2012 Rivals II A Competitive Analysis of Toyota and Honda This paper will view Honda and Toyota implementing different types of analysis to come to conclusions. These conclusions are used to determine which of the two companies are weaker. The weaker of the two companies will be given suggestions on how to improve the strength of the company. Mike Hollingsworth B 499A 3/24/2012 Table of Contents Introduction .................................................................................................................................................. 2 Analysis ......................................................................................................................................................... 2 SWOT Analysis........................................................................................................................................... 2 Honda .................................................................................................................................................... 2 Toyota ................................................................................................................................................... 3 Financial Analysis ...................................................................................................................................... 5 Conclusions ................................................................................................................................................... 7 Strategic Road Map ....................................................................................................................................... 8 Current Position ........................................................................................................................................ 8 Objective ................................................................................................................................................... 8 Strategy ..................................................................................................................................................... 9 Car Design ............................................................................................................................................. 9 Natural Disasters ................................................................................................................................... 9 Tactics ....................................................................................................................................................... 9 Car Design ............................................................................................................................................. 9 Natural Disasters ................................................................................................................................. 10 1 Introduction This paper will review two auto manufacturers, Honda and Toyota. These to manufactures have long been viewed as each other’s main rival in the auto industry. Both companies are from Japan and both have built plants in the United States. This report will view each company using a financial analysis as well as a SWOT analysis. These two analyses will allow the reader to gain more insight into each company and view what could be done. The paper will continue on to bring out the conclusions of the writer from the evidence displayed. These conclusions will then be used to give suggestions to weaker of the two companies. Analysis This section will employ SWOT analyses of both Honda and Toyota and a financial analysis of both companies. SWOT Analysis Honda Strengths Strong financial condition Strong brand name and image Cost advantage over rivals Increasing demand in North America Opportunities Increasing stability in market’s financial area Automotive designs with alternative energy supply Build smaller cars in response to demand Increased production in North America Weaknesses Weak supply chain and logistics management Threats Increased loss of market share to Korean automakers Inflating Yen Unstable gasoline prices Changes in laws and regulations Strengths Honda has a comparatively strong financial position with higher margins. These high margins allow for a 5.5% investment in research and design. Honda has an internationally acclaimed brand that is instantly recognized by the target market. Honda is known for quality and longevity of its autos. Honda has a large cost advantage with its Cost of Goods Sold. Honda’s operating margin is 26% allowing for higher investment in the company. Honda is enjoying a 3.5% growth rate, allowing Honda as an international company to continue growing although demand is falling in Japan and Europe. Weaknesses While Honda has low Cost of Goods Sold, they have high levels of inventory with 61 days of inventory. This causes Honda to absorb waste as capital is spent in holding inventory and in handling the inventory. 