Toyota Operations Exposure - Assignment Example

Toyota Operations Exposure Case Questions Analysis 1. Introduction Toyota Motor Corporation headquarters are in Toyota Aichi, Japan and is a Japanese automotive manufacturer with worldwide operations with 338,875 employees as at March 2014 (Toyota, 2015). Toyota has achieved global success and has been the largest automotive producer in the world competing with Volkswagen, General Motors, BMW, Daimler-Benz, among other automotive makers. Toyota has a presence and is widely accepted in Europe but took time before deciding to shift manufacturing operations to Europe for the Europe sales forming the basis for the paper. Exchange rate movements affect the performance of international organizations as evidenced by the operation of Toyota in Europe with its manufacturing done in Japan and but has been forced to relocate manufacturing centres for Europe sales to Europe. This paper is aimed at the provision of an in-depth analysis of the impact of the exchange rate movements in the manufacturing and sales of Toyota in Europe. The paper begins by providing the reasoning behind the long time it took for Toyota to shift manufacturing of Europe sales operations to Europe, followed by an analysis of the impact of British Pound joining the European Monetary on Toyota, short-term and long-term problems that faced Toyota, and solutions to the determined problems provided. 2. Reason for the long time taken to move Toyota European manufacturing to Europe The reasons for the Toyota taking so long in moving manufacturing operations to Europe sales to Europe include the capital intensiveness and complexity of manufacturing production. The need for Toyota enjoying economies of scale and scope in the production of vehicles destined for global locations and avoiding the capital requirements for the development of manufacturing locations in Europe. The possibility of increasing production in Japan at a low cost per unit would have been the other reason behind the long period taken by Toyota to set up manufacturing plants and capacities in Europe until 2004. The lack of manufacturing plants in Europe resulted in losses to Toyota in Europe sales owing to operational exposure that arose from the euro losing value compared to the Japanese Yen (Khan & Jain, 2007, 35). The reasons for Toyota continuing to incur losses through not setting up manufacturing plants in Europe include the need to maintain competitiveness in the Europe market (Kandil, 2000, 4). Another reason that could have made Toyota take time in making the decision to set up manufacturing plants in Europe for Europe sales is the large size of the company with massive production capabilities in Japan. The large amounts of production in Japan allowed for efficiency, greater employee understanding, high technology and smooth operations, factors that must be developed in new manufacturing plants affecting the ability of the company to deliver quality and at a lower cost. Expectations that the fall in the Euro in respect to the Yen would not last for a long time reducing the operations exposure faced by the business could also have been the other reason for not setting up Europe manufacturing plants earlier. Toyota could have expected that the fall of the Euro against the Yen would only take a short period, and its profitability and revenue in Europe is regained resulting in the decision to take more time waiting. Since, the Euro continued falling, and Toyota’s revenue in the region went to losses, the manufacturing in Europe began. 3. Possibility of solving the problem by the British Joining the European Monetary Union The problem faced by Toyota owing to the operations exposure of operating in Japan and selling to Europe is the fluctuating exchange rate of the Euro against the Japanese Yen. In this case, there is no direct relationship between United Kingdom and Japan in the presence of the problem on the operations of Japan. The decision by British joining the European Monetary Union will not have any impact on the operations exposure of Japan in Europe and will not eliminate the problem. The reasons include that British joining the EU will serve at eliminating currency risks that persist between Europe and United Kingdom and will not in any way eliminate currency risk between Japan and Europe (Hadfield-Amkhan, 2010, 176). The deviations in the value of Euro and the British pound will be eliminated, and it would only have been beneficial in solving the Toyota problem if Toyota was manufacturing from the United Kingdom and selling to Europe. Since the manufacturing and operations are conducted in Japan and the currencies affected are the Japanese Yen and the Euro, British joining the EU would not solve the problem. However, if Britain joined the EMU and Toyota decides to base its operations for the manufacture of cars to be sold in Europe in Britain, the problem will be solved. The decision to base operations in Britain will allow Toyota to access certain benefits including solving the problem when Britain joins the EMU. The benefits include easy transportation of products to the market, reduction in shipping costs, access to a large Britain market owing to localization of operations, and tax advantages since the products will face low tariffs in the EU and get treated as a local company within the UK. Joining the European Monetary Union could aid in solving the problem if it will serve at