Company Spotlight MarketWatch: Automotive

Company Spotlight: Toyota Motor Corporation

Toyota Motor has developed a new clear-coat paint with self-restoring qualities that is resistant to
surface scratches usually caused by car wash brushes or fingernails.

Toyota has said that its newly developed coat is not easily damaged and can even restore itself even if it is
deformed. Moreover, it requires no special maintenance, prevents luster degradation caused by surface
scratches and helps to prolong new-car color and gloss.

The new coat reportedly features an ingredient that encourages closer molecular bonding, resulting in a
denser structure than conventionally possible. This gives the coat flexibility and elasticity, making it less prone
to damage and more resistant to light and acid, and giving it the ability to self-restore after deformation.
Toyota plans to use the coat on the soon-to-be-upgraded Lexus LS full-size luxury sedan.

Business Description

Toyota Motor is one of the largest automobile manufacturers in the world. The company is engaged in the
design, manufacture, assembly and sale of passenger cars, minivans and trucks and related parts and
accessories. The company also provides financing to dealers and their customers for the purchase or lease of
Toyota vehicles. Toyota has 50 manufacturing facilities in 27 countries and regions. The company operates
through three business divisions: automotive, financial services and other. Toyota produces automotives in
two categories: conventional engine vehicles and hybrid vehicles. Toyota’s product line-up includes sub-
compact and compact cars, mini-vehicles, mid-size, luxury, sports and specialty cars, recreational and sport-
utility vehicles, pickup trucks, minivans, trucks and buses. Toyota’s subsidiary, Daihatsu Motor Company,
produces and sells mini-vehicles and compact cars. Hino Motors, another subsidiary of the company,
produces and sells commercial vehicles. Toyota also produces forklifts and several other kinds of material-
handling equipment, such as automatic-guided vehicles, automatic rack systems, power shovels, towing
tractors and aerial work platforms.

The company sells its products under the Toyota, Lexus, Hino and Daihatsu brands. Under the Toyota brand,
the company includes models such as the Camry, the Corolla and the Avensis. Lexus is the luxury car
division of Toyota Motor, and is operated as an entity separate from the Toyota brand. Lexus also produces
the luxury sports utility vehicle, the RX330. In Japan, the company sells luxury cars under the brand name
Crown and the Century limousine. The Prius is the company’s mass-produced hybrid car. Toyota’s sub-
compact and compact cars include the four-door Corolla sedan, which is one of Toyota’s best selling models.
The Yaris, marketed as the Vitz in Japan, is a sub-compact car, designed particularly for European
consumers. The company’s sport-utility vehicles and pickup trucks include the Tacoma and Tundra pickup
trucks. Toyota’s models for the minivan market include the Alphard, Sienna, Estima, Hiace, Regius Ace, the
Noah and the Voxy. In FY2008, the company recorded total sales of 8,913,939 units, as compared to the unit
sales of 8,524,659 units in 2007. Out of the total sales, the company sold 2,958,314 vehicles in North
America; 2,188,389 vehicles in Japan; 1,283,793 vehicles in Europe; 956,509 in Asia; and remaining
1,526,934vehicles in other countries. Furthermore, the company produced a total of 8,547,200 units in
FY2008, as compared to 8,180,951 units in FY2007.

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Company Spotlight MarketWatch: Automotive

Toyota’s financial services business provides finance to dealers and their customers for the purchase or lease
of Toyota vehicles. Toyota’s financial services also provides retail leasing through the purchase of lease
contracts originated by Toyota dealers. Furthermore, Toyota Finance (TFC) in Japan and Toyota Motor Credit
(TMCC) and other overseas subsidiaries and affiliates provide sales financing for Toyota's products and the
products of its subsidiaries and affiliates. Toyota’s network of financial services currently covers 32 countries
and regions.

At the end of March 31, 2008, the company’s net finance receivables outstanding for all of Toyota’s dealer
and customer financing operations were approximately JPY10.3 trillion (approximately $90.4billion),
representing an increase of approximately 2.7% as compared to the amount outstanding as of March 31,
2007. The majority of Toyota’s financial services are provided in North America. During FY2008,
approximately 61.9% of Toyota’s finance receivables were derived from financing operations in North
America, 12.6% from Japan, 13.1% from Europe, 4.0% from Asia and 8.4% from other areas.

