we have Toyota Europe design development which focuses on design concepts specifically for European markets. All these facilities have been put in place to ensure that the company operates efficiently and autonomously with little support from the mother corporation. Since it started its operations in Europe, Toyota has grown and changed in according to the tastes and preferences of the European customers. TMEM believes in a localization policy where the manufacturers vehicles basing on the needs of a variety of the European customers. This implies that various facilities such as research and development centers, marketing department, and training centers are located in Europe. These facilities consider the marketing conditions of the markets in these region and design vehicles 5hat are convenient for the population in this regions. Toyota motor Europe manufactured its first vehicle in 1971 under the license in Portugal (Toyotauk.com 2013: p. 1). In 1992, the company started full production of vehicles and engines; it introduced Carina. A new car production site in France started manufacturing Yaris model in 2001. Toyota managed also to open a new manufacturing plant in Poland in 2002. During the same year, the manufacturing center at Adaparazi in Turkey made itself a strategic center for corolla models which are exported to other European countries. In fact, nearly all Toyota’s best selling car models are made in Europe (Toyotauk.com 2013: p. 1). Examples of these models are Aygo, Auris, Avensis and Corolla verso. Records reveal that two out three Toyota vehicles sold in Europe have been manufactured in Europe. Proponents for Britain Joining the European monetary union (EMU) The Euro is a single currency that was launched by eleven members of the European Union in 1999. After it was adopted; twelve European members got rid of their local currencies and adopted Euro as their sole currency. However, Britain was reluctant to join this EMU because some people argued for and other argued against joining the union basing on the economic consequences Britain would have by joining. Both the proponents and opponents argued out their reasons and this delayed Britain to join this union. Some of the reasons that were given by those who supported Britain to join EMU areas discussed in the following paragraphs. First, they argue that there would be a reduction in the exchange rate uncertainty when Britain joins EMU. The United Kingdom businesses would incur lower exchange rates costs hence, bringing an increase in economic welfare. When the exchange rates among the European countries are eliminated, the risks of unforeseen exchange rates are also eliminated. In the initial case where every European country had its own currency, businesses in this region incurred a lot of exchange rates costs. One single entity had to process various exchange processes converting different currencies and in the processes, the costs are incurred. Therefore, when one currency is adopted, then all these costs would be eliminated. This in turn increases the profitability of the business because the costs have been cut down. Thus, those who supposed the move knew that businesses organizations would benefit a lot from them a decision. Secondly, Britain joining EMU, it should make this union be stronger and resilient than the exchange rate mechanisms hence, the union would not be vulnerable to speculative attacks. In a situation where each country has its on currency, there is a high degree of speculation by the investors; they fear investing in various sectors because of the uncertainty of the currency. However, when many countries come together and adopt one currency, this eliminates the speculator aspects of the investors. The investors just invest confidently knowing that the currency being used is stable and they would benefit from the investments they are doing. This implies that the proponents of joining the union were sure that investment would increase automatically if Britain could join the union because the investors would not have any doubt about the fluctuation of the currencies. The third reason why the proponents wanted Britain to join EMU is that the European central bank would be able to focus solely on economic conditions across the community since it will have less volatile interest rate than the other central banks. The monetary policy attached to the European central bank will make Euro be a strong currency hence; allowing lower interests rates than the rate that is experienced in the UK. When the interest rate lowers, there is more investment and increase in economic growth. Another reason is that when Britain joins the EMU, the task of ensuring sustained low inflation rate would be in the hands of the independent European central bank. This would also reduce the long-term interest rates and even stimulate competition and growth among the European countries. Britain has successful flexible labor market which would be quite effective in a market that has a single currency. The introduction of a common currency tends to do away with significant barriers to free competition across national borders. In addition, a single currency system tends to promote price transparency; consumers can easily enjoy relative prices of same products in any part of the union. Another reason forwarded by the proponents of this issue is that the large Eurozone will enable the integration of the financial markets which would later on lead to more efficiency in the allocation of the capital in Europe. The adoption of the single currency would enable the United Kingdom to benefit from an increase in the intra-European trade flows and even more capital