2 Opportunities Honda’s target market is beginning to recover from the recession of 2009 allowing people to purchase new durable goods allowing Honda to capitalize on the opportunity. Honda has started an initiative to build low CO2 cars. This initiative will allow Honda to take people to more places and reduce the cost of the new technology of today so more people will be able to purchase these hybrid cars. Honda is also looking at larger electric vehicles that are able to charge their batteries by being plugged into traditional home electrical outlets. Honda is also looking at building more of their smaller cars in the global market. They used India and other Asian countries as an opportunity to learn and grow their experience in manufacturing and selling motorcycles. Their success has led Honda to desire to create more hybrid options for their smaller vehicles. As Honda continues to develop more new technology and drive demand, the production demand in North America enjoys a 12.1% increase. If marketed correctly, Honda can take advantage of this to build an image of being more American made, bringing die-hard customers of the Big Three over to Honda. Threats As the Korean automakers continue to develop in the midsize car market, they are stealing more of the market from Honda forcing Honda to innovate and continue to build their brand image. In the currency exchange rates, the Yen is gaining value causing the sales made internationally to lose their value in the Japanese economy. This shift from Japan having a weaker Yen to a stronger Yen can cause financial problems that will need to be worked around. With planning displayed in the financial report, this threat seems to be minimalized. The resent unrest of the price of oil and refined gasoline has caused concern with Honda’s management. The increased prices of oil will push people toward buying more hybrid cars; however, further driving Honda’s initiative to further develop hybrid and alternative fuel technology while lowering the price of said technologies. Honda is concerned over the changes in tariffs and other protectionist tools that could be used in markets around the world. This would lead to increased prices to the end customer, causing the brand to lose market share in international markets. The changes may also include regulations as to what components can be brought into the United States. This change can lead to costly policy and process changes as well as sourcing changes and rework of engineering designs. Toyota Strengths Core competency in Just In Time manufacturing Product innovation capabilities Weaknesses Too narrow a product line relative to rivals Short on financial resources 3 Joint venture with Tesla Motors Opportunities Recovering brand image Developing new fuel efficient technologies Moving more operations to the United States Threats Decrease in North American sales Oil price uncertainty Strengths Toyota has invested highly in their supplier base to allow for a lower need in materials on site for their manufacturing centers. The investment has allowed for the company to continue growing during the recent recession where it would not have been able to without the investment. Toyota developed one of the original hybrid cars, giving Toyota increased experience as other automakers are developing their own alternative energy powered cars. Toyota has created a joint venture with Telsa Motors. The purpose of this joint venture is to increase the ability of both companies to innovate in the way of alternative energy and applying the new innovations that come about. Weaknesses Toyota has slightly fallen behind in different types of alternative powered vehicles besides the hybrid cars. In the all-electric arena, Toyota has not kept up with the competition and is now attempting to catch up to what the competition has already achieved. Toyota’s financial strength has weakened in the last few years due to the recession in 2009. During the recession, Toyota continued to pay higher dividends in 2010 to stock holders while attempting to recover from a $4.4 billion loss which occurred in 2009, instead withholding that asset to further recover from the loss. Opportunities During 2009 and 2010 Toyota suffered a major recall due to breaking failure and sudden unexpected acceleration. These defects damaged Toyota’s reputation and brand image dramatically along with costing Toyota a large portion of profit. As Toyota has successfully been able to recover from these defects, the target market is beginning to regain faith in Toyota allowing Toyota to continue to grow. As Toyota continues to recover from this, their image will improve with the target market as well as the general public. Toyota is continuing to innovate in different technologies to increase gas mileage and create new vehicles that will be completely electric. They plan to unveil and begin production on 15 new hybrid vehicles by 2015. One of these new vehicles will have a gas mileage of 94 mpg. This extremely high gas mileage will drive technology across the industry allowing for further research and development in the future. Toyota plans to move more operations to the United States so the United States can be a second global center. Their plan is now in progress as they now have over 50% of Camry production in the United 4 States. The excess production not consumed by the U.S. market is now being shipped overseas to different countries, further bolstering Toyota’s reliance on the United States. Threats Toyota had a decrease in sales in the North American market of 3.2% with a decrease of 4.3% in net profit. Further planning must take place to counteract this decrease and to keep North America from losing too much market share. If this were to occur, Toyota’s plans of moving more operations to the United States and to have the United States as a second global hub could be foiled. The resent unrest of the price of oil and refined gasoline will push people toward buying more hybrid cars, further driving Toyota’s initiative of being a green company and car manufacturer to further develop hybrid and alternative fuel technology while lowering the price of said technologies. Financial Analysis Between the two companies, Honda is in the better financial