Risk Assessment of Toyota USA - Case Study Example

Risk Assessment report on (Toyota USA) Toyota in the USA is widely known because of its business, innovation, and its manufacturing prowess ties. It is difficult to maintain and manage a global supply chain. Planning for an automated, comprehensive and exception based risk assessment is not an easy thing for the company. Despite the high rates of growth in Toyota Company, there are risk issues that need to be addressed. Executive summary…………………………………………….3 Introduction…………………………………………………….3 Product Development Risks……………………………………3 Competition risks……………………………………………….4 The volatile industry risk……………………………………….4 Future success risk………………………………………………5 Market risks…………………………………………………….7 Economic Risks………………………………………………..9 Regulatory and natural disasters……………………………….10 Conclusion………………………………………………….,….12 Works cited……………………………………………………14 Executive Summary Toyota Company USA is considered as the best automaker in the world. It sells more cars compared to other competitors and has gone to the extent of surpassing general motors’ at one time. It is one of the highest ranked car companies in the entire world in terms of global brands. Even when sales are low Toyota in the United States sold almost 1.8 million vehicles, thus the company is able to make 16.7% share in the market. Toyota Being the third largest car manufacturer in the world, it has been known as the most efficient. The main business segments include automotive and financial services. The automotive segment can account for at least 90% of the revenue in Toyota and almost 96 percent of Toyota’s operating income. The manufacturing, product development and vendor management practices of Toyota Company are known to be the best. Introduction This risk assessment was carried out on Toyota Company in the USA to find out on the risks that face the company during production, selling and distribution. Toyota USA is faced with major risks that can affect the profitability of the operations. Factors such as vehicle sales volume, marketing costs, sales incentives, and price discounts, the vehicle models and the options that are sold, customer warranty claims or customer satisfaction actions, cost of research and other costs, production capacity, changes in the value of currencies used in Toyota business, intensified competition, and regulation issues. Product Development Risks In Toyota company product development can be highly capital intensive. In any automobile industry, this has been experienced. The automakers are faced with the challenge of making new models from time to time to stay up to standards. The automakers are supposed to standardize the core product through creating a platform on which, they can build feature. Toyota can be said to be the pioneer in product development that is lean. A philosophy where a company is supposed to come up with a development process that comes up with new products using minimum resources. Competition risks According to Toyota Motor Corporation SWOT Analysis 10, the automotive market worldwide is very competitive. Thus, Toyota faces high competition from other automotive manufacturers. Even when the economy is globally recovering, the automotive industry faces very high competition especially with the existing difficult market conditions. The competition has the likelihood of intensifying for the continued globalization of the automotive industry since reorganization of the industry is a possibility. Factors that affect competition include product features and quality, reliability, safety, fuel economy, financing terms, development, customer service, pricing, and the time required in innovation. When competition increases, there is a possibility of low vehicle unit sales that in turn can result to downward price pressure. Toyota’s financial conditions and operations can easily be affected by competition. It is important that Toyota is able to respond to the changes that are rapidly taking place in the market so that it can maintain its market share. It is not assured that despite its growth, Toyota will be able to maintain competition in the future. The volatile industry risk The market in which Toyota competes is very volatile in terms of demand. The demand of vehicles highly depends on the social, political, and the economic conditions of the market. The introduction of new technology and new vehicles also has an effect. Toyota’s revenues are derived from the sales gained worldwide and thus the economic conditions are very important to Toyota. For example, in the fiscal year 2010, the government made efforts to stimulate the demand in USA and it resulted to an upward trend in economic recovery. However, the market conditions remained very difficult in the area, Toyota was affected highly because of the changes in market structure and several shifts in consumer demands, and low priced vehicles. The weakness in demand for automobiles and changes in market structure have continued and it is not even clear how the transition will be in the future. It is possible for the financial conditions and operations in Toyota to be affected with weakness in demand and if there are changes in the market structure. Demand can be affected by factors that affect the prices of vehicles or the costs of operating or purchasing the vehicles like financing and sales incentives, raw materials prices, prices of parts and components, and the cost of fuel and government regulations. Volatile demand leads to low vehicle unit sales resulting to negative effects on Toyota’s financial conditions. Future success risks The future of Toyota is dependent on its ability to offer competitive products that meet the needs of the customers on timely basis. It is important that automotives such as Toyota meet the demands of the customer through introducing new vehicles that are attractive and by reducing the time that is required for developing products. Toyota has to meet the customer needs in terms of safety, reliability, and quality. Though Toyota is successful in perceiving the customer preferences and demand, it is not an assurance that it is capable of developing or manufacturing competitive products in a manner that is timely using the available technology, property, raw material sources, parts and components, production capacity and cost reduction capacity. In addition, it is not assured that Toyota is capable of implementing capital expenditures at levels planned by management. Toyota can easily experience low market share and low volumes of sales from inability to develop or offer products that meet the preferences of the customers and their demands. The quality, safety, reliability, and styling are some of the factors that meet the customers’ preferences and demands. In return, Toyota’s financial condition can easily be affected and the operations become