investment. Moreover, the adoption of the single currency will be of importance to the complement to the single European market; this would fortify the European Union to be a powerful player in the world economy. This would enable UK to participate fully. Another reason given by the supporters of this issue is that one member country cannot devalue its currency against the member state in the quest to boost the competitiveness of its exporters. All member states would work in integration as if they are one state hence no member would involve in selfish motives to benefit while the other members state suffers. Moreover, when UK joins the EMU then the Euro will be among the world’s strongest currencies and most import reserves after the US dollar. They also argue that when Britain does not join the EMU, it stands a chance to lose political and economic influence in shaping the future European economic influence if it insists on remaining outside the union. Opponents of Britain Joining the European monetary union (EMU) One reason given by those opposing the move of UK joining the EMU is that currency unions have collapsed in the past. Therefore, the joining to the union will not help since history may repeat itself. They argue that there is no guarantee that the union would succeed. They assert that members that will discover themselves to be undergoing difficultness due to single currency would withdrawal their membership and thereafter reestablish their independent currency and inflationary monetary policies. They cite an example when Ireland departed from sterling currency and it later on benefited more than it was benefiting the time it was in the union. Another point they put across is that the Euro may lead to economic stagnation and even cause higher structural unemployment in case the independent European central bank employs deflationary monetary policies. Therefore, it is dangerous for UK to join EMU because unemployment rates may rise out of the action of the central bank. The UK has a balanced labor force therefore anything that can distract this balance may cause a terrible unemployment which is one economic problem other countries are struggle g with. Another argument put forward by the opponents of this move is that lack of exchange rate which would come as a result of single currency would remove every effective mechanism for adjusting trade imbalances that would exist between member states. This would cause a big problem of differential shocks of the economies. Past historical records reveal that well-chosen devaluation can easily aid in an economy to move from difficultness. Therefore, they assert that UK should just continue with its currency because a state can no longer stimulate the economy through devaluation of its currency and boosting of the exports. Joining the EMU would lead to a lack of coordination between a European monetary policy that would emerge from a committee of central banks and the European fiscal policy that would come out of the committee of finance ministers. This would weaken further the possibilities of reducing local economic problems. This implies that when UK adopts the Euro as its currency, most of its domestic economic problems would be overlooked by the committee of the central bank and that of the ministries of finance. It is because these committees would tend to focus on bigger issues affecting the general union and neglect the local problems that affect each member state. However, every member state has its own domestic problems that can be taken care of well when they have their own currency system. Another reason for UK joining EMU is that adjusting to new European currency will involve a lot of costs for business firms like Toyota motor and financial institutions. The process of adjusting to economic divergent by transfer of labor or capital will be costly. The EMU has no clear guidelines and commitment to relieving these institutions of these costs. Therefore, they argue that there is no need for UK to join the EMU since it will just trigger extra costly that would harm the economy. Finally, the opponents of this move still explain that it is easy to start a union but sustaining it is a big challenge. At the moment, the EMU tax revenue is only 1.5% of the gross domestic product. This rate is very insufficient to the basis of an effective system of redistributive taxation. It is obvious that there would be differential prosperity among the member states. In the case where there would be differential prosperity within the union, it is not guaranteed that the fortunate member states would allow a greater degree of redistribution to other unfortunate members. This may lead to misunderstanding among the member states and even collapse of the union. When UK joins EMU, then it is likely that the problem faced by Toyota motor European manufacturer (TMEM) would solved. As seen from the case study, the main problem TMEM is facing is that the company is not making sales as other subsidiaries located in other parts of the world. Toyota Europe is incurring regular losses since 2008 while other subsidiaries are making big profits from the sale of their products. The probable cause of this problem is that there is no single currency in Europe. As much as other eleven states have agreed to come together to form a single currency system, other states such as UK and Denmark have not joined this union hence, they are using their own currencies. This causes high exchange rates cost to the business firms such as Toyota. Therefore, the proceeds from the operations are low and this is why Toyota motor Europe is not performing as other subsidiaries around the world. Thus, by joining EMU