Toyota and the
Changing Car Market
A case of non-price competition
Toyota, the world's third largest car maker, was having a hard time in the mid 1990s. Not only
was it suffering, along with other car manufacturers, from a depressed car market, but it also had
to face a high valued yen, making exporting difficult and domestic sales, with more and cheaper
foreign competition, difficult to achieve.
On top of these external problems, which all Japanese car manufacturers have faced, Toyota
seriously miss-read the market in the early 1990s and failed to develop products customers
wanted, especially in the Japanese market where its share in 1996 fell below 40 per cent for the
first time in 15 years.
Honda by contrast, a third of Toyota's size, and with only 13 per cent of the home market,
saw its market share grow by 20 per cent in 1996 alone. The reasons for this disparity in
performance lies in the fact that Honda was successful in developing 'new' segments within the
car market, and Toyota was not. The new markets in which Toyota got left behind were for offroad vehicles and people carriers or minions, generally known as recreational vehicles. This
segment in Japan now accounts for 30 peer cent of all vehicle sales. It took Toyota 15 to 18
months (which in car product development time is very short) to move into these markets with
the Ipsum and RAVA 4.
Along with launching these new products, Toyota decided to reassert its position in the
more traditional segments of both the Japanese and overseas markets. Many of its current car
models were consequently redesigned and re-marketed.
Question
Toyota's strategy has been one of non-price competition. Why might price competition
prove to be ineffective in helping to restore Toyota's market position?
As well as developing new types of vehicle and relaunching existing ones, Toyota sought to
slash production costs and by-pass the high yen by shifting car production overseas.
Toyota estimates that between 1986 and 1996 it was able to cut production costs by an
average of $920 million a year. It also estimated that by 1998 65 per cent of its overseas sales
would come from local production. This compares with only 48 per cent in 1994.
On top of this cost cutting and shifting of production, Toyota launched an aggressive
advertising campaign, seeking to maintain and strengthen its market position. In September
1996, Toyota was estimated to be spending more than a $1 million a day in marketing its cars,
and was believed to be prepared to spend anything up to $2 billion a year in advertising and
product promotion. Given a 'war chest' of ¥1.18 trillion ($10 billion) – the estimated bank
deposits at Toyota's disposal - the advertising offensive is likely to last for as long as Toyota
wishes it to.
Question
Why is advertising such an important weapon in the car industry?