Corporate Finance and Research Report: Toyota Motor Company

INTRODUCTION TO COMPANY AND FACTORS AFFECTING OUTLOOK

The Toyota Motor Company is a multinational corporation that is currently traded on the London and Tokyo exchanges. While the Toyota Motor Company was founded in 1934, and officially incorporated in 1937, one of the more significant aspects of its history that most acutely affects its current financial state is a recent scandal regarding safety. In the mid 2010's, the Toyota Motor Company faced a major public relations crisis as the result of faulty accelerators in several lines of automotive products manufactured under both the Toyota and Lexus brands. These issues came to the forefront of the United States public when, in 2009, a California Highway Patrol officer was driving with this family in his Lexus, and called 911 for help, stating that his accelerator was stuck. Emergency personnel were unable to arrive to the uncontrollable Lexus on time, and result was a tragic accident that left the patrolman, his wife, and two children dead. News of this horrific accident immediately went viral on social media, and was highly publicized on the traditional American news media. Besides the terrifying details of the accident, the news gained widespread attention because it contradicted a widely held view among American car buyers that Toyota and Lexus vehicles were some of the safest and most reliable cars on the market.

The effects of the accident and its resultant publicity were disastrous for Toyota. The Japanese automaker was forced to initiate a recall on over 1.5 million cars throughout the world. Within the automotive industry, auto recalls are a rather common occurrence; however, this one gained special attention because it soon came to light that executives at the Toyota Motor Company had been aware of the faulty accelerator issue for several years, but had chosen to do nothing about it, nor to even warn dealerships or new owners about the potential problem (Rajasekera). Even more egregiously, Toyota leadership did nothing to update the design of the cars, and simply continued to manufacture new Toyota and Lexus vehicles to the exact same specifications.

In regards to this recall and product harm crisis, there are two major problems that Toyota leaders must solve, if they are to remain competitive within the global automotive industry. First and foremost, the company must implement stricter quality control measures on production, and resolve to deal with problems as they arise. One of the more abhorrent aspects of the recall scandal is that Toyota leadership was aware of the accelerator problems for several years, but consciously chose to do nothing about cars that had already been manufactured, nor to resolve the issue for future cars. In some respects, this willing malfeasance may have had to do with the financial problems that the Toyota Motor Company faced in the mid 2000's, as a result of the global financial crisis. After the 2008 financial meltdown, global sales of new cars slowed down, for all manufacturers, and Toyota was particularly hard hit. Executive leadership may have felt that to initiate a recall would mean bad publicity for the company, and an even greater reduction in new car sales. Further, leader may have also worried that a manufacturing overhaul may have been too expensive at the time. However, the consequences of doing nothing turned out to be far more expensive for the Toyota Motor Company in the end.

EVA ANALYSIS

In the past five years, the Toyota Motor Company has demonstrated outstanding performance with regards to EVA, in spite of the numerous public relations and leadership problems that it has been experiencing. In the years spanning 2012-2017, the no of shares of common stock outstanding were as follows (all figures in USD): $ 1,573,406,816; $1,584,883,010; $1,583,714,334; $1,583,404,877; and $1,567,997,930.

COMPARABLE RATIOS

Current Ratio: 1.09
Accounts Receivable Turnover: 10.81
Inventory Turnover: 9.52
Total Asset Turnover: 0.57
Debt Ratio: 0.3
Equity Ratio: 0.37
Debt to Equity Ratio: 1.03

Of all of these ratios, the Accounts Receivable Turnover is the most important for both the automotive industry writ large, as well as the Toyota Motor Corporation. This ratio is indicative of the company's ability to issue credit, and collect debts from customers in a feasible manner. As many consumers finance their cars, this is perhaps the most essential ratio for the financial health of Toyota.

GENERAL OUTLOOK FOR TOYOTA MOTOR COMPANY

Overall, the Toyota Motor Company appears to be in excellent financial health; its current assets are strong, and it has a low ratio of debt. Further, the company seems to be determined to deal with the public relations issues that it has faced in recent years, and it has recommitted itself to a high standard of quality and customer service. Additionally, the fact that Toyota is taking a proactive role in the promotion of Lexus vehicles indicates that it is ready to take advantage of the improving United States economy.

A second problem that Toyota leaders face is the resurrection of their global brand and public image. To this end, the Toyota Motor Company has engaged in an extensive publicity campaign to convince the global consumer public of their newfound adherence to principles of corporate social responsibility. When analysing any of the marketing that has been released by the Toyota Motor Company in recent years, it is hard find any advertisement that does not champion the importance of corporate social responsibility. While this may be a sincere effort on the part of the Toyota Motor Company to demonstrate that they have changed their ways for the better, it also comes across as a highly targeted public relations campaign.

As a result of the product recall scandal, as well as the $1.5 billion USD in fines that were levied against the Toyota Motor Company, the company underwent several organizational changes, some of which were successful and others that were not so successful. One of the more successful organizational changes at the Toyota Motor Company has been the implementation of more extensive quality control measures in the manufacturing and production process (Bowen & Zheng 2015). As a result of these new controls, the Toyota Motor Company has been able to avoid further issues with the accelerator, and has not had to initiate any recalls in the years since the conclusion of the scandal. Moreover, the company was also able to identify several problems in the electronic systems of the cars that they were able to catch and resolve before the cars went to market.