situation. While Toyota consistently has the higher revenue, Honda three times as high of Return on Sales, Return on Assets, and Return on Equity. Honda also has double the Gross Profit Margin of Toyota. Toyota used 3.8% of net revenue toward research and development, an increase from last year. However, this is still down from the pre-global recession of 2009 levels. Honda used 5.5% of their total revenue toward the research and development. The high spending by both companies shows they are investing heavily in their future designs. A possible cause for the lower ratios with Toyota can be attributed to the global recession in 2009 begun in the United States with the burst of the housing bubble; however, the dramatic decrease in the net income does not agree with the decrease in revenue. In 2009 Toyota took a net loss of $4.4 billion. Current Ratio Inventory Turnover Days of Inventory Debt Debt-to-Equity Gross Profit Margin ROA ROE ROS 2009 1.09 5.96 61 0.66 1.95 25.9% 1.2% 3.4% 1.4% Honda 2010 1.35 6.86 53 0.63 1.69 25.2% 2.3% 6.2% 3.1% 2011 1.31 7.22 51 0.62 1.60 27.3% 4.6% 12.0% 6.0% 2009 1.07 12.65 29 0.64 1.83 10.1% -1.5% -4.3% -2.1% Toyota 2010 1.22 11.73 31 0.64 1.87 12.0% 0.7% 2.0% 1.1% 2011 1.10 12.74 29 0.63 1.83 12.5% 1.4% 4.0% 2.1% Table 1: Financial Ratios for Honda and Toyota for the years 2009 through 2011 5 Revenue ¥30,000,000 In Millions ¥25,000,000 ¥20,000,000 Honda ¥15,000,000 Toyota ¥10,000,000 ¥5,000,000 ¥2007 2008 2009 2010 2011 Figure 1: Revenue for Honda and Toyota through the years 2007 and 2012. Net Income ¥2,000,000 In Millions ¥1,500,000 ¥1,000,000 Honda Toyota ¥500,000 ¥2007 2008 2009 2010 2011 -¥500,000 Figure 2: Net Income for Honda and Toyota through the years 2007 and 2011. Although Toyota took a $4.4 billion loss in 2009, Toyota continued to pay a dividend of $1.0316 in the next year instead of using the money to rebuild the company to help it recover from such a large loss. Toyota has continued to pay higher dividends than Honda showing that Honda is investing more in the future of the company. 6 Dividend Amount $3.00 $2.50 $2.00 Honda $1.50 Toyota $1.00 $0.50 $2007 2008 2009 2010 2011 Figure 3: Dividends for Honda and Toyota for the years 2007 through 2011 Conclusions The company I choose to focus on is Toyota. Although Toyota has higher revenue, the net profit is lower than that of Honda since the recession of 2009. Toyota is also losing market share in the United States allowing other companies like Honda, Hyundai, Kia and others to capture that market share. Toyota has a lower net profit because of costs of goods sold being more expensive due to inflation rates in Japan causing the other currencies to become weaker in comparison. While this can be viewed as good for the consumer, Toyota is continuing to struggle because of this. However, this does not account for why Toyota would have a lower net income because Honda will be suffering from the same misfortune of inflation. Another reason Toyota is struggling in this is because the Selling, General & Administrative costs. Toyota is losing market share because of a decrease in trust from the consumer from the break failure and spontaneous acceleration. Also the younger population or the new generation of the workforce views the designs of Toyota cars as they are made for “old people”. As the new generation graduates and is employed, they are provided with the opportunity to earn more money allowing them to purchase better cars. While Toyota has been seeing a decrease in market share and in net profit, the company is still focused on several of the principles that helped to make Toyota great. These include the use of a lean management and production system. The organization of Toyota is quite flat allowing for more cross learning and development in other portions of the company, developing the employee to a higher degree. Also the company is focused on many of the 14 points of Deming to produce a product at a higher quality to get better results and to save money. 7 Strategic Road Map In this section, I will review the current position, give my suggestion objective, and present the strategy to be employed and tactics to follow. Current Position The current position of Toyota is competitive in the car market. However, Toyota is losing market share due to several factors: Toyota had some quality defects, Toyota’s target market is aging and Toyota struggles to overcome natural disasters. Toyota is competitive in the market. Toyota presents itself as a manufacturer that is very competitive and is looking to be very environmentally oriented. As a manufacturer Toyota is known for producing cars that have longevity. Toyota is concerned about the environment. Many of the facilities are zero landfill facilities meaning they do not send any waste to the landfills. They incinerate compost or recycle their waste. Toyota also is investing in cars that use alternative sources of energy either completely or as a hybrid. Consumers are desirous to move away from gasoline as much as possible because of the high gasoline prices and high likelihood of gasoline prices rising in the future. In the past, the media gave Toyota a couple of series of bad publicity because of brake failure and sudden, unexpected acceleration. These two series of events cause consumers in the United States to be concerned about buying a Toyota; however, Toyota has worked to overcome this bad publicity and is recovering nicely. Toyota’s car designs tend to be target to the more mature customer, ignoring the younger customer and leaving that customer to look for cars targeted toward them, such as