Toyota’s Faltering China Strategy Threatens To Hurt Its Future Prospects

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Toyota Motor

Japanese auto giant Toyota Motor Corp (NYSE:TM) narrowly kept its position as the global leader in terms of vehicle unit sales in 2014, ahead of German auto maker Volkswagen AG. [1] Toyota sales, including deliveries from its mini-car subsidiary Daihatsu,  and truck making affiliate Hino, rose by 3% in 2014 to reach 10.23 million units, while Volkswagen increased its sales by 4% to reach 10.15 million units sold in 2014. However, for 2015, Toyota expects sales to decline by 1% and fall to 10.15 million units, just 10,000 more units than sold by Volkswagen in 2014. [2]  The company cited the expectation of a 7% fall in deliveries in its native Japan as the major factor behind the downgraded expectations. However, an equally significant factor for Toyota’s fall from the number one position is likely to be its China strategy. Below, we take a closer look at what that entails.

We have a $168 price estimate for Toyota, which is about 25% higher than the current market price.

China Capacity

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A significant factor in Volkswagen’s rapid ascension to the throne of the global leader in vehicle sales has been its performance in China, the world’s largest auto market. The German auto maker is the leader in terms of unit sales in that country.  In 2014, it increased its sales in the country by 12% to reach a record 3.67 million deliveries, further extending its lead. [3]  Furthermore, the company is opening a new factory this year in Changsha. [3] The factory is expected to add a capacity of 300,000 vehicles to the company’s operations in China.((Toyota may lose global sales lead to VW without new China strategy, Automotive News, January 2014)) Volkswagen expects to raise its vehicle capacity in China to more than 4 million by 2018. [3]  U.S. based auto maker General Motors, the holder of the second position for unit sales in China and third worldwide, is planning to add five new factories in China in the same time period.

In contrast, Toyota hasn’t built a single plant in China since 2012 and decided to avoid using its cash reserves for that purpose in 2014, instead opting to buy back shares. The company is unlikely to add to its capacity in China for a year at least. Toyota missed its sales forecast of 1.1 million units in 2014, less than even one-third of the units sold by either Volkswagen or General Motors, even though the company managed to increase its sales in the region by 13% to 1.03 million units on the back of increased sales of the Corolla and the Levin compact. [3] The Japanese auto maker will have to take solace in the fact that it is more profitable than both Volkswagen and GM, and is likely to remain so for the next few years. In 2014, Toyota earned a profit of $16.7 billion compared to Volkswagen’s $12.4 billion. [3]

Another problem looming on the horizon for Toyota in China is the potential threat of dealers dropping out of the company’s network. A number of dealers have threatened to drop out of the company’s network citing poor sales and a lack of profits. According to the China Automobile Dealers Association, as many as 10% of the dealers could abandon the brand. [3] Out of a total 523 distributors for Toyota’s vehicles in the country, as many as 95% are losing money. [3] A number of dealers have already either stopped sales or shutdown already because of the losses, as well as a tough economic environment, which saw vehicle sales slowing in tandem with the country’s slowest economic growth in 24 years.

See our complete analysis for Toyota Motors here

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Notes:
  1. Toyota keeps top spot despite strong VW challenge, Automotive News, January 2015 []
  2. Toyota gives first forecast for shrinking sales in at least 15 years, Reuters, January 2015 []
  3. Toyota may lose global sales lead to VW without new China strategy, Automotive News, January 2014 [] [] [] [] [] [] []