improving the value of the euro against US dollar and Japanese Yen. The competitiveness of the European Union could be increased when the large UK economy joins the other 28 countries in the union to form a larger trading block with large economic and political decision-making (Welfrens, 1997, 9). An increased competitive EU would cause an increase in the value of the euro against major currencies though this is dependent on the monetary policies and regulations that will be followed by joining the union. A better economic outlook and high economic performance of the region is required to improve the value of the euro against major currencies and since such occurrence is currently blink. Joining of the EU by UK will not cause the strengthening of the euro and will have no impact on the problem of pricing problems of Toyota from a low value of the Euro against the Japanese Yen. In conclusion, Britain joining the EU will not solve the problem when operations are in Japan because of lack of an impact on the exchange fluctuations of the Yen and the Euro. The likelihood of British joining the European Monetary Union Britain is the only large country that is not Euro-based and has continued to use the British pound despite the start of operations of the European Union and subsequent getting rid of currencies to adopt the euro by 12 EU members in January 2002. Other members have joined the EMU over the years, but Britain has not done so owing to a number of reasons that will be explored in this part of the study. There has been a lot of debate on the possibility of Britain joining the European Monetary Union. However, it is evident that there are no specific plans, and there is very little likelihood that Britain will join the EMU. One reason why there is a low likelihood for Britain to join the EMU is the problems faced by Ireland as a member of the European Union. According to Coppola (2014), the Ireland financial crisis is one of the reasons that will make Britain not join the Euro. Ireland was faced with a financial crisis that threatened to result in failure of its banking system, and behest from the EU resulted in Ireland bailing out its banks. The concern was that a failure in Ireland banks would destabilize the European Union banking system but the effects on Ireland include high taxes and price increases with unemployment increasing to 12% at the end of five years after the bailout (Coppola, 2014). British would not wish to be in such a situation that requires external intervention in the decisions it makes relating to its economy further diminishing the chances of it joining the EMU. The effect of the crisis on UK was limited owing to a different currency and functional central bank allowing for low-interest rates and extraordinary measures. The impact on the UK economy would be much if it were a member of the EMU, as exemplified by Ireland’s crisis. The second reason why the UK may not be likely to join the EMU is the April 2013 collapse of two large Cyprus banks that formed the backbone of the economy. Since it was a member of the EU, lack of a central bank ruled out measures to save the economy and the only option present was use of capital controls owing to reduced tax revenue for the sovereign and aid against capital flight. The Cyprus economy fell by 5.4% within a year of the crisis giving UK the other reason for not entering the EMU (Coppola, 2014). Iceland faced the same crisis as Ireland and Cyprus but having a functional currency, and central bank allowed the country to implement a protective monetary policy for its households and businesses that resulted in full recovery of the economy. Iceland would not have recovered if it were a member of the EMU, giving UK an example of the benefit of not joining the EMU. Other reasons that make it highly unlikely for the UK to join the EMU include the high household debt in form of mortgages, high sovereign debt, and primary deficit that will put the UK at a high financial risk for joining the EMU. Watt (2014) outlines the views of EU’s spokesperson Lord Liddle of the possibility of Britain joining the EMU despite the fact that he quotes a long time of 10 to 20 years for that to occur. He believes that joining the EMU will allow UK to deal with problems including jobs and growth despite the need for the EMU to show a growth and a recovery from the banking crisis that faced the region and were yet to recover from for some years. Since the period quoted is long and is dependent on the ability of Europe overcoming the challenges from the crisis, it is still unlikely that UK will join the EMU. Another reason that depicts the low likelihood of the UK joining the EMU is the low performance of the European economy compared to that of the UK and USA (Dyson, 2002, 105). Also the euro has shown poor performance since the formation of the EU over a decade ago compared to the performance of the pound, dollar, and other currencies including the Japanese Yen providing other hindrance for the UK to join the EMU. An improvement of the economic and currency performance of the European Union and euro respectively could increase the likelihood of UK joining the EMU. However, since the performance of the region is currently insipid, and there is no likelihood that the EU performance improvement in the near future, UK will opt to remain out of the Eurozone. Joining the EMU will have one main consequence being the lack of independence in setting