Business Internationalization Process of Toyota - Assignment Example

Toyota’s Global Expansion of the of the No. Introduction This essay will implicitly analyze business internationalization process of the second largest automobile company in the world, Toyota Motor Corporation. The company was founded in 1937 and its headquarters lies in Toyota, Aichi, Japan (Kitamura, 2011). Apart from selling different models of automobiles, the company also provides banking, leasing and financing services. The current chairman of the organization is Takeshi Uchiyamada and Akio Toyoda is the CEO (Kitamura, 2011). It has been found that since 2004, the company has changed its corporate level internationalization strategy. Instead of conducting primary manufacturing activities in Japan and exporting to other foreign markets, the company is seeking prospective markets for establishing new foreign manufacturing units. The context of the essay will study different financial and international trading activities of the company. Finally, the essay will determine a lucrative place in North America, where the company would be able to establish a new manufacturing plant. Q1. Why do you think Toyota is expanding so aggressively outside of Japan instead of focusing more on manufacturing in Japan and exporting to other countries? In 1980, major manufacturing activities of Toyota were conducted in its native market, Japan. The company had owned only 11 production units in foreign marketplaces (Ohnsman, 2012). Business internationalization process of the organization was conducted through means of direct exports from Japan (Kitamura, 2011). However, in 2004, it was found that the company sold products over nearly 26 foreign markets by way of contract manufacturing. Under this process, semi-finished automobile parts of the company were exported from Japan and were assembled in these foreign economies by approximately 51 overseas manufacturing organizations (Kitamura, 2011). Although primary production base of the organization is located in Japan, the company is attempting to expand scale of its manufacturing base across other foreign marketplaces. In 2006, the company had announced to manufacture automobiles worth 3.8 million in Japan, but at the same time, had committed to increase foreign output to 6 million. The company had primarily undertaken this decision to protect commercial returns from exchange rate issues. Though Toyota is a multinational organization, yet company’s financial information is reported in terms of the official currency of Japan, Yen. Over time, it is found that the currency value of Japan is evaluating or appreciating in the international market (Kitamura, 2011). This is because growth of the country’s manufacturing segment is higher than that of its service sector. Since job opportunities in Japan are low, the economy experiences low growth in domestic demand for various goods and services. Lower demand is responsible for generating low inflation rates in the country, thereby leading to appreciation of domestic currency. Even so, it should be noted that if currency value of an economy is evaluated, then value of its exports (to the international market) is more than that of imports (in domestic economy). Hence, considering the appreciating value of Yen in international market, exports are becoming expensive and Toyota in turn is facing difficulties to export its produce. As a result, in order to enhance profit in the long run, the company must establish manufacturing plants in foreign markets for selling its products. The company’s profit had trimmed by 120 billion Yen in 2011 for Japan’s currency appreciation (Kitamura, 2011). Moreover, the proportion of aging population in Japan is significantly increasing with time. Potential buyers of new vehicles launched by Toyota are young and middle aged individuals. So, aggregate demand experienced by Toyota in Japan is declining over time. Even so, it should be noted that the Japanese economy is gradually turning sluggish. The government of the country is facing severe economic problems relating to debt burden and deflation. The Japanese economy was severely affected during the global financial crisis. The economy was primarily dependent on exports; as a consequence, aggregate income earned by Japan from exports has declined since the recession in 2008 (Kitamura, 2011). Furthermore, growing competency of Chinese economy is also responsible for diminishing demand for Japan’s electronic goods in international markets. Figure 1: Falling Domestic Demand of Japan (Source: The Economist, 2010) As shown in Figure 1, abovementioned reasons can be attributed for fall in domestic demand for goods and services in the Japanese economy. Figure 2: Increasing Public Debt in Japan (Source: The Economist, 2010) In order to increase domestic supply of money and stimulate domestic demand through expansionary fiscal policies, the proportion of external borrowing made by Japanese government has augmented with time. All such factors indicate falling competitiveness and productivity of Japan. Due to these factors, multinational companies like, Toyota, have decided to expand manufacturing bases across prospective markets, outside Japan (The Economist, 2010). 