CAR INDUSTRY ANALYSIS



CAR INDUSTRY ANALYSIS

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Toyota vs. Honda

By:

Blaire Davidowitz, Greyson Katkaveck, Sara Wall, and Yati Vaghani

Contents

Part I: Describe Two Publicly Traded Business Rivals 3

Total Assets 6

Operational Efficiency 7

Share of Market 7

PART II: OPPORTUNITY 8

PART III: INDUSTRY ANALYSIS 10

Threat of Rivalry 10

Threat of Suppliers 11

Threat of Substitutes 11

Threat of Buyers 12

Threat of New Entry 12

PART IV: STRENGTH ASSESSMENT 15

Works Cited 19

Part I: Describe Two Publicly Traded Business Rivals

1. Toyota and Honda are two publicly traded businesses that compete in the same industry.

a. Both companies are headquartered in Japan. Toyota is located on 1 Toyota-Cho in Toyota City, Japan, while Honda is located on 1-1, 2-ChomeMinami-AoyamaMinato-ku in Tokyo, Japan (Standard).

b. According to Standard and Poor’s, Toyota Motor’s and Honda Motor’s corporate overviews respectively are:

“Toyota the world's largest vehicle manufacturer based on sales and production volume.” They actively use information technology to increase their customer loyalty and company and brand image (Standard).

“Honda Motors is a leading manufacturer of automobiles. The company aims to create value by offering high-end innovative products, establishing advanced customer relations activities, and building a foundation for new business projects (Standard).”

c. According to , Toyota and Honda compete in the Automobile Manufacturing Industry (IBIS).

2. According to the Bureau of Labor Statistics, the automobile manufacturing industry was one of the largest manufacturing industries in 2008. This industry employs over 877,000 individuals in the United States (Bureau). Where in the past there was demand for a quantity of workers, now there is more demand for multi-skilled workers. This means that the automobile manufacturing industry expects its workers to have a wide variety of skills. Companies are hiring fewer employees, however, these employees are better skilled and more capable of performing multiple tasks.

Along with increased demand for a multi-skilled worker, there is an increase in employability for workers with higher technical education. For instance, workers should have a two-year technical degree whereas in the past, education was not a key factor in employability. Additionally, the automobile manufacturing industry is extremely volatile. Because the industry follows economic cycles job increase in business and workers increases in up-swings, and decreases in recessions (Standard).

In the future, this industry can expect to see a large increase in job openings due to a large number of auto workers reaching retirement. In the 1980s business was booming and there was a large increase in the demand for cars called the business boom. The business boom along with the aging baby boomer population will soon retire leaving vacant positions. To fill these jobs the industry will be looking for more highly skilled workers. As the industry progresses automobile manufacturing jobs are expected to shift from the Midwest to the Southeast (Bureau).

3. Over the period of 2006-2011, there have been some obvious trends in strategic and financial ratios for Honda and Toyota. The following graphs depict the trends in return on equity, share price, total assets, operational efficiency, and the share of the industry value.

+ All financial data came from Standard and Poor’s.

Return on Equity

Return on equity (ROE) measures how well a company uses reinvested earnings to generate additional earnings.

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Both companies show an ROE trend with some similarities from 2006 to 2010. In 2006 both companies had fairly strong ROEs with Honda’s being slightly higher. As more customers became concerned with energy efficiency Toyota experienced an increase in revenues from 2006 to 2007, while Honda, late to respond, performs slightly lower. In 2008 when the recession hit, the entire automobile manufacturing industry took a negative hit in revenues and experienced large decreases in ROE. Up until 2010 both companies have been working to stay afloat as the recession subsides. Honda has been more effective at increasing ROE than Toyota (Standard).

Share Price

Share price can demonstrate how a company is performing, or how others perceive a company is performing.

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While Toyota’s share price has been historically higher than Honda’s, it has also been more volatile. In both graphs you can see a decrease in stock price beginning in 2007 and ending in 2009. This can be explained by the recession that hit all businesses, especially this industry. Also, the credit crunch caused an increase in price of materials in 2008 affecting most companies in the automobile manufacturing industry.