As for the other organizational change that was strongly suggested to the Toyota Motor Company, which was to engage in more transparency about their operations and financial records, this has yet to materialize. Indeed, it is a tall order to ask the Japanese multinational automotive conglomerate, which has maintained a culture of secrecy for decades, to suddenly embrace transparency (Rajasekera 2013). For one thing, the Toyota Motor Company is one of the giants in an extremely competitive industry, and the executive leadership at the company may rightfully believe that transparency could mean opening themselves up to predation by their competitors. Additionally, if the organizational culture has grown to embrace an ethic of secrecy, it is almost impossible to change the entire corporate culture in a matter of years.

In reviewing the available literature about the Toyota product-harm crisis, it is apparent that there are several recommendations that can be made to the executive leadership of the Toyota Motor Company. First, it appears that an organizational culture of maintaining high production quotas and increasing profitability, no matter what the human cost, has taken hold at the Toyota Motor Company, and this must be dealt with immediately. As the consequences of the 2011 car recall, as well as the massive fines that were levied against Toyota demonstrate, such a strategy does not pay off in the long term. Further, one of the major strengths of the Toyota brand is that consumers throughout the globe have long considered Toyota and Lexus cars to be some of the most reliable and trustworthy cars on the market (Choi & Chung, 2013). However, as a result of this scandal, global consumer trust has been diminished in the Toyota brand, and it will be quite a while before this trust can be definitively re-established. Thus, the Toyota Motor Company should work to maintain a high standard of organizational ethics at all levels of the company, from the executive chambers in Tokyo to individual dealerships.

A second recommendation for the Toyota Motor Company would be for the company to establish a direct means of communication by which automotive consumers and dealerships can report potential product defects directly to the executive headquarters. Not only will this allow the executive leadership to be made aware of potential manufacturing and engineering defects immediately, but it will also provide a means by which disgruntled consumers can take their complaints directly to the company, rather than making posts on social media about it. In this day and age, companies must do all they can to ensure customers feel comfortable taking their concerns directly to the company.

A recent financial news article makes it clear that Toyota intends to expand its luxury line, Lexus, in the upcoming years to assure its continued buoyancy. Lexus North America was formed in 1990, and is well known for its management of the massive global marketing campaign it undertook in the early 1990's, which was coupled by the manufacturing of a new line of luxury cars within the United States, and succeeded in this endeavour through a skilled use of business leadership, marketing acumen, and a strong organizational culture. As Lexus is the luxury vehicle subsidiary of the Toyota Motor Company, and this fact was well known to the American consumer public in the early 1990's, it was a difficult task for the company to convince the American (and global public) that it was worthwhile to spend upwards of $60,000 USD for a vehicle that much of the public simply regarded as a rebranded version of a Toyota Camry (which tends to cost approximately $27,000 USD). However, Lexus North America succeeded in this endeavour, but only after the conclusion of a global marketing campaign that took several years and cost nearly $30 million USD. Further, the production of Lexus vehicles had to be diligently separated from that of Toyota vehicles, and the company was required to provide a level of customer service that distinguished the brand from its more plebeian "parental vehicles," the Toyota line.

In the 2017 annual report to shareholders, the President of the Toyota Motor Corporation mentions, "To do right by our customers, investors, and other stakeholders, I believe that we must build Toyota into a company that can sustainably grow in any environment. We must manage it so that, like a tree, the Company will grow larger and stronger over time, adding new growth rings year by year so that it can bear abundant fruit in the future." Clearly, Toyota plans to recommit to high standards of customer service, and to more squarely place their organizational focus on long-term objectives, rather than short-term gains.

References

Andrews, A.P., Simon, J., Tian, F. and Zhao, J., 2011. The Toyota crisis: an economic, operational and strategic analysis of the massive recall. Management Research Review, 34(10), pp.1064-1077.

Bowen, S.A. and Zheng, Y., 2015. Auto recall crisis, framing, and ethical response: Toyota's missteps. Public Relations Review, 41(1), pp.40-49.

Choi, J. and Chung, W., 2013. Analysis of the interactive relationship between apology and product involvement in crisis communication: An experimental study on the Toyota recall crisis. Journal of Business and Technical Communication, 27(1), pp.3-31.

Lieberman, M.B., Balasubramanian, N. and Garcia-Castro, R., 2018. Toward a dynamic notion of value creation and appropriation in firms: T he concept and measurement of economic gain. Strategic Management Journal, 39(6), pp.1546-1572.

Rajasekera, J., 2013. CHALLENGES TO TOYOTA CAUSED BY RECALL PROBLEMS, SOCIAL NETWORKS AND DIGITISATION. Asian Academy of Management Journal, 18(1).

Toyota Motor Corporation. (2017, Nov. 15). Toyota Financial Services Announces Partnership with Launch Mobility.

Toyota Motor Corporation. (2018). Annual Report 2017.