2. What are the risks it faces in expanding its overseas manufacturing? It is true that Toyota will experience increased profit from business in the long run by expanding manufacturing base in other foreign economies. Nevertheless, business of the firm will be exposed to numerous market risks during this process. Manufacturing process of Toyota is successful in Japan because it shares good relationships with native suppliers. Nippon Denso is a popular raw material supplier of Toyota in Japan. Then again, in new manufacturing markets, the company needs to acquire new suppliers, who would provide superior services as that of Nippon Denso (Ohnsman, 2012). If these new supplying firms fail to deliver raw materials at the time of assembling, Toyota would not be able to provide products to customers at the right time. This would lower brand value of the company in new markets. Furthermore, bargaining power of suppliers in the new markets would be higher to the company. This would enhance cost of manufacturing and lower profit from the sales in foreign markets. The second big challenge to the company will be competition. Automobile companies, like, General Motors, BMW and Mercedes, are potential market competitors of Toyota. For instance, Toyota aims to enhance business scale with the help of its strong financial position. In 2004, the company could finance investments worth $ 30 billion. In the same year, investment made by its biggest rival, General Motors was $ 58.623 billion (The Economist, 2010). So, financial position of several market rivals of Toyota was stronger. These potential rivals can generate barriers for the company in new manufacturing markets. The level of open communication shared by these companies with prominent automobile suppliers can be higher than that of Toyota. Since companies such as, Mercedes, Tesla and BMW, acquire more resources than Toyota, the extent of product, process, marketing and organizational innovations made by former companies would be higher. In addition, brand recognition of Toyota in markets of the U.S. and Germany is less than that of competitors like, General Motors and Tesla. However, monetary information of Toyota is provided in terms of Yen, which is why its financial position is affected by volatility in exchange rates. Since currency value of Japan is appreciating over last few years due to low rates of inflation in its economy, the value of Yen relative to U.S. Dollar is rising. As a result, operating income of Toyota’s manufacturing plants in foreign markets like, the U.S., is falling owing to appreciation of Yen. The company would be able to avoid this challenge if its financial information is represented in terms of Dollars in foreign markets, besides Yen. Thus, cost of raw material procurement and operations incurred by Toyota in foreign markets would be higher than that in Japan. At the same time, if the company decides to expand production base in the U.S., then it would face severe problems relating to high gasoline prices. Gasoline is the widely used North American petrol. Car and petrol shares complementary demand pattern in the market. Figure 3: Car Demand and Gasoline Price Price of Gasoline Demand for automobiles in North America Demand for cars (Source: Author’s Creation) As shown in the above graph, demands for automobiles in North American countries are falling due to rise in price of gasoline. All these factors are potential challenges that Toyota would experience while expanding manufacturing base outside Japan (Woodyard, 2014). 3. Where do you think Toyota should put its next plant in North America and what factors should it consider in making that decision? In 2004, Hiroshi Okuda, the previous chairman of Toyota Motor Corporation, claimed that the company will soon build a new manufacturing plant in North America. Through this expansion, the firm would increase the count of its factories to 14 in the continent. After enactment of the North American Free Trade Agreement (NAFTA) in 1994, most of the products manufactured in U.S. can be freely exported to Canada and Mexico (Hirsch & Undercoffler, 2014). So, it was a highly rational for Toyota to expand business in North America. The most popular manufacturing branches of the company in North America are located in Mississippi, Kentucky, Texas, Indiana, Alabama and Virginia (Hirsch & Undercoffler, 2014). This shows that the company attempts to establish manufacturing plants in prominent states of North America. The company can set up a new manufacturing branch in California, U.S. Toyota sells its products in the market of California through trade dealers. California is a prominent state in U.S. and can be the company’s new manufacturing market (Hirsch & Undercoffler, 2014). Even so, before establishing the manufacturing base in California, the company needs to verify conditions of the business environment. This analysis can be done with the help of PEST model. Political Toyota’s new manufacturing unit in California must strictly abide by norms of Auto Industry Trade Association. The association had once declared that automobile companies in California could only sell electric cars. Such regulations have now been removed with active efforts of Bush administration in 2002. Even so, it should be noted that since 2010, California is trying to develop an electric automobile industry. Hence, the new manufacturing branch of Toyota will be subjected to numerous emission and sustainability related regulations in California. The local government of California aims to enhance job opportunities. Toyota might get additional benefits from political authorities of California while settling up manufacturing units. In this manner, the company would be able to avail the state’s workforce and enhance aggregate employability (Woodyard, 2014). Economical California is the most economically prosperous state of U.S. The gross domestic product of the state was $ 1891361 million in 2009, which was highest