Total Assets

Assets are anything capable of being owned. Assets can be tangible or intangible, or can be controlled to produce value. An asset is normally held to have positive economic value.

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As evidenced in these graphs, companies in the automobile industry benefit from access to capital and assets such as maximizing capacity (economies of scale). Having adequate funds also allows for access to the latest available and most efficient technologies in the industry. These graphs have a very similar pattern to each other. Assets increase throughout 2006-2008 as more people buy cars and the huge demand from Toyota for Hybrid cars. As the economy hits a recession, the total assets start to level out because the companies are holding on to the assets that they have, while fewer cars are being sold.

Operational Efficiency

For these companies the inventory turnover ratio (operational efficiency) is used for evaluating sales effectiveness and how fast new inventory is purchased and then resold to customers.

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The operational efficiency, also known as the inventory turnover ratio, is used to determine how fast new inventory can be purchased and then resold to customers. This is an important factor in the auto manufacturing industry. A higher inventory turnover rate is better. Toyota has the highest operational efficiency, allowing them to convert inventory into sales faster than Honda. Higher turnover ratio in 2008 for Toyota can be attributed to the shortage in energy efficient cars. In other words, Toyota was able to sell their cars faster than usual as they were in higher demand.

Share of Market

For the share of industry value, or team is using market share because in this industry, these two rivals compete with very similarly priced products. It should be mentioned that market share drives profitability. Very often, a higher market share means greater economies of scale and a higher rate of return.

[pic] [pic](Washington Post) (The Operations Room)

Honda has experienced a lower market share because it has been less aggressive about vamping production. Instead od producing more automobiles Honda has been hesitant, often waiting to see demand before excess production. This shortage has made the inventory and allocation system of automobiles between Honda and its dealerships less efficient. Toyota’s decrease in market share is contributable to the mass recall issued in 2009. Toyota has had a difficult time regaining market share in light of the defective automobiles.

PART II: OPPORTUNITY

1. According to IBISWorld, this industry is “involved in manufacturing motor vehicle parts and accessories other than engines, engines parts, batteries, tires, bodies and chassis (IBIS )”. How the vehicles are actually made and assembled is not included in this industry definition. Manufacturers like Toyota and Honda normally supply parts to the inventive equipment manufacturers who in turn use the parts to manufacture new automobiles or replace old parts (IBIS).

2. The graph below details the geographic spread of sales from 2010 in regard to revenue generated. Keep in mind that this is right in the recession. Europe (specifically UK, France, and Germany) and North America are the leaders of the geographic market in relation to revenue. This graph shows that most revenue comes from Europe, however, the most cars that are out on the streets and in the sellers’ lots are in the United States, which consists of the 50 states, Canada, and Mexico). Therefore, as far as the highest demand goes, the United States is the leader (IBIS)

Revenue By Area For 2010

|[pic] |[pic] |

| | |

| |  |

| |Region |

| |Percentage |

| | |

| |[pic] |

| |Europe |

| |30.3 |

| | |

| |[pic] |

| |North America |

| |27.5 |

| | |

| |[pic] |

| |North Asia |

| |26.0 |

| | |

| |[pic] |

| |South America |

| |5.9 |

| | |

| |[pic] |

| |South East Asia |

| |4.9 |

| | |

| |[pic] |

| |India & Central Asia |

| |1.9 |

| | |

| |[pic] |

| |Africa & Middle East |

| |1.8 |

| | |

| |[pic] |

| |Oceania |

| |1.7 |

| | |

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(WSJ 2)

The graph above shows the number of vehicles sold (in millions) in the United States from 2009-

2011. We can see that demand in industry is still increasing.

|Cars |17.9 |

|Light-Duty Trucks |22.6 |

|Total SUV/Cross-over |21.9 |

|Total SUV |28.4 |

|Total Cross-over |19.0 |

(WSJ 2)

The graph above shows the percent change in segment totals, year to date for the year from

March 2010- March 2011 for the type of cars sold in the United States. Sales are definitely increasing.

