European Automobile Market: The of Toyota Motor - Case Study Example

A ToyotaMotor Europe Manufacturing (TMEM), established as a subsidiary of the Japanese automobile giant Toyota company in September 1998, was a victim of the lopsided foreign exchange and fiscal policy adopted by the then Japanese authorities. The birth of this company took place at a time when the Japanese economy was ruled by a phenomenon called the "Japanese Premium." ( Internet, Wan Chen, Dec.1,1998) The policy of super low interest rates had plunged the country into a disastrous state weakening the JPY at home. When the US dollar gained a perfect command, precipitated by the misguided super low interest policy of Japan, Toyota had jumped into the European automobile fray. TMEM was targeting big sales in Europe but most of its demands were met by importing the automobile spares from its original plants in Japan. As per the figures available, TMEM had complied with its market demands in 2000 by importing 76 % of the automobile spares from the Japanese plants and assembling them in its European plants. For the next fiscal year, the company reported operating losses of JPY 9.897 billions. The main problem TMEM faced here was simple but peculiar. As the euro was continuously trekking down, except for a few occasions, the revenues in shape of euros did not equal to the expenditure figures when converted into JPY. This cycle repeated all over for three years since the inception of TMEM pushing itself into losses. In addition to these conversion losses, the Japanese subsidiary had to contend with reduced margins on sales in an atmosphere abetted by cut throat competition from the native automobile manufacturers compounding its problems further. This was only a part of the problem faced in Europe by the world's third largest automobile manufacturer. The euro downtrend against the pound sterling also added to the company's owes 2 as it had to shell down more Euro currency at times towards pound sterling payments made to the UK plant which also supplied automobiles after assembling them. TMEM was caught in this vicious circle of currency conversion. The parent company played the role of an observer as it could not afford to make payments direct from its coffers on behalf of its subsidiary. However, in such a case, it could have been forced to lose more JPY reserves as the yen was playing low against the pound sterling. From this circle of operations, one thing is emerging clearly. The parent company had miscalculated the future of euro and expected an early forward march of its value in international markets. It also expected an early entry of the UK into the European Monetary Union (EMU). These two miscalculations had boomeranged on its operations in Europe leading to its ever increasing dependence on a weak euro. TMEM's problem has therefore been the result of a wrong analysis on the future of the newly created euro currency. The following charts (Internet, graphs) show how the pound and yen values against the euro picked up from 1991 to 2001. In the beginning of 1991, the euro value was equal to 0. 712825 GBP. During the end of 2001, it equalled to 0.618756 GBP indicating gains for the pound. 3 In July 1999, one euro was equal to 124.23150 JPY but it ended it at 115.280232 during the last week of December 2001. Though the yen was strongest during October 2001 reaching a peak of 91.919638, it lost some ground afterwards against the euro but on the whole, the JPY remained stronger during the three years against the euro. B Now, after going through the above summary, it is not difficult to pinpoint the reasons why Toyota had waited so long to move its manufacturing operations for Europe sales to some European countries. First of all, it had made the mistake of expecting a rise in the value of euro. It did not know that it was making a mistake by opting for only one plant in UK whose pound sterling was very strong in international currency markets. As its expectations of euro picking up gradually failed, it had no other alternative but to adopt a wait and see policy expecting England to join the EMU and thereby raise the value of euro. But it never materialised into action even 4 after 3 years of TMEM's commercial activity in Europe. Adding a Himalayan blunder, Toyota started assembly operations for the Yaris autos at a plant at Valenciennes in France but much of its value-added spares and other material had to be imported either from its plants in Japan or UK again involving heavy transfer of euros for the sake of yens or pounds. The big bosses of Toyota might be still expecting a sudden rise of Euro in international market. It seems that the runaway success of its operations and the related big profits in North America had not taught any lessons to the Toyota Motor Company bosses at Tokyo. They must recognise the fact that the strength of the USD had fetched good returns in the Americas and the weakness of the euro had resulted in considerable losses in Europe. C. The question to be considered is if Britain joins the EMU, will the problem of TMEM be resolved It is true that if Britain joins the EMU and agrees to adopt the euro as its currency, it will lead to the strengthening of the euro as all the strong fundamentals of pound sterling are likely to be absorbed by the euro. Pound sterling has been continuously maintaining its supremacy against major currencies and is known for its consistency in international currency markets. And once the Euro is strengthened through the dissolution of pound sterling, TMEM will consolidate its financial fundamentals in its European automobile market resulting in the rise of yen reserves in the coffers of the parent company. Now, we have to deliberate on the