Macro and Micro Economics: Toyota Motor Corporation - Research Paper Example

? Macro and Micro Economics Analysis Business Background Toyota Motor Corporation is one of the leading multinational automaker Headquartered in Aichi. The type of business that Toyota practices is manufacturing and the organization is conducting its business practices within the automotive industry. The organization produces Automobiles, Engines, Commercial Vehicles and motorcycles. Toyota operates in global market and the demand of every products of Toyota is highly recognized in international market place. The study will reveal the Microeconomics and Macroeconomics aspects of Toyota Camry in Indian Market. Toyota Camry is one of the popular cars that are being manufactured by Toyota. The car is available in global market in two classes, such as Narrow-Body; Compact class and Wide-Body; Mid-Size class. The car under these segments has achieved huge fame since its establishment in the year 1982. Indian car industry is very much potential and year after year the demand of cars is increasing significantly. The target audience of Toyota Camry in Indian market is the people who are highly educated and enjoys high living standard. Both men and women over 30 years of age are the key target consumer of this particular product. Indian automotive and car market is highly potential and competitive enough. Maruti Suzuki, Hyundai Motors, Tata Motors, Ford Motors and Mahindra and Mahindra are the major competitors of Toyota in Indian market (Kotler, 2009). Maruti Suzuki is the leading player within the Indian Vehicle industry according to the market share figure 2010 (Figure 1). Microeconomics Market Mechanism: Demand and Supply Considering the market mechanism in India, historical facts help us to understand the Indian market. India started manufacturing automobile after 1947. Before Independence in the times of 1920, the Maharajas possessed cars especially of Rolls Royce as their status symbols. With time after independence, the need for a people’s car evolved and the middle class families also started to own cars. Initially the indigenous automobile companies captured the majority of market share but with the liberalization in government policies, the foreign automobile giants like Toyota started to invest in the Indian market. For launch of Toyota Camry, Toyota can look at the positive indicators of Indian market which indicates that the Indian car market is the fourth largest in the continent of Asia and stands out as the fifth largest manufacturer of commercial vehicles. The price elasticity of demand and supply in the Indian market are the key factors that Toyota would need to consider before the launch of Toyota Camry. It is to be kept in mind that the cars in India are considered as a luxury product. Also the Indian market consists of consumers ranging from lower class to lower middle class to middle class to upper class. Thus various sections of the society according to their levels of income make the Indian car market a mixed bag. Thus the price of cars in Indian car market is a significant factor as market responses largely vary with respect to changes in the car price. With unit changes in price of the cars, the demand of the cars in India would decrease and the supply of cars in India would fall. Thus the price elasticity of demand and supply for cars in India is greater than 1 showing the demand and supply id highly elastic with respect to price of cars in India. Also the rise in price of related goods of car like petrol, diesel also affects the demand and supply of cars in India. Thus the factor of cross-elasticity of indirect goods like petrol is also present in the Indian car market. The income elasticity on demand and supply in the Indian car market also needs to be considered for the launch of Toyota Camry. The factors of production for Toyota Camry with respect to its launch in the Indian market include an analysis of the demand and supply of the car market in India. The Indian car market was de-licensed in 1991 with the gates in automobile sector opened for 100% investment by the foreign investors or FDI. This policy by the Indian government has witnessed several automobile giants in the world like Toyota setting up their offices in India which took the production of cars from 2 million in 1991 to 9.7 million in 2006. The increase in purchasing power of people backed by a strong growth in the Indian economy in the last few years attracted investment from foreign investors like Toyota. Also factors like market linked exchange rates and presence of trained workers at competitive cost led to increase in production by Toyota in India. This pull factor in the Indian market followed by cut throat competition in US and Japan led to increase in expansion of Toyota’s car market in India (Schotter, 2008). The increasing trend in the supply of Toyota cars to meet the increasing market demand can be understood from the above graphical representation. The launch of Toyota Camry has been envisaged by the company looking at the increasing demand for sophisticated and technologically advanced cars in the Indian market. Toyota Corp. operates from its two