monetary policy by Britain to meet the needs of the economy and makes the other reason for the low likelihood of joining the EMU. The housing market in Britain differs from the other EU members owing to the British buying their houses while other Europe member country’s citizens live in rented houses. Having a monetary policy that suits the country’s housing needs is a sufficient reason for UK not joining the EU. Joining the EU will herald devastating effects on the UK housing market owing to the unique nature of housing in UK compared to the rest of Europe. The reason is that the control of monetary policy by European Central Bank will have the interest of the whole region in devising monetary policy especially interest rates affecting the British people providing the other incentive for the UK to stay outside the EMU. United Kingdom has a lower unemployment rate in comparison to that of Europe which is also the other reason that makers the likelihood of UK joining the EMU. With an unemployment rate of 5.2% and Europe’s 9.9%, the UK would prefer to continue with its monetary policy that has proved effective in taming inflation and unemployment rather than join the EMU (Europa, 2015 & Inman, 2015). It is evident that UK has little likelihood of joining the EMU owing to the loss of independence on monetary policy through interest rate and central bank manipulation following the crisis faced by Ireland, Iceland, and Cyprus. Other reasons that make it unlikely for UK to join the EMU include unique housing system, low unemployment rate, the poor performance of the EMU since its formation, and the need for UK to take control of its economic recovery from the crisis (Britain and the EU, 9). 4. What was a short term and what was a long-term problem? (1000words) Short term Problem Toyota owing to the reduction in current cash flows owing to the fall in the value of the Euro against the Japanese Yen. From the data in the case, the short-term problem is the pricing problems related to the primary exchange rate between the Japanese Yen and the Euro owing to the manufacturing operations of Toyota in Japan and export to the EU (Keown, 2003, 518). Significant fall in the value of the euro against the Japanese significantly affected the ability of Toyota to meet breakeven values for the sales in Europe since manufacturing was done in Japan and shipped to Europe as exports affecting the ability of the costs of manufacturing and transportation to the be met by the low value of the euro. Toyota continued to meet demand from Europe through manufacturing operations in Japan despite having made the decision to make manufacturing plants in North America. The short-term problem involves taking in the huge losses orchestrated by the fall in value of the Euro against the Japanese Yen with the hope that the fall in the euro will hit an end and maintain customer loyalty as a long-term solution to the problem is devised. The short-term problem involves the decision by Toyota on the ability of the company to absorb the losses arising from exchange rate fluctuations in the euro zone affecting the pricing of Toyota vehicles. Losses incurred by Toyota being a large company from the Eurozone can be shouldered by other revenue generating regions that are more profitable including America, Africa, Asia, and United Kingdom, among other overseas locations. The decision to allow the losses to continue in the short run in the expectation that the fluctuation in the exchange rate will stop aimed at maintaining the competitiveness of Toyota in the region and ensure the problems with the exchange rate dot does not affect market share. Toyota is also faced with the short-term solution of maintaining market share and competitiveness in the Europe market without affecting the decisions of the consumers in terms of prices (Kumar, 2007, 310). Finding a balance between the profitability, market expansion and growth, and the needs of the consumers in the short-term in the wake of exchange rate fluctuations is the short-term problem. One problem is deciding to choose profitability at the expense of market share and EU competitiveness through increasing prices to reflect exchange rate fluctuations. The other short-term problem is choosing competitiveness and market share through absorbing the losses in revenue and profits from shouldering the exchange rate fluctuation by keeping current prices. However, Toyota has to make a long-term decision on ensuring the fluctuation of the exchange rate does not remain a factor in the profitability of the company over the years (Siddaiah, 2010, 129). The short-term decision will not be effective in meeting the needs of the company in terms of market growth, profitability, sales, and continued revenue generation owing to losses arising from high operating losses in Europe evident from the operations exposure. A long-term will also give the company a better strategic position in dealing with exchange rate fluctuations and augmenting competitiveness in the European market. Long-term Problem Economic exposure involves the undervaluation or overvaluation of a currency involved in competitive or potential competitive situations affecting the value of transactions (Martineu, 2000, 110). Economic exposure deals with the long-term multi-transaction view of the foreign exchange exposure faced by a business operating internationally, representing the Toyota case (Hartmann, 2003, 1). The long-term