PART III: INDUSTRY ANALYSIS

1. This industry is competitive and has multiple high power threats to profits such as the threat of rivalry, suppliers and buyers. On the other hand, threat of new entry and substitutes are low in this industry.

Threat of Rivalry

Threat of rivalry is high in this industry. The most significant competitive bases are price, quality, efficiency, supply chain integration, industrial relations, types of car manufactured and product innovation, such as development of hybrid vehicles (Thormahlen 22). The car and automobiles manufacturing industry has a moderate market share concentration, with top four firms accounting for 55.6% of industry output in 2011. The next four largest companies are not too far behind. The top eight companies account for 85.3% of industry output. IBISWold expects the market share winners over the next five years to 2016 will be the companies that can most effectively balance affordability, technological advancement and attractive product styling (Thormahlen 20).

Industry profit margins are low compared to other industries, which leads to a highly competitive climate and higher fixed costs (Thormahlen 21). Overall, the industry experiences high material costs, which have been on the rise during the past five years due to an increase in the price of steel. These high costs are partly responsible for the industry’s low profit margins even when demand and economic conditions are favorable (Thormahlen 21). Automakers try not to reduce material costs because it might hurt the quality of product, which is very important in this industry. Every year, there are recalls in this industry due to defects on parts, which in turn can hurt the reputation of companies in the short and long term.

Threat of Suppliers

The threat of suppliers for the automobiles industry is high. Modern production methods, such as just-in-time production, require full and efficient collaboration across the supply chain. By law, automakers must source their components from different companies. Because of this law, competitors in this industry need to have strong relationships with all their vendors in order to ensure the smooth flow of production. An example of this factor is when Toyota had to cut its production by 75% because supply of parts was limited due to the earthquake in Japan (NY Times). Honda also had to cut its production as they work to obtain inventory it needs from parts made in Japan. As they become more global, suppliers have been consolidating. In the process, they have expanded their product offerings and gained economies of scale to keep pricing competitive (Levy 18).

Threat of Substitutes

The threat of substitutes is low in this industry. External competitions come from substitutes like public transportation and bicycles in urban areas for commuting and recreational purposes (Thormahlen 22). The rental car industry has been generally rising, as industry revenues peaked at 19.40 billion in 2000. Another trend in the vehicles rental market is the rise of car-sharing/hourly rental car companies verse the traditional rent-by-the-day or longer services (Levy 12). Used cars could also be another substitute for new cars, which are typically more expensive (Levy 16).

Threat of Buyers

The threat of buyers in the automobile industry is high. Keeping up with product demand trends is an important competitive strategy. When consumers want more fuel-efficient motor vehicles, the automakers that respond to this change in demand the quickest will have a competitive advantage over their competitors (Thormahlen 22). Toyota’s US market share fell from 19.5% to 16.8% as panicked and angry car buyers opted to purchase cars from other companies after Toyota’s enormous recall of eight million vehicles. Consumers still want vehicles that are safe and fun to drive. Demand for latest technology continues to drive growth in automotive electronics (Levy 12). Cars are a major purchase for most families, and consumers need to feel comfortable before they spend so much of their hard-earned money. Safety has captured vehicle buyers’ attention in recent years and has become a pervasive theme in automakers’ ad campaigns (Levy 24). A high level of consumer confidence generally signals that people feel good about the economy, their job prospects, and their future earning ability (Levy 28).

Threat of New Entry

The threat of new entry is low for this industry. The industry is capital intensive, with wages accounting for a low proportion of revenues. Large-scale production requires significant capital to install automated processes (Thormahlen 31). Large capital commitments are required to keep pace with product development and model changeovers. With outsourcing on the rise, some automakers are requiring that their suppliers pick up an increasing share of capital spending (Levy 22). Government regulation is medium with regulations regarding safety; fuel consumption and pollution control (Thormahlen 34).