plants based at Bangalore and is catering to the huge demand in the automobile sector in India. Toyota planned to increase its supply of cars from 210000 to 310000 units to meet the market demands of sophisticated, stylish and advanced technology cars in India. Apart from its existing models and imported models, the launch of the new Toyota Camry in India is expected to increase its production capacity and will add to its existing list of cars on high demand in India (Hall & Lieberman, 2009). Government Policy: Taxation The factors of production of Toyota Camry for its launch in India take into consideration the policies of the government on account of taxation. The automobile sector in India has witnessed sale of more than one million cars in India and also recorded a rise in the exports. The government has framed its policies in such a way so as to support the production of cars in India. From the time of liberalization in India, the government has adopted fiscal measures like tax reforms and reliefs to foreign investors like Toyota that boosted their production capacities in India. The government also reduced a percentage of tariffs on the export of cars and brought in regulations for equity reforms and foreign exchange. All these policies of the government have created a favorable environment for Toyota. Toyota could reap benefits from these policies of the government which are essential to considered for the production and launch of Toyota Camry in India. Looking at the fact that the automobile sector contributes to the growth of GDP in India, the government has also proposed a one-stop clearance of any foreign investment proposal. Concession in import duties and exemption of tax on export profits to the extent of 100% would greatly favor Toyota’s Endeavour of launch of Toyota Camry in India. The Indian government has also urged the state governments to provide the automakers with continuous supply of electricity and also allocating preferred areas of land for their production process. Negative Externality The production and launch of Toyota Camry has to take into account the negative externalities associated with the production of Toyota Camry. Launch of Toyota Camry in the Indian market has to consider the environmental issues and the green policies of the government. The Indian government has policies of promoting automobiles that run on alternate sources of energy. The exhaust and emission system of Toyota Camry consists of accessories that provides for arrangements in order reduce harmful emissions to the environments and reducing the ill-effects of emission. Thus production of Toyota Camry should take the negative externalities into account for its launch in the Indian market. Special quality control checks should be applied in Toyota Camry in order to avoid negative externalities in terms of recalling the units for repair as done by Toyota before (Domansky, 2006). Market Structure: Monopolistic market The market structure in India is monopolistic. This means that apart from Toyota, there are several other automakers which are expanding their activities in looking at the market demand. The companies investing for production of cars in the Indian market are homogeneous but the buyers or the people of India are heterogeneous that various sections of the population have varying needs. The market is monopolistic because the products of the companies like Toyota, Suzuki, etc. can be differentiated according to the different needs of various sections of the population depending on their income levels, demographics, etc but the products which include the cars like Toyota Camry and its accessories could not be substituted with other models. Thus Toyota Camry would need to focus on its unique features powerful body built, stylish exterior, increased performance efficiency, extremely responsive handling, more inside space, advanced safety, availability of multi-media navigation centre, features of fuel economy and use of advanced technology makes it highly impossible to substitute in the monopolistic Indian market. For launch of Toyota Camry, Toyota would need to incur a high start up cost for market penetration but has the option of leveraging on its brand name. Cost Structure Analysis A cost structure analysis for launch of Toyota Camry is given below. The cost structure analysis takes into consideration the fixed cost and variable cost components of the total cost of production. An average value of the cost components along with a marginal cost has been enclosed. For launch of Toyota Camry, the company should consider the cost components of various ancillary parts that are manufactured and assembled in the factory for producing the cars to its customers. The total cost of the Toyota Camry can be classified under general heads as given below. The cost components of the chassis comprising of the body of the car, engine, comfort fitting, suspension systems, ignition and exhaust systems, transmission systems, interiors, steering, brakes, glass and other related costs together would make up the cost of the car. A cost structure analysis shows that the cost of the body, engine and comfort fittings would together constitute 45% of