possibilities of UK joining the EMU. European Union is a conglomeration of 25 European countries. As part of its plans to introduce and run a common 5 economy for all the member countries, it had adopted a single currency known as euro after signing the Maastricht treaty on February 7, 1992. But till now, only 12 countries had joined the Euro zone raising a question mark over the mind of other member countries including the UK. When Austria, Belgium, Finland, France (except Pacific territories using the CFP franc), Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain have fallen in line and adopted the euro as their currncies for common trading, the UK has deliberately put off its decision and is not in a mood to say yes or no even now. Why In regard to our study, let us know the mind of the country. European Union was first formally launched in 1952 with Belgium, France, Germany, Italy, Luxembourg and Netherlands as its founding members. That the UK was not among the founding members of this entity must be noted. (Internet, current members). Britain, along with Denmark and the Republic of Ireland, had joined the EU in 1973. That it took a longer period of 21 years for the UK to join the Union reveals its hesitating mind. It was quite natural for a country that ruled two-thirds of the world with an iron hand for more than two centuries to exhibit that much pride. It was really worth an action on part of the Great Britain. The sweet memories of its past glory and leadership qualities must have been hunting it and influencing its decisions. When it is the question of joining the EMU, England no doubt entertains in its mind the fear of losing its sovereignty in the currency field in Europe in general and in the world in particular. Leaving aside UK's pride in terms of its past glory, its pound sterling's history was really amazing. England has enjoyed a relatively stable single national currency with an unbroken history of over 900 years, and the origins of the pound Sterling go back even further still. ( Internet, the long history of the pound sterling ).With such a dynamic currency 6 background , England can never think in terms of losing its pound sterling identity for the sake of other European nations, come what may. Now, the UK is rearing its head as a financially independent country in international affairs because of its strong financial currency base. In addition to that , it has a very good equation and vibration with the most powerful country USA. In this backdrop, if England decides to join EMU, it will suffer from serious consequences which are as follows. 1. England's equations with USA will change adversely affecting the former. 2. USA will emerg as a single power ful country with no equals. 3. England's powerful role in the region will be reversed turning it into an ordinary member of the EU. 4. The disappearance of pound sterling may lead to the emergence of a new economic power in the region. England knows very well of these possible consequences in case it joins the EMU. Moreover, a strong public opinion has been building up in the UK against any such proposal. (Internet, Is the British pound sterling about to disappear ) One can therefore safely conclude that the chances of the UK joining the bandwagon of EMU are bleak. D Coming to the categorisation of problems, there is no hard and fast rule to divide the issues. A problem considered to be a short term one can become acute and turn into a long term one. A long term problem can be suddenly resolved turning it into a short term one. Of course, it all 7 depends on the situation and its tacking methods. When you think of solutions, you can divide them into permanent and temporary ones. Solutions are found after analysing the problems and depending on the sources available to him / her, one can work out a permanent or temporary solution. The TMEM's problems and the company's way of finding solutions can thus be categorised as follows. 1. The problems Toyota has been facing with a weak euro are long term ones as there are no indications of the euro currency picking up in the near future. 2. TMEM's idea of importing value added items from the Japan and UK plants and assembling them at other Europe plants was only a temporary solution to the permanent problem. 3. The parent company's failure in visualising the temporary and permanent problems has messed up its operations in Europe. E. The following measures are recommended for turning the TMEM profitable. 1. Give up the hopes and expectations of a rise in euro value. 2. Shift all the assembling and manufacturing plants located in France, Portugal and Turkey into the UK and start all your operations from there. In such a case, you will be mainly dealing with a major currency i.e. pound sterling. 3. If these measures are not possible, continue your operations in the present mode but try to boost up the value of the euro by all possible actions. 8 Bibliography: Wan Chen K, Chih (1998) "The super low interest rates in Japan and the anomalies of the world economy", http://www.forcastglobaleconomy.com/p1/article01.htm (accessed on 16/10/2005). Graphs, "Currency graph and forex charts", http://www.discount-currency-exchange.com/currency-resources/currency-graph.cfm ( accessed and prepared on 18/10/2005). Current members, "European union member states", http://en.wikipedia.org/wiki/European_Union_member_states#Current_members (accessed on 16/10/2005). The long history of the pound sterling , "Britain and European Monetary Union", http://www.ex.ac.uk/RDavies/arian/emu.html (acessed on 16/10/2005). Is the British pound sterling about to disappear , "A conservative news forum", http://www.freerepublic.com/forum/a3b1979e1075b.htm (acessed on 18/10/2005). Read More