2. There are two low-power forces, which are the threat of substitutes and the threat of entry. Since there are two low power forces, for a company with no particular strengths or weaknesses on key success factor, the expected profitability will be about equal to the cost of capital. Since financially this industry has higher risk of credit, it is more greatly affected by changes in the economy. If there is an increase in price of raw materials, profit will shrink more, making it hard to maintain market share in the industry.

3. Key Success Factors (KSFs) are “specific resources and activities any competing company must be good at if it is to be profitable in satisfying demand and defending against high-power competitive threats” (Measuring 4). In order to be profitable in the motor vehicle and parts manufacturing industry there are numerous KSFs needed. These KSFs include Inventory Turnover, Economies of Scale, G Star, and Manufacturing Efficiency.

Inventory Turnover is how often inventory is sold and replenished over the course of a normal operating cycle. A high inventory turnover means that a company is selling their products quickly, which in turn brings in more revenue. In order to measure Inventory Turnover the total revenue is divided by the average inventory (Measuring 5).

Another KSF that is beneficial for companies in the motor vehicle and parts manufacturing industry is Economies of Scale. Economies of scale are when business activity chains combine or share resources (Corporate 6), and this is important because it significantly helps companies reduce costs. It can be measured by dividing the costs by the total assets, and the lower the results the better (Measuring 5).

G star is the index of sustainable growth for a company. It is measured by subtracting the dividend payout ratio from one and multiplying the result by the Return on Equity (Measuring 5). If the result is more than the company growth rate, then cash is available to flow to the corporation, but if the result is less than additional financial resources to keep up with the growth so its cash does not flow to the corporation (18).

Finally, the last KSF is Manufacturing Efficiency. In order to measure this KSF cost of goods sold is divided by sales revenue. This is important to success because the more efficiently a motor vehicle and parts manufacturing company can produce, the less time and money is wasted. A lower manufacturing efficiency is sought after in order to attain a profitable outcome (Measuring 5).

4.

|KSF’s |Honda |Toyota |

|Inventory Turnover |6.4 |11.3 |

|(revenue/average inventory on | | |

|balance sheet) | | |

|Economies of scale |.9145 |.62 |

|(costs/total assets) | | |

|G* |9.6 |1.3 |

|((1-Div Payout)*ROE) | | |

|Manufacturing Efficiency |.74 | .84 |

|(cogs/sales revenue) | | |

5. Economies of scale helps protect against the threat of rivalry because economies of scale are an excellent way to cut costs. By combing and sharing resources throughout different business activity chains, companies are able to spend less money on those resources. If a company can cut costs while still providing the same quality service or product then they have an advantage over rival companies in their industry.

Manufacturing efficiency helps protect against the threat of buyers. As companies find new and innovative ways to efficiently manufacture automobiles and automobile parts, buyers are more likely to purchase those products. Buyers are looking for parts that will work with the least amount of problems, so their decision is based on which company can produce the most reliable product

PART IV: STRENGTH ASSESSMENT

1) To assess the strengths of Honda and Toyota, we used the following Key Success Factors.

Inventory Turnover: Because of the expense of excess inventory in Honda and Toyota’s industry, it is important to examine the inventory turnover ratio. Inventory turnover is calculated by dividing revenues by the average inventory on the balance sheet. A higher inventory turnover rate means that the company has been more successful at turning inventory into sales in a given period.

G *(Index of Sustainable Growth): The index of sustainable growth indicates how much access to financial capital a company has. In other words, G* reveals how much a company should be able to grow if they efficiently use all of their resources. A higher G* indicates that a company is more capable of growth in the future. In the Motor Vehicles and Parts Industry to keep up with consumer wants and needs, these companies must be able to invest money into research and development. The Index of Sustainable Growth also supports economies of scale. A company that experiences more growth is better prepared to cut internal costs, thus realizing economies of scale.