the cost of the car. For manufacturing the suspension, ignition, exhaust and transmission systems, 24% of the cost of the car is allocated. The remaining 31% cost is allocated to the manufacture and fitting of interiors, brakes, glasses and other related components for manufacturing the car. Total Cost, Fixed Cost, Variable Cost The Toyota Camry in India is priced at INR 24 lacs thus targeting a high-income group market segment. This price has been fixed after consideration of profit margin on the total cost of production. The total cost can be divided into fixed cost which does not change with the increasing levels of production of Toyota Camry cars. The variable part increases with the increase in production of Toyota Camry cars. The fixed cost for the production of Toyota Camry involves the cost of inputs like the cost of premises, plant and factory, fixed assets or equipments required in the production process. The variable costs on the other hand includes cost of its accessories, cost of labor wages and cost for supply of utilities like electricity, processing plants, etc (Stewart, 1991). Cost Components Fixed Cost components Plant   Machinery   Fixed assets   Equipments Variable cost components Accessories   Wages   Utilities like electricity, water, advertisements, promotions, etc. Average Cost, Average Variable Cost, Average Fixed Cost, Marginal Cost The average cost for production of Toyota Camry may be obtained by dividing the total cost of production and launch of Toyota Camry by the number of units of Toyota Camry manufactured. The average fixed cost of Toyota Camry would decrease as the production capacity is increased by Toyota. Since the investment in fixed assets and equipments as well as plant and machinery has been done by Toyota looking at the future scale of production, the investment in fixed cost are widely distributed. Due to this reason the average variable cost would tend to decline for the initial increase in the production levels following the economies of scales. However, after a certain point of production capacity for Toyota Camry, the average variable cost of production of Toyota Camry would start to increase. The cost of Toyota Camry would also include the Marginal cost as shown in the above graph by MC. The marginal cost required would be the extra cost incurred for production of extra one unit of production of Toyota Camry. Likely overall cost structure of business based on the cost structure analysis In a monopolistic market, Toyota Camry would have to focus on its unique selling propositions like advanced safety, increased space, strong body built, stylish outlook, etc to capture the market which has offers no scope of substitution. Thu initial stages would involve low levels of production of Toyota Camry and the company would invest more in the factory establishments, equipments and fixed assets. Thus the fixed cost is likely to be higher at the time of launch of Toyota Camry and the variable cost would gradually increase after the market demand for the model picks up in the market. Thus in the later stages the variable cost would surpass the fixed cost component of Toyota Camry. The average fixed cost of Toyota Camry would decrease with time and the average variable cost of Toyota Camry would increase with the increase in the production units of Toyota Camry. The optimal size of the firm would be reached when the company recovers its fixed cost on the production of Toyota Camry and the total revenues earned from the investment matches with the total of the fixed cost and the variable cost thereby producing a breakeven point. The optimal size however depends on the positioning of Toyota Camry in the Indian market and the demand that the market generates for this model. The supply of Toyota Camry in order to meet the market demands would determine the size of the firm which may range from small to medium or large size. Macroeconomics Political Stability and Government Interventions India is politically sensitive country. In India, there are existence of several political parties with different value and ideologies. Therefore, it is not an easy task for an automobile firm to enter India and do business practices smoothly. The major concern is the availability of land in terms of automobile business in India. Toyota should consciously set up their factory for Camry in India according to the rules and regulation. Firstly they should apply for a land to Land Bank and after that they should be eligible for setting up the factory. After 1947, India was highly dependent on its agriculture. The India China war in 1962 and India Pakistan War in 1965 had resulted economic distress. In 1991, when the economy of India was ready to collapse, the government of India adopted globalization. India had invited several foreign investors in the country in order to overcome the difficult economical scenario. Since then, is feasible that government has the tendency to influence the foreign players from different industries. Toyota is a renowned brand name in India within the automobile industry. Toyota has entered in India in the year 1997. They have joined with Kirlosker private limited and started a joint venture