problem is the continued servicing of the operations aimed at servicing the Europe market in Japan with new products aimed at the European market manufactured in Japan. The introduction of the new models including the Yaris aimed at the European market but maintaining operations in Japan coupled with the fluctuating Euro value is a long-term problem that has already started affecting Toyota’s profitability and revenue generation. The insistence on continuing operations from Japan despite the over two years fall in the value of the euro without specific emphasis or plans on development of a major long-term plan to solve the issue makes it a long-term plan. The problems in the eurozone are many and will not be addressed by large austerity measures that could have been afforded by a single country owing to the large geographical and economic region. The possibility of the euro augmenting in value is limited by the less possibility of the European Central Bank to implement plans that could improve the euro value but have negative consequences on some of the member countries. Developing comprehensive plan that fits the needs of all the Eurozone member countries will take time and the fluctuations of the euro will persist requiring the decision by Toyota to salvage the losses and impending fall in competitiveness in EMU. Toyota’s problem is finding a solution that will allow the company to operate profitably in Europe without worries on the exchange rate fluctuations of the euro that negatively impact on Toyota’s is pricing decisions. The solution will aid in dealing with an economic exposure that has negatively impacted on the profitability of Toyota in Europe. Development of a strategy that will positively allow Toyota to profitable operate in Europe without having to face economic exposure will form the main solution to the economic exposure problem. The other long-term problem affecting Toyota is the inability to predict the changes in the exchange. Forecasting of exchange rate changes is hard and presents a dilemma for Toyota tat will provide a lasting solution to a problem that may affect the company for a long time to come if it is not dealt with decisively. The other long-term problem faced by Toyota in Europe is competing effectively in Europe despite having the disadvantage of high export costs to the region from the fluctuating exchange rate. Firms that have manufacturing plants and operations in Europe have the advantage of lower taxation and low operating costs orchestrated by the low market distance compared to that of Toyota. Effective competition of Toyota requires low operation costs from manufacturing, operations, transportation, shipping, and marketing of the products. The low value of the Euro against the Japanese Yen has complicated Toyota’s situation further creating more problems for Toyota to compete effectively with firms that have manufacturing plants and operations in Europe. 5. Solutions to the Problems facing Toyota Short-term Solution The short-term solution for Toyota to the problem is to continue shouldering the losses and low-profit margins from the low euro value compared to the Japanese Yen. The aim is that in the near future, the value of the euro will improve as it has already shown slight improvements and loses and low-profit margins will be corrected within a short time. The short-term solution will allow the company to preserve market share since increasing the prices to reflect the changes in the value of the euro will reduce the demand for Toyota’s products in the European market further affecting the performance of the company internationally. The short-term solution will also allow Toyota to maintain its competitiveness against other brands including BMW that operate within the European market and have manufacturing operations within the Eurozone. These manufacturers are not affected by fluctuation in the Euro against the Yen and are poised to benefit from the situation owing to the increased competitiveness of their exports to countries including Japan. The need to counteract this competitiveness has to come at the costs of a reduced profitability for Toyota as it looks for a long-term strategy to solve the problem. The other short-term solution to the problems is entering into futures and options with dealers selling Toyota motor vehicles to protect the company against rampant exchange rate fluctuations. Futures and options will form the best way to predict prices correctly to allow Toyota to have set prices that will aim in the determination of the costs to be reduced in terms of transportation/shipping, manufacturing, sales, marketing, and operations, among other activities (Smith & Paglia, 2005). Toyota will be in the right position to decide the amount of sales and revenue generating activities that will allow the company to break even in Europe. However, options and futures only present a temporary solution to the problem, and there is a need for a lasting solution for Toyota to ensure success and augmented profitability in its European operations. Long Term Solution Toyota is faced with economic exposure that has affected Europe operations and threatens to reduce the global dominance of the Asian automotive giant. The long-term solution to Toyota is the establishment of manufacturing plant and operations centres in Europe to be able to service the demand for Toyota cars within Europe. The ability to create a long-term solution is