to adopt one currency system in the whole of Europe, this problem would reduce. However, it would not be eliminated completely because there are other factors making TMEM not to perform well. Short-term and long-term problems facing TMEM There are other problems facing TMEM, some of these problems are long-term and others are short term problems. One of the major problems that have shocked the world about the European made Toyota motors is that there was allegations that over two million Toyota made vehicles in Europe are believed to have been fitted with the faulty mechanism. According to Bolduc (2010; p1) in one of the wall street journal, Toyota motor corporation has been dealing with defective accelerator pedals in Europe right from the year 2008. The company had to recall over two million vehicles to rectify the problem. However, the management insisted that the company would still continue with the production in Europe because the company has already changed its production process that use different components that have solved the raised problem. This is a big scandal that has hit Toyota motors in Europe leading to low sales and high losses. Another problem that face Toyota motors European manufacturer is that the European motor market is quite saturated. This means that there are so many car manufacturers and sellers on this market, therefore, it becomes hard for a company to strategize to make more sales. Other companies manufacture vehicles and serve the consumers at even a lower price a fact that denies Toyota a chance to have a bigger market share. In such saturated market, it is hard for one single company to set the prices of the products because the market share is too mall and when a company tries to manipulate its prices, the customers opt for other companies products. This is a big problem that has made Toyota not to make great sales as other subsidiaries in another region of the world. The third problem close to the above that faces TMEM is that there is intense competition on the European market. Most companies have realized that car manufacturing is a lucrative business, therefore; they do their best to come up with high-quality brands that surpass those of Toyota. Car manufacturing is in the technology industry. It means that firms that would thrive well in this market are those that would always carry out research and innovations to keeping pace with others. The stiff competition Toyota encounters in the European market makes it realize fewer sales and even losses compared to other Toyota subsidiaries in other continents. In addition to the stiff competition, there are other more rivals entering the market making things more difficult for Toyota. Political uncertainty is another main problem facing Toyota motors in the Europe. Europe is made up of many countries. Each country has its own political ideologies and economic capabilities. Some countries are rich and others are poor. The governments of these states have got different policies. Therefore, it is hard for a company that operates in all of these countries to operate smoothly because of various business obstacles that are found in every country. As we have seen earlier, some states agreed to come together and use a single currency while others like UK refused just because f the differences in political ideologies. Thus, business organizations such as Toyota motors find it hard to run their businesses in the regions that exhibit different political policies. This to some extent has affected Toyota motors from performing up to its expectations. In Europe, most states have enacted laws that require all companies to meet the demand of transparency, the responsibility of supply chains, practice greener operation and participation in community development. In simple terms, most European states need a business organization to practice what is known as corporate social responsibility. This is operating a business but taking care of the environment and helping the community around to improve their state of life. Most companies such as Toyota motors find it difficult to practice corporate social responsibility because this practice has its own costs. Therefore, when the profits margins are too small, a company may end up making continuous losses by involving in other nonprofit making practices. Since the European market is quite saturated and has stiff competition, it is obvious the profits margins for the car manufacturers such as Toyota are narrow. Therefore, these companies incur many losses because of the social obligation they have to fulfill. Another problem faced by Toyota in Europe is that its relationship much benefit from the Japanese approach to growth than a typical western view. A Japanese perspective tends to emphasize on the longer-term development of a product brand with a good consistent long-term relationship with the customers. This tends to improve year after year and later on leads to cost overall cost reduction. However, the western or European view is a bit different from that of the Japanese view. The western view is more of short-term and it is affected by the shareholder’s returns. Since TMEM has to adhere to the Toyota motor attributes basing on the Japanese approach, it finds it hard to cope with the different situation in the western countries. Another problem that faces Toyota in the European market is that its suppliers are not sustainable. The company invests a lot in educating suppliers to equip them with the knowledge required during the operations so that they can supply the requirements for a long time. It employs mutual trust with its suppliers thus, it over relies on its trusted suppliers. However, in the