business. Since then, the quality of cars and effective customer services has created the success story for Toyota Kirloskar Motor PVT. LTD. India. Therefore, it is feasible that government of India have always supported the foreign automobile organizations as they play an important role in the Country’s GDP. Since 2002 or 2003 people around the globe started to became more environment conscious. They started to reduce the consumption of in order to reduce the environment pollution level. Same thing happened in India. Moreover, government and environment department has implemented several laws and regulations. Therefore, it was difficult for the organizations to do business practices. Random hike in fuel price has forced the Indians to stop the consumption of cars and private transport options. Last but not the least the global recession and European Financial crisis has affected the global economy. Presently, India has a high and fluctuating inflation rate. In order to reduce the market liquidity Indian Government has increased the interest rate and road tax. Therefore, now the Indians are tending to save more money rather than purchasing a car. These economic and political uncertainties can be a threat factor for Toyota Camry. The organization needs to introduce fuel efficient, reasonable priced diesel cars in order to achieve impressive market shares through its vehicle. Economic Growth: GDP The GDP of India has increased by 4.50 percent in the fourth quarter of the year 2012 comparing to the same quarter in 2012 (Figure 2). Over the last 10 years the economy of India has been achieving impressive growth, while the other developing countries have got affected due to the global recession and financial crisis. Percentage change in total output without considering inflation rate indicates the real GDP of a country. Consequently the price is constant. It is feasible that GDP growth is a positive indicator of India’s promising future economy. The prime reason of this GDP growth is the increase of aggregate demand. The automobile industry is becoming very much potential in India and contributing a major role in country’s GDP. Toyota has significantly contributed in the India’s GDP growth since last 10 years. Moreover, the population of India is growing rapidly; therefore the positive growth of country’s GDP is an important factor. If the GDP does not grow positively along with the population growth then it may create a high demand and low supply scenario in India. Moreover, it may result market shortage or market failure. Therefore, Toyota needs to keep increasing its production capacity in order to balance the GDP growth and population growth of India. These will significantly increase the GDP per capita. They need to produce sufficient number of Toyota Camry cars in order to optimize the balance of aggregate demand and supply. It is evidenced that, if the output is being enjoyed by the individuals, quality of life can be maximized. Inflation Rate It is feasible that India inflation rate has decreased constantly since January 2012. In between July 2012 and January 2013 the inflation rate has increased 8.07 percent and again it came down since from the starting of 2013 (Figure 3). The Ministry of Commerce and Industries have estimated that the inflation rate will grew up to 7 percent in 2013. However, the inflation will always have a negative impact on the car industry. Due to inflation the cost of raw materials increases. The organization is used to outsource the raw materials from several countries (Etro, 2009). For an example, Toyota in India used to outsource engines from Japan, Seats and Accessories from Bangladesh. As Toyota Camry is a luxurious product, therefore, it has an elastic demand. As a result, it can be state that higher inflation rate may increase the price of luxurious products and it may affect and would reduce the profit margin of Toyota Camry in India. But fortunately, it is feasible that the rapid population growth and controlled inflation rate may not affect the organization heavily. Toyota Camry may maximize its revenue by the escalation of its number of output. In this way the organization can reduce the threat of increasing inflation rate. India is the second largest population in the world. Growing per capita income and high disposable income of middle class and upper middle class people will force the organization to produce more number of products. Unemployment Rate Unemployment rate in India has reduced to 3.80 percent in the year 2012 from 9.40 percent comparing to the year 2010. The unemployment rate can be defined as the number of individuals who are actively looking for a job divided by the labor force (Figure 4). As the unemployment rate is decreasing Indian economy is becoming highly productive and gaining the ability to produce more number of outputs (Bureau of labor Statistics, 2013). Moreover, due to high productivity India can achieve higher GDP growth. The Indian Currency (INR) will become strong in global perspective if the nation attains Higher GDP growth. It will motivate the foreign investors to enter in Indian market to do business practices. The Indian market will become one of the