difficult to carry out normally. The ability to market sales and distribute them effectively is an integral part of ensuring future success of the Toyota Company. The ability to market and distribute the vehicles effectively is dependent on the distribution networks that are put in place and the sales techniques that are used in relation to the customer needs. There is no assurance that the Toyota Company has the capability to develop sales techniques and networks that can effectively adapt to customer preferences changes or changes within the regulatory environment in the markets that it operates. If Toyota is not able to maintain sale techniques that are well developed and good distribution networks, then it may result to decrease in sales and the market share can affect the financial conditions and the operational results. Toyota’s future success is also dependent on how well it is able to maintain and develop its brand image. It is very difficult to maintain and develop a brand image in the automotive industry. For Toyota to maintain its brand and image, it needs to increase the confidence of the customers through providing them with products that are safe, and of high quality so that their needs and demands are met. Incase Toyota fails to maintain or develop its brand image then it is not in a position to provide high quality and safe products then the vehicle sale units will decrease and the revenue and profits might decrease or not increase as it is desired thus affecting the financial conditions of the company and the operations. According to Company Spotlight 9, Future success is also dependant on how the suppliers are constant in provision of parts, raw materials and other components. Toyota highly relies on suppliers from different parts of the world on supply of raw materials, parts, and other components. Some of the supplies that Toyota requires, there are a limited number of suppliers or in some cases a single supplier. Therefore, replacement of these suppliers is very difficult. If Toyota Company is at one, time not able to obtain its supplies from a limited supplier than the results might be restriction on the company’s ability to produce vehicles. Even if Toyota relied on a large number of suppliers, the first-tier suppliers could in turn rely on single second –tier supplier. The ability of Toyota to obtain supplies from suppliers in a cost effective and timely manner is subject to different factors that are not within the control of Toyota Company. Such factors are such as the ability of suppliers to ensure continued source of supply, and the ability of Toyota to compete and get competitive prices from the suppliers. In case of loss of single suppliers, limited source suppliers, or not being able to obtain supplies in a manner that is timely and cost effective, leads to increased costs , delays, and suspensions in deliveries that in turn can adversely affect the financial conditions and the operations of Toyota company. Future success can also be affected because of the competitive nature of the financial services industry. Worldwide, the financial services industry is very competitive. Increased competition within the automobile financing industry leads to decreased margins. The financial services operations are affected by factors such as a decrease in unit sales of the vehicles, increase in value risk because of low vehicle price, increase in the credit losses and high funding costs. If Toyota fails to respond to the changes in automobile financing, then its financial services operations affects the financial conditions and operations of the company. Market Risks Toyota is exposed to many market risks due to changes on foreign currency rates, change in interest rates, and commodity and equity prices. Toyota has entered into derivative financial instrument to manage risks that arise from currency exchange rates as well as the changes in interest rates. The financial instruments used are inclusive of Toyota’s cash equivalents, securities investments, long-term and short-term debts, finance receivables, and other financial instruments. Foreign currency rate risks and Risks on interest rates Toyota Company is faced with currency exposures that are related to buying, financing, and selling in other currencies instead of the local currency in USA. Toyota is often exposed to the risk of foreign currency risk that is related to the earnings of the future and liabilities that are often exposed because of operating cash flows or financial instruments denominated in foreign currencies. In most cases Toyota USA is exposed to foreign currency risks of the Euro. Through using the VALUE at Risk Analysis, it is possible to evaluate the company’s exposure to foreign currency exchange risks. The VAR is used to calculate currency movements in a certain year and then it is estimated using the Monte Carlo simulation and a confidence level is assumed. Through calculating the risk levels, the company in turn is able to tell when the risk is high and when it is low. Toyota is subjected to market risk exposures on interest rates based on finances, investments, and cash management. Toyota has entered into different financial transactions in order to maintain good levels of exposure to interest rates fluctuations and in minimizing the expenses. Sensitivity analyses are presented in carrying out the risk assessment involved in interest rate changes. However, the model assumes that the rates change instantaneously while in reality they are rarely instantaneous. Even though there assets and liabilities they have maturities that are similar, they may not react to the changes in market interest rates. Some interest rates also fluctuate with change on interest rates of the liabilities and assets. Receivables based on finance are not easily susceptible to prepayments with change on interest rates thus Toyota Company does not carry out prepayment risk for the automotive finance receivables (Stephanie 235). Fluctuations in foreign currency are highly felt by Toyota. Toyota’s financial statements are highly affected by foreign currency exchange fluctuations through translation risks as well as the transaction risks. Changes in foreign currency affect Toyota is pricing of the products and material purchased in foreign currency. For example, if the Japanese yen is strengthened against the U.S dollar the operations of Toyota Company can be highly affected. Toyota has a believe that the use of financial instruments like interest rate swaps and increase in localized production has reduced the effects of fluctuations of interest rates and foreign currency exchange rate. Fluctuations in interest rates and foreign exchange rates can affect the financial conditions and operations in Toyota. Economic risks According to Toyota Tsusho Corporation SWOT Analysis 6, Increase in prices of the