among all other states of the country (Woodyard, 2014). So, per capita income level of the individuals residing in California is growing after recovery from recession in 2008. It can be stated that disposable income and discretionary spending power of these individuals are growing with time. Growing domestic productivity of California indicates convenience of conducting business in the state. As a result, economic conditions of California would favourably affect Toyota’s new manufacturing plant. At the same time, it would be able to experience high demand for its product in market. Furthermore, higher demand from Californian market can help the manufacturing unit experience economies of scale in production (Ohnsman, 2014). Social The public, private and household authorities of California are highly conscious about protecting ecological balance of the state. The automobile companies should abide by the clean air rules in California. According to this norm, any car manufactured within 2003 to 2008 should be electric or follow the “zero-emission vehicles” rules in California (Sleeye, 2002). Hence, the manufacturing plant of Toyota in California should follow strict environmental norms. The plant should possess zero landfill facility. Thus, its manufacturing wastes should be reused and recycled in production process, instead of generating wastes in lands. Since the state is socially conscious about environmental protection, such alternations would help in enhancing company’s brand value in California (Sleeye, 2002). Technological The California Civic Innovation Project aims to enhance the state of technology and strengthen related policies between government and local business communities of the state (North America Foundation, 2014). So, at this juncture, when the local government of the country attempts to enhance scope of technology in California, Toyota can obtain additional benefits while establishing its new manufacturing plant in the state. By utilizing the new technologies, it can lower the manufacturing cost. What are some of the major accounting issues that Toyota faces as it expands its global reach? Toyota aims to provide less pricy, fuel efficient cars to customers that strictly abide by all norms of emissions and sustainability. It attempts to expand the scope of internationalization for enhancing commercial profit. However, while broadening global reach, the company is seen to face several accounting issues in trade (Foster, 2011). The company encounters problems in recording the important, but uncertain, events of the external business environment in the accounting system that is followed. For instance, the firm has incurred losses in millions against numerous product recalls from 2009 to 2010. One such incident entailed a fine worth $16.4 million, which was paid by the company to National Highway Traffic Safety Administration (NHTSA) for holding up the recalls of some of the vehicles produced with problems in accelerator (Tabuchi, 2010). At the same time, the company cannot include future warranty costs within its accounts. With rising scale of commercial internationalization, costs and uncertainties relating to such affairs is increasing for Toyota. Moreover, the company cannot easily analyze and provide the costs associated with legislation in international markets. The contingencies and liabilities of the company were incorporated in accounts, according to U.S Generally Accepted Accounting Principles (GAAP) (Tabuchi, 2010). Nonetheless, legal regulatory authorities of U.S. as well as Japan are trying to make companies follow the new integrated accounting rules of International Financial Reporting Standards (IFRS), as opposed to traditional accounting standards such as, U.S. GAAP. Such revolutionary activities in the field of accounts have enhanced complicacies for Toyota’s accounting system in the foreign markets. Since Toyota’s financial information is estimated according to native currency of Yen, it is highly influenced by market uncertainties like, currency fluctuations. The accounting system of Toyota is showing high instability after implementation of the U.S. GAAP. It is also noted that the company faced severe accounting losses worth $ 89 million from its U.S. business arm in 2008 (Tabuchi, 2010). The financial accountants of Toyota in U.S. were found to incorrectly estimate the debt and derivatives value in accounts. The internal control system (that records interest expenses and debts) of Toyota’s accounting framework in U.S. appeared to be very weak and hence, had to be reinstalled (Toyota Global, 2014). From the above analysis, it can be claimed that uncertainty measurement aspects are not accurate within Toyota’s accounting system. Furthermore, after inclusion of U.S. GAAP rules within its accounting network, the company is experiencing high volatility in terms of financial status. The company’s accounting information is provided in terms of Yen, despite following generalized U.S. accounting norms. Therefore, as the value of Yen is becoming stronger in the international market, financial profit and sales value of Toyota is declining across foreign economies (Ohnsman, 2012). What are the pros and cons to Toyota of issuing its financial statements according to U.S. GAAP? Generally Accepted Accounting Principles (GAAP) of U.S. represents a set of accounting rules for companies operating in the U.S. market (Davoren, 2014). Toyota conducts financial accounting activities as per the U.S. GAAP. Nevertheless, it is found that U.S. Securities and Exchange Commission ( SEC) is presently aiming to modify accounting