anchored on Toyota committing a substantial amount of income on setting up European production facilities that are capital intensive. Other requirements include staffing the manufacturing plants and inputting the correct and latest technology to ensure quality production evidenced in Japan is replicated in Europe to meet consumer needs for quality products. The development of a network of suppliers is the other measure that can be used to solve the problem once plants are set up in Europe allowing for the selection of suppliers whose exchange rate to the euro is favourable at a certain point in time (Andersson & Holm, 2010, 70). Moving operations and manufacturing plants from Japan to Europe would be the most suitable option. The plants and operations to be moved to Europe are those directly involved in meeting demand for Toyota products and services within the European Union. Production for other regions including Asia, Africa, among other regions that have not experienced fluctuating exchange rates should be done in Japan owing to the economies of scale of production and the high efficiency rates in established plants. Good employee understanding of operations and well-established quality technology in the production facilities in Japan form the other main reasons for the continued production in Japan for products aimed at other markets apart from the European Union. Manufacturing plant and operations in the United Kingdom will not be adequate in Japan meeting the needs of the company to overcome exchange rate fluctuations between the euro and the Japanese Yen. The United Kingdom, currently, is not a member of the European Union, and the British Pound has been stronger than the euro in recent years with numerous fluctuations. The depiction is that companies in the United Kingdom selling to the EMU also face the same challenges faced by Toyota in terms of exchange rate fluctuations. Toyota will not have sold but transferred the problem of euro fluctuations against the Japanese Yen to the British pound, which is not a long-term solution to the problem at hand. Setting up operations, and manufacturing plants in UK will aid in reducing fluctuations of the British Pound against the Japanese yen reducing economic exposure of Toyota in the UK and not in Europe. The other solution available for Toyota is the creation of long-term financial hedges to guard against the supply of raw materials after the plants and operations have been set within the EMU. Development of long-term contracts with the suppliers will form the main way in which plants in the EMU will be protected from the fluctuation in exchange rates (Garg, & Gupta, 2012, 355). According to Blecker et al. (2012, 307) implementing lean systems and fine logistics management in the Toyota stores to be situated in Emu will form the other long-term solution for Toyota. The effect will be reduced operation costs allowing the company to regain lose and be competitive within the EMU. The other long-term solution is rotation and training of labour between plants in Japan and new plants for set up within Emu to ensure success in terms of quality delivery, effectiveness, and efficiency of the new EMU plants and meet customer expectation (Leendert, 2005, 39). Sega (2012, 63) believes that setting up of joint ventures in the EMU will position Toyota at a better place of meeting the demand without much worries on the exchange rate fluctuations in the long-term and have access to low operation costs. Joint ventures also allow for technological convergence that is beneficial in creating an efficient and less costly operational plan (Buckley, 2012, 275 & Buckley & Casson, 2010). 6. Conclusion It is evident that Toyota faces economic and operational exposure from the case information and has to take corrective measures aimed at augmenting the competitiveness of the company in Europe. The main problems that emerge from the analysis include having to balance between profitability needs, market expansion, and competitiveness in the face of euro/yen exchange rate fluctuation. Having operations in the United Kingdom does not solve the exchange rate problems faced by Toyota in the EU since the UK is not a member of the EU. The options available for Toyota include absorbing losses from the exchange rate fluctuations to keep its competitiveness and market share in Europe in the short-term. In the long-term, Toyota has to set up manufacturing plants and operations in Europe aimed at meeting the European demand to ensure the company is not affected by exchange rate fluctuations. References Andersson, U., & Holm, U. (2010). Managing the contemporary multinational the role of headquarters. Cheltenham, UK: Edward Elgar. Blecker, T., Kersten, W., & Ringle, C. (2012). Managing the Future Supply Chain: Current Concepts and Solutions for Reliability and Robustness. 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Britain should keep open possibility of joining euro, says Labour frontbencher The Guardian. Retrieved on April 12, 2014 from http://www.theguardian.com/world/2014/feb/26/britain-possibility-joining-euro-labour-frontbencher Welfens, P. J. J. (1997). European Monetary Union Transition, International Impact and Policy Options. Berlin, Heidelberg, Springer Berlin Heidelberg. Appendix The following graph depicts the exchange rate fluctuations of the Japanese Yen for the Euro from January 2000 to date that had an impact on the decision. Read More