Friday, May 20, 2005

The Scions Don’t Fall Far from the Tree Either

Toyota Motor Corporation, time and again one of the world’s most profitable auto makers and currently the second largest in terms of market share, has set an aggressive growth target for itself. It is aiming to boost its global market share from 10% to 15% by the next decade, thus surpassing GM to become the number one player in the auto industry. This is indeed a lofty goal but not an unachievable one. However, will the eventual growth be worth the soaring cost Toyota has already endured and will likely continue to incur? That is the multi-billion dollar question.

A major portion of Toyota’s current and future expansion plans are focused predominantly on increasing its presence in the emerging markets in Asia, South America, and Russia. The competitive landscapes in these less developed geographical areas are quite different from those in the more established markets, resulting in a different set of competitive strategies. In order to successfully compete in any foreign country, Toyota establishes local manufacturing plants to assimilate itself and its products into the host society. This not only allows Toyota to gain the good will of the locals, but it also provides valuable insights on their specific needs, leading to more suitably tailored products for each country or region.

In theory, Toyota also stands to add to its bottom-line through the lower labor costs in these less developed countries. However, in actuality, because the products of each plant are mostly intended to be sold in localized markets, the lower labor cost, more often than not, simply drives down the overall price and lowers product quality along with it. And, the intensive capital investments associated with creating these numerous new plants in places with little or no prior infrastructure have taken their toll on Toyota’s earnings. This (along with the temporary weakening of the dollar in relationship to the yen) has led to falling profits in the midst of steadily increasing revenue and market share figures.

As Toyota focuses more on its expansion plans in these less developed countries, it can’t help but shift some of its attention from the more mature markets, such as the US. However, there needs to be a balanced approach to Toyota’s overall strategy. The concept of “growing market share” in and of itself brings no inherent value to the shareholders; it is merely a means to an end. Ultimately, that end should be increased shareholder value in the form of profits, dividends, or stock price. That is why we think Toyota must not lose sight on the lucrative-ness of the US market.

In a highly sophisticated market like the US, Toyota could capture value, add to its competitive advantage, and stay one step ahead of its rivals by leveraging its excellent brand equity, its wide distribution channels, its superior customer relations, and its existing technological lead. Two specific examples come to mind as successful results of Toyota’s complementarity capabilities: its venture into hybrid vehicles and the Scion brand targeted at the younger car buyers.

The US is not only the largest market for automobiles, it is also the biggest market for hybrid cars. Increasing by 81% in 2004, more than 80,000 such vehicles were registered, of which the Toyota Prius consisted a whopping 64% (USA Today). To put this into perspective, Toyota sold a total of only 47,000 cars in Russia during the same time period. The overwhelming success of the Prius in the United States has caused a few other car companies to either start or increase their efforts in the hybrid vehicle segment. Notable among them are Honda’s Civic (31% market share) and Ford’s Escape (3% market share). Toyota must do its best to stick with the current plan of continued research in this area and roll out the other hybrid models, such as the Highlander or the Lexus RX400h. Demand for hybrid cars currently far outpaces supply in the US, as this disruptive technology gets closer to the growth part of the S-shaped technology adoption life cycle. Toyota’s interests would be very well served through continual focus on the wooing of the early adopters and maximizing its market share of the hybrid car market.

Another of Toyota’s latest success stories is the launch of the Scion nameplate. By leveraging Toyota’s massive distribution channels in the US and pent up consumer demand in the young male demographic segment, Scion utilized existing Toyota dealerships to create one of the most outstanding automotive brand launches in recent times. Around 100,000 Scions were sold in 2004, and about 130,000 are expected to be sold in 2005. More impressively, 85% of these buyers have never owned a Toyota before. Furthermore, the Scion brand is not only bringing in needed revenue, but it is also establishing customer loyalty at relatively early stages of adult-hood. Now Toyota Motor Corporation has a full line of vehicles to accommodate the full spectrum of customers, who can start with the hip Scion brand, graduate into the dependable Toyota brand, and perhaps eventually move up into the luxurious Lexus brands.

In short, Toyota’s current plan of global expansion by branching out into the less developed locales is not without merits. After all, wisely investing in the future is what keeps a market leader several steps ahead of its competition. However, in determining its competitive strategies for the future, Toyota must not lose sight of the importance of its highly profitable US business in the process. Although some may think this mature market is already too saturated, the (perhaps surprising) success of the Prius model and the Scion brand indicate otherwise. By leveraging its high product quality in the US, its entrenched dealership network, and its investments in new technologies, Toyota has already taken a few first steps in the right direction. Whether the company stays on this track will be a key determinant of its future success.

By Chia-Hao Han, Sachin Gupta, and David Kim


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