Manufacturing Efficiency: Manufacturing Efficiency indicates how efficiently a company is able to complete their manufacturing process. Because of the high costs of materials such as steel, it is important for manufacturers in this industry to efficiently manage the manufacturing process to lower internal costs where possible.

Economies of Scale: Economies of scale demonstrates how well a company has been able to cut down on internal costs, thus allowing for a higher profit. As production increases costs per individual pieces of production tend to decrease. Economies of scale are an important factor because it allows a company to offer a better price to customers without having to give up profit.

Financial data for the calculation of the following key success factors came from Bloomsberg Business Week, Standard and Poor’s NetAdvantage, , Stock Analysis on Net and for the year 2010.

|Key Success Factor |Honda |Toyota |

|Inventory Turnover |6.4 |11.3 |

|(Revenue / Average Inventory on Balance Sheet) | | |

|G *- Index of Sustainable Growth |9.6 |1.3 |

|(1 – Dividend Payout Ratio) * ROE | | |

|Manufacturing Efficiency |.74 |.84 |

|(COGS / Sales Revenue) | | |

|Economies of Scale |.9145 |.62 |

|(Costs / Total Assets) | | |

|Key Success Factor |Honda |Toyota |

|Inventory Turnover |1 |5 |

|G* |5 |1 |

|Manufacturing Efficiency |5 |1 |

|Economies of Scale |1 |5 |

2)

|Key Success Factor |Honda |Toyota |

|Inventory Turnover |1 |5 |

|G* |5 |1 |

|Manufacturing Efficiency |5 |1 |

|Economies of Scale |1 |5 |

|Total |12/4= |12/4 = |

| |3 |3 |

| | | |

3) Upon completion of the strength assessment test, we find that Honda and Toyota are equally poised for success in their industry. Honda performed better on index of sustainable growth and manufacturing efficiency, while Toyota performed better on inventory turnover and economies of scale. Honda’s advantage on the index of sustainable growth suggests that they will be better able to pursue growth, research, and development, allowing them to better meet consumer demand. On the other hand, Toyota’s advantage in inventory turnover suggests that they have been more effective in selling their product than Honda.

Works Cited

1. Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2010-11 Edition, Motor Vehicle and Parts Manufacturing, on the Internet at (visited April 26, 2011 ).

2. "Honda Motor Company, Ltd Income Statement." Stock Analysis On Net. N.p., Jan. 2011. Web. 24 Apr. 2011. .

3.  "Standard & Poor's." Web. 26 Apr. 2011. .

4. "Standard & Poor's." Web. 26 Apr. 2011. .

5. "Toyota's Market Share Plummets - ." The Washington Post: National, World & D.C. Area News and Headlines - The Washington Post. Web. 26 Apr. 2011. .

6. "Global Motor Vehicles Parts and Accessories Manufacturing." IBIS World. N.p., n.d. Web. 26 Apr. 2011. .

7. Lariviere, Mary. "Why Is Honda's Market Share Slipping?" The Operations Room. Wordpress, 7 Dec. 2010. Web. 2 Apr. 2011. .

8. Levy, Efraim. Autos & Auto Parts Industry Surveys. Standard &Poor’s, 23 Dec. 2010. Web. 26 Apr. 2011. .

9. "Auto Sales." Auto Sales. Wall Street Journal, 1 Apr. 2011. Web. 26 Apr. 2011. .

10. Young, Greg. Measuring Performance Using Financial Ratios & Setting Objectives.

North Carolina State University. 2 Feb 2011.

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11. Young, Greg. Corporate Strategy. North Carolina State University. 29 March 2011.



12. Thormahlen, Casey. Car & Automobile Manufacturing in the US. IBISWorld, March 2011. Web. 26 Apr. 2011.

.

13. Bunkley, Nick. "Toyota Plans to Reduce Production for 6 Weeks." The New York Times. Global Business, 19 Apr. 2011. Web. 26 Apr. 2011. .

14. "Toyota Motor Corp." Bloomsberg Businessweek. N.p., 24 Apr. 2011. Web. 24 Apr. 2011. ................
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