Honda, Mazda and Nissan. As the baby-boomers continue to age, Toyota must work to win over loyalties from the new generation and those that are entering the workforce with the means of purchasing the next level of car from what they used to be able to afford. Toyota, in recent history, has sustained a couple of large natural disasters to itself or its supply chain. The tsunami of Japan as well as the flooding in Malaysia has caused several problems for Toyota. While Honda suffered from the same disasters, Toyota seems to have recovered at a slower rate. Objective My suggestion’s objective if for Toyota to work to change its image to the target market and the younger generation who have not yet entered the workforce as well as hardening their supply chain in case of other disasters that may happen in the future. For Toyota to stay competitive and continue to grow these suggestions should be taken into account to build a more solid future for Toyota. 8 Strategy Car Design Toyota has plans to build more cars that use alternative energy or use hybrid technology. This is a good plan. To go along with this goal Toyota has, they must also build cars that will appeal to a target market used to instant gratification. The consumer has the desire for cars that look stunning while not breaking the pocketbook. There must by a style change on the exterior look of the Toyota. As Toyota works to change the look, there will be a higher amount of younger people who want to buy the newest Toyota. To attain this objective, Toyota must work to find designers that are in tune with what the consumer wants and what the consumer will be able to see themselves driving to school, or work or on a pleasure trip or outing. To combat the threat of natural disasters in the area of Japan and other far eastern countries, Toyota should diversify where they are sourcing from and producing at. Natural Disasters While Toyota works to be a lean company and use a just-in-time system for their supply chain, when a natural disaster strikes, their just-in-time suppliers lose the ability to provide the components needs, causing supply shortages. Because the countries in which these natural disasters are happening tend to be industrializing and not fully industrialized yet, the countries’ infrastructure is not fully developed to hand the demand of disaster mitigation and recovery. This can lead to further shortages that would have been necessary for a country that had the infrastructure in place. Toyota should look to building more of their sourcing options inside developed countries to allow for the effects of natural disasters to be lessened. Tactics Car Design To affect the way in which the consumer views Toyota, Toyota must begin to bring in younger and newer designers. The people designing the car must be in tune with what the consumer of the car would like to see and have available to them as they are researching the different types of cars on the internet. There is an opportunity for the Toyota to learn more about their target market by building into the Toyota website a functionality allowing for the consumer to “design” their own car by taking concepts of new portions of cars to click and drag across the screen to where they would like a certain feature to and allow the visitor to the website to manipulate the exterior design to be exactly what the consumer would like the new model of car to be. This would force Toyota to give away some of their concepts to the competition, while allowing for further refinement of the design so the design has the opportunity to be more dynamic later into the design process. This can also allow for the competition to be misled as to what the final result of the car may look like. Toyota must conduct focus groups as well as surveys. Currently Toyota survey’s heavily the employees working at Toyota for feedback in what styles should be used to design new cars. The same types of 9 efforts should be extended to a large population of people outside the company. Once this information is collected and analyzed, the designers need to look at this information for what could be done to meet this demand as closely as possible and build models to show what can possibly be brought into production. Once Toyota has these models created, Toyota should once again conduct focus groups to see if the participants of the group will give buy in to what is proposed. If they can get buy in from the focus group, further market research should be conducted to see what the target market thinks and how the designers can improve upon. After this step, the designers should bring their new designs forward to present them to management to decide which models to create. Natural Disasters In the past Toyota has created with suppliers new joint venture companies to supply to Toyota. Toyota should continue to look for these opportunities and continue create these joint ventures in more established countries. One of the countries of choice for these new joint ventures should be the United States. Because many of the suppliers for Toyota come from pre-industrialize nations and the standard of living in these industrialized nations is improving, the cost advantage of sourcing from these countries is being diminished. Toyota wishes to build operations in the United States to be like a second hub for operations around the world and so more suppliers should come from the United States. As more suppliers come from the United States, the supply base will be closer to the auto plants allowing for a shorter lead time and giving a shorter recovery time in case there are supply disruptions. 10