strongest potential automobile markets in worldwide. Therefore, it can be said that, Toyota Camry will be sustainable and stabilized if it will do business practices significantly in Indian market. Monetary Policy Interest rates and Exchange Rates come under the monetary policy. These two factors can impact on the output and growth of Toyota Camry. Interest Rate The benchmark interest rate was measured at 7.50 percent at the end of January 2013 (Figure 5). Reserve Bank of India used to report the interest rate of this country. Historically, from the year 2000 to the year 2013, the interest rate of India averaged 6.56 percent. In the year 2009 the interest rate was recorded at 4.25 percent which a record low percentage comparing to the other years in history. Hence, lower interest rate will surely benefit the Toyota Camry as it will significantly cut the expenditure in order to pay back the loan. Therefore, it can be said that the organization may earn more profit. It is feasible that, after 2009 the interest rate in India has been fluctuating. It may create depression for any kind of organization. Although several problems may arise, but Toyota can be benefited by this as it will reduce the competition in market as several new global players may not get encouraged in order to enter in the Indian market. Therefore, it can be said that higher and fluctuating interest rate may not be beneficial but not at all harmful as well. Exchange Rate Another monetary policy, which has a significant impact on the business of Toyota Camry, is known as the Exchange rate. INR is the currency of India. The comparison between USD and INR has been structured in this study. Exchange rate matters when Toyota used to outsource its resources and raw materials from the foreign countries in order to manufacture its luxurious Camry car. It has been identified that over the last two years the value of INR against USD has decreased significantly. The rate is progressively increasing from the end of the year 2010. The fluctuation and increase in Exchange rate may create problem for Toyota Camry depending on the currency that is being used for transaction. In order to maximize the profit margin, the INR needs to increase its value. Therefore, government of India need to consider and the RBI needs to control this factor. Now in the year 2013, I USD stands for 54 INR (Figure 6). If a Toyota Camry priced in India 20, 00,000 INR including all taxes, in US it will price almost 38,000 USD. Therefore, India has to pay more in order to outsource its resources from foreign countries. In terms of Exporting, after the recession and financial crisis the value of USD and Euros get decreased. Therefore, exporting of things to another country was not profit making at all as the value of USD has failed. In order to achieve huge strong foreign currency, the global economy needs to be stabilized and exporting currency need to be strong enough. Fiscal Policy The impact of fiscal policy on the Indian automobile industry can be explained with the explanation of tax rate (Paul, 2006). The fiscal policy has a significant impact on the production and pricing of cars. Government used to increase road tax, insurance tax for car in order to reduce the liquidity in market (Mankiw, 2011). From the year 2006 to 2010 India was facing a high inflation rate due to high market liquidity. In order to reduce the threat, government of India has increased the tax rate. As a result, due to high interest rate, people will look to save more rather than expending. If the fiscal policy such as the interest and road taxes is increased massively, it may significantly affect the automobile industry. If the interest rate and road tax increased massively, then the price of cars will increase automatically. Therefore, based on the law of demand, the demand of Toyota Camry may be deteriorated as it is a luxurious product and has a high elastic demand and the organization will be failed to generate more revenue. Therefore, the consumption of such kind of products will automatically decrease. References Bureau of labor Statistics, (2013). Economy at a glance. Retrieved From: http://data.bls.gov/timeseries/LNS14000000?data_tool=XGtable. Domansky, L. R. (2006). Automobile Industry: Current Issues. New York: Nova Publishers. Etro, F. (2009). Endogenous Market structure and the Macro Economy. New York: Springer. Hall, R. E. & Lieberman, M. (2009). Microeconomics: Principles & Applications. Stamford: Cengage Learning. Kotler, P. (2009). Marketing Management. New Delhi: Pearson Education India. Mankiw, G. (2011). Principles of Economics. Stamford: Cengage Learning. Marshall, A. ( 2006). Principles of Economics. Washington: Osprey Learning. Paul, J. (2006). Business Environment. New Delhi: Tata McGraw-Hill Education. Schotter, A. (2008). Microeconomics: A Modern Approach. Stamford: Cengage Learning. Stewart, R. D. (1991). Cost Estimating. New Jersey: John Wiley & Sons. Appendix Figure 1: Market Shares of Key Players in the Indian Automobile Market Figure 2: India GDP Growth Figure 3: India Inflation Rate Figure 4: India Unemployment Rate Figure 5: India Interest Rate Figure 6: India Exchange Rate (INR-USD) Read More