raw materials and high pressure on the suppliers can affect profits of Toyota negatively. Raw materials used by Toyota in manufacturing products, parts, and components can lead to high production costs. The raw materials are inclusive of steel, metals, alloys, and other plastic parts. High costs of these raw materials can cause low profitability since not all the incurred costs that are passed on to the customers or to the suppliers. Downturn of financial markets can affect the ability of Toyota to raise capital that is required for production. In case the world economy deteriorates, financial institutions and investors face difficulties in provision of capital to the markets at a level that corresponds to their capacity thus, there is the risk that Toyota Company may fail to raise capital under terms they would expect to receive on their creditworthiness. If by any chance, Toyota is not able to raise the capital that is required under given conditions, then the financial condition of Toyota are highly affected (Stephanie 240). Regulatory risks and Natural disasters According to Toyota Motor Corporation SWOT Analysis 5, Toyota Company in the USA is highly affected by the change in regulations, the existing policies, and government actions. The change on regulations in most cases affects the profits that Toyota Company should be enjoying. The laws, policies, and regulations are inclusive of those that affect environmental matters and the safety of vehicles. Frequent changes of the laws and regulations highly affect the cost of vehicles. The automotive industries are under various governmental regulations related to safety of the vehicle, and environmental factors like the emission levels, fuel economy, pollution, and noise. Automotive manufacturers need to implement safety measures like recalls on vehicles that do not comply with the safety standards and governmental regulations. For example, Toyota may decide to implement safety measures such as recalls to reassure its customers of the safety of Toyota vehicles. Most governments impose tariffs and trade barriers, levies, and taxes or exchange controls. Toyota always incurred high costs when complying with the regulations. When Toyota launches products that are meant for, safety measures like recalls, Toyota incurs costs like free repairs costs. New legislation or any changes on the current legislation could subject Toyota to additional expenses. If there, are significant costs related to implementation of safety measures, laws, or governmental regulations, then Toyota’s financial condition and operations can be highly affected. There is a possibility for Toyota to become subject to different legal proceedings with respect to various issues such as product liability and infringement of property. Toyota is subject to legal investigations and proceedings by shareholders and the government. Currently, Toyota is subject to several pending proceedings and investigations. In case of any negative result from any of the proceedings can lead to negative effects on the financial condition and operations of Toyota. Toyota can be affected by instabilities, fuel shortages, social infrastructure, war, terrorism, and strikes. The various risks that are associated with doing business around the world can also affect Toyota. Political and economic instability are in the front line as things that can adversely affect operations in Toyota. Interruption on the n social infrastructure, energy supply, transport systems, communication systems, and other natural hazards can negatively affect Toyota. Such factors can easily stop the production process and cause high volumes of low sales within the company. In addition, if the markets where Toyota gets its materials, parts, and components for manufacture of Toyota products are disrupted then there are delays in operations of Toyota business. Prolonged disruptions on Toyota operations can highly affect the financial condition of the company. Natural disasters can easily affect the economy of Toyota Company. When a disaster such as an earthquake occurs, the entire economy of the country is affected. Earthquakes cause temporary suspension of operations within the company since the social infrastructure is also affected. If the zones affected are around Toyota regions then the supply of energy, transport systems, and communication systems are adversely affected and it is difficult for the operations to continue. Such disasters would affect not only the operations but also the financial conditions of the company at any one given time. The costs that are associated with the damage caused by natural disasters are very high and they could cause high losses in Toyota Company. Conclusion In conclusion, from the discussion above, it is notable that Toyota USA is faced with numerous risk factors that need to be looked out for in daily operations. Toyota, being one of the best automaker in the world requires close monitoring to ensure the risks are mitigated. The risks that Toyota is faced with include competition risks where the competition is very high. High completion can be risky to the business since low sales can cost a business. Natural disasters also are a source of risks that affect the Toyota Company adversely since they touch on the operations of the business. Without operations, Toyota will definitely fail to give the quality products it should give. The automotive industry being volatile is also a risk to Toyota since it has to work out on way in which it can prevent such volatility. Ensuring provision of safe and high quality products is part of the requirements that Toyota should be aiming to meet. Consequently, Toyota is faced with future success risks. It is the aim of every company that in the future it will be successful however, Toyota faces risks that can result to its failure in the future. The market risks can easily bring down Toyota if they are not well handled. Since Toyota is international, it will always face interest rate changes and foreign currency exchange risks that can cause low profits for the business. The regulatory risks should also be avoided to ensure a smooth flow of business in Toyota. Despite all the risks, that Toyota faces it is possible to mitigate them and avoid their occurrence. Works Cited Stephanie Schmitz. "Managing Recalls in a Consumer Product Supply Chain - Root Cause Analysis and Measures to Mitigate Risks." International Journal of Production Research 49.1 (2011): 235-253. "Toyota Tsusho Corporation SWOT Analysis." Toyota Tsusho Corporation SWOT Analysis (2013): 1-9. "Toyota Motor Corporation SWOT Analysis." Toyota Motor Corporation SWOT Analysis (2014): 1-9. "Company Spotlight: Toyota Motor Corporation." Marketwatch: Automotive 12.12 (2012): 9-19 "Toyota Motor Corporation SWOT Analysis." Toyota Motor Corporation SWOT Analysis (2013): 1-11 Read More