European market as discussed earlier, this market is saturated and has tough competition. This means that companies operating in this industry tend to compete with the available suppliers thus, any company that does not offer good terms, make the suppliers opt for other companies. Therefore, the trust and reliability that is a norm with Toyota subsidiary is betrayed. Thus, this company has so many issues with the suppliers in this market. The suppliers cannot be trusted or they are not sustainable because they always look for firms that offer them with good terms. This uncertainty of the suppliers’ behavior contributes to the poor performance of this company in Europe. Measures or solutions to the above problems Toyota must ensure that it gives its suppliers bids that are realistic so that the suppliers can also make profits for them to be sustainable and reliable suppliers. It should check on how other competitors are offering their bids to the potential suppliers so that when negotiating, it also offer such bids with other good goodies that would make the suppliers remain their suppliers for long time. Thus, the company has to build a good relationship with its supplier to ensure a steady supply of raw materials and hence a steady production of vehicles. The second measure Toyota motor should take to reduce its problems in the operation is that it should adjust according to the European short-term perspective so that it can manufacture vehicles according to the demand of the European population. It should not strictly adhere to the principles of the Japanese Toyota in the application in the operations in Europe. It should understand that the marketing environment of Japan is quite different from that of Europe. Therefore, it should try to embrace the European culture so that it can be in a position to compete effectively with European manufacturing that understand the market conditions. Thirdly, this company should invest a lot in research and development to counter the competition that is on the western market. This market is quite competitive in that every firm wants to capture a big market share. They do this by coming up with new and high-quality brands that outdo those of their competitors. Since there are many firms operating in this market, a lot of research and innovations are done which requires that Toyota has also to get down doing its research to remain relevant in this market. Another solution to the problem of faulty parts is that the company must strengthen it quality management departments which test all the manufactured units thoroughly to ascertain whether all of them have the required quality. Faulty units should be retained to be worked on again. It should ensure consistency in the quality of the products. When consumers realize that a company offers consistent quality services, brand loyalty is developed among them. This will make the company make big sales even in future without using a lot of efforts. Loyal customers would always come back for more services and they would always encourage and refer other new customers to come for the products. To boost its sales, Toyota should employ the modern means of advertisement. It should invest a lot in the advertisement of its brands so that the consumers can be able to differentiate its products from those of the competitors. It should use the various social media available, to create more awareness among the consumers to boost its sales. As much as the European market is saturated, some companies have fewer market shares as compared to Toyota. This means that Toyota has financial muscles which it can use to boost its sales through advertisement and product promotion. Another solution that this company should establish is good training centers for its new employees and even provides refresher courses for the existing employees. This would give the employees a chance to learn new ideas hence, boost productivity. Companies that invest in the development of its employees create a long term high productivity. It may seem to be expensive to train the employees, but the benefits that come with this exercise are quite tremendous. Another solution to the problems that Toyota is facing in Europe is that the study the taxation systems and business policies in the European countries. Different countries have their own business policies, therefore; any foreign firm should acquaint itself with these policies to ensure that it adheres to the laws of the land. Moreover, the observation of the taxations policies would help Toyota to set its profit margins and prices for its products. A miscalculation of the profits margins tends to lead to losses. Thus, since Europe is made up of various nations that have different taxations policies, Toyota should be keen with every taxation policy in any country its carries its business. Another solution that can help Toyota in Europe is to study the culture of various consumers on the European market. This would enable it to manufacture the right vehicles needed by the consumers on the market. There is nothing as good as offering consumers with the exact products they want. A satisfied customer would always come for more. Therefore, Toyota should concentrate in manufacturing vehicles that fit the behaviors and preferences of the consumers of this market. Bibliographic references Bailey, M., G.S. Tavlas and M. Ulan (1987) ‘The impact of exchange rate volatility on export growth: some theoretical considerations and empirical results’ Journal of Policy Modeling, 9, pp. 225-243. Bolduc, D. (2010). Europe has faced Toyota’s problem pedal since 2008. Accessed on 15th April 2015. 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