process of the companies operating in U.S. according to the rules established in International Financial Reporting Standards (IFRS) (Davoren, 2014). Despite attempts made by SEC, the shift in accounting system of companies from GAAP to IFRS is extremely slow. Toyota is found to experience advantages as well as disadvantages for applying U.S. GAAP rules within its accounting system. Toyota tries to maintain consistency in the accounting results by adhering to GAAP guidelines. Misrepresentation of accounting information can generate massive problems within a company. GAAP rules helps Toyota facilitate proper accounting representation. Fraudulent activities conducted within operational process of the company can also be detected very easily through GAAP. Over time, utilities and values of Toyota’s stakeholders are increasing (Davoren, 2014). The loyalty of stakeholders towards a firm is greatly dependent on accuracy of its financial reporting. GAAP rules enable Toyota to report financial information in an appropriate manner to the business stakeholders and consequently, augment their faith in the firm. Hence, true and fair financial information about Toyota is facilitated largely with the essence of GAAP norms. The company can truly judge its financial performance with the help of such detailed accounting information. Toyota can correctly forecast scopes of risks, future opportunities and investments by considering such details. If these nationalized standards of accounting were not established, then the profit earned by Toyota could not be easily compared to the surplus of any other automobile company (Davoren, 2014). This is because revenue calculation of each organization is different. Though GAAP accounting norms has provided numerous advantages to Toyota, yet there are few issues that are entailed. The financial information of the company provided on basis of GAAP rules is non-comprehensive and too complicated for an investor’s understanding. The GAAP rules are established only according to the nationalized accounting system of U.S. So, financial information of Toyota is less standardized and integrated in order to correspond with the accounting norms of other nations, apart from U.S. Cross-border takeovers and acquisition related financial estimates also become highly complex for Toyota. These problems are faced by many other companies like, Toyota, which follow the GAAP norms. Perhaps for such problems, Toyota is planning to employ IFRS in the long run, which is a more standardized accounting system, guided by the new regulations of SEC (Amold, 2010). Conclusion Since emergence of globalization in 1990, the extent of trade liberalization has significantly increased. Companies in the contemporary era seek competitive advantages in business by operating on grounds of resource based view theory. Under this regime, organizations attempt to exploit productive resources of business across several international markets after saturation of domestic demand. As a result, business internationalization has become an indispensible aspect of trade in the current epoch. Increasing strength of Yen in the international market has forced Toyota Motor Corporation to suffice its foreign demand by establishing new manufacturing bases in international markets, apart from exporting its produce. Even so, from context of the essay, it is identified that high competition, soaring prices of gasoline, faulty accounting process and low liquidity will create problems for the company in global expansion process. Nevertheless, it is assumed that California can be the place, which is apt for Toyota to establish its production plant. Also, in the long run, accounting related issues faced by the company can be lowered through strict implementation of IFRS (Amold, 2010). References Amold, R. A. (2010). Macroeconomics. Connecticut: Cengage Learning. Davoren, J. (2014). What Are the Benefits of the GAAP?. Retrieved from http://smallbusiness.chron.com/benefits-gaap-59622.html. Foster, W. (2011). Accounting for Toyota Recalls. MSNBC. Retrieved form http://faculty.washington.edu/rbowen/cases/Toyota_Recall_case_April_2011.pdf. Hirsch, J. & Undercoffler, D. (2014). Toyota to move jobs and marketing headquarters from Torrance to Texas. Retrieved from http://www.latimes.com/business/autos/la-fi-toyota-texas-20140428-story.html. Kitamura, M. (2011). Toyota President Says He May Move More Production Outside Japan on Yen. Retrieved from http://www.bloomberg.com/news/2011-01-14/toyota-may-move-more-production-outside-japan-on-yen-update1-.html. North America Foundation. (2014). About the California Civic Innovation Project Retrieved form. http://ccip.newamerica.net/dashboard. Ohnsman, A. (2012, January 8). Toyota Says North America to Become Global Export Base. Bloomberg Buisness Week. Ohnsman, A. (2014). Toyota unveils plan to move U.S. headquarters to Plano; gets $40 million from Texas. Retrieved from http://www.star-telegram.com/2014/04/28/5772575/toyota-plans-to-move-us-sales.html?rh=1. Sleeye, K. Q. (2002, October 10). White House Joins Fight Against Electric Cars. The New York Times. Tabuchi, H. (2010, March 5). Little Help in Japan for Owners of Toyotas With Acceleration Problems. The New York Times. The Economist. (2010). Crisis in Slow Motion. Retrieved from http://www.economist.com/node/15867844. Toyota Global. (2014). North America. Retrieved from http://www.toyota-global.com/company/history_of_toyota/75years/data/automotive_business/sales/activity/north_america/index.html. Woodyard, C. (2014, April 8). Toyota moving U.S. headquarters to Texas. USA Today. Read More