The company’s ‘other’ segment includes its operations in telecommunications. Toyota currently holds around
12% ownership interest in KDDI, a full service telecommunications provider in Japan. The company also
designs and manufactures prefabricated housing and handles information technology related businesses,
including certain intelligent transport systems and an e-commerce marketplace called Gazoo.com.

Key facts Major products & services

Address Toyota Motor Corporation Automotive
1 Toyota-cho Mini vehicles
Toyota city Mid sized cars
Aichi Prefecture 471 8571 Luxury cars
JPN Recreational and sport-utility vehicles
Website http://www.toyota.co.jp Brands
Telephone 81 565 28 2121 Daihatsu
New York ticker TM Toyota
Turnover (JPYm) 2.6 Lexus
Employees 316,121 Hino
Financial year end March

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Company Spotlight MarketWatch: Automotive

SWOT Analysis

Table: SWOT Analysis

Strengths Weaknesses

Strong financial performance Poor profitability of ‘financial services’

segment
Brand image
Expenses related to post retirement benefits
Strong performance in Asia region for employees

Research and development activities

Toyota production system

Opportunities Threats

Increasing demand for hybrid electric Competition in the global automotive market
vehicles
Tightening emission standards
Opportunities in Asian market
Appreciating yen against the dollar
New models

Source: Datamonitor

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Company Spotlight MarketWatch: Automotive

Strengths

Strong financial performance

The company has recorded a strong financial performance in recent years. Toyota Motor’s revenues
increased at a compound annual growth rate (CAGR) of 11.1% during 2004–08, from JPY17,294,760m
(approximately $151,848m) in 2004 to JPY26,289,240m (approximately $230,820m) in FY2008.The company
also witnessed significant growth in profitability. The company’s operating profit grew at a CAGR of 8.3% from
JPY1,666,890m (approximately $14,635m) in 2004 to JPY2,270,375m (approximately $19,934m) in 2008.
The net profit of the company grew at a CAGR of 10.3%, from the net profit of JPY1,162,098m (approximately
$10,203m) in 2004 to reach JPY1,717,879m (approximately $15,083m) in 2008. Similarly, the cash from
operating activities grew at a CAGR of 8.1% from JPY2,186,734m (approximately $19,200m) in 2004 to
JPY2,981,624m (approximately $26,179m) in 2007. During 2004–08, the average operating profit margin and
net profit margin of the company stood at 9.1% and 6.5%, respectively. The strong financial performance of
the company has contributed to its market dominance. This, in turn, enhances investors’ confidence in the
company.

Brand image

Toyota is one of the leading automotive brands in the world. In the annual ranking of top 100 global brands by
BusinessWeek and Interbrand in 2008, Toyota figured in the sixth position. According to the survey, Toyota's
brand value has surged by 6%, to reach $34.1 billion in 2008. Furthermore, it is the highest ranking
automotive brand name in the world. It is ranked well ahead of its competitors like Mercedes, BMW, Honda,
Ford, Hyundai, Porsche and Nissan. For instance, in the same period, Ford has been faced with a number of
troubles, including a failure to meet its goals for SUV mileage gains or to exploit its well-regarded Escape
hybrid; subsequently, the brand value of Ford fell by 12%, to $7.9 billion in 2008. Toyota’s luxury car, Lexus,
also has an independent ranking in the top 100 global brands. The brand value of Lexus was around $3.6
billion, with a ranking of 90. Some of the other popular product brands of the company include Corolla,
Camry, Sienna, Prius and Scion. The company’s strong brand image gives it significant competitive
advantage and helps the company to register higher sales growth in domestic, as well as in international
markets.

Strong performance in Asia region

Toyota Motor registered strong business growth in the Asian region. The revenues of the company in this
region grew at a rate of 41.7%, from JPY1,969,957m (approximately $17,296.2m) in 2007 to reach
JPY2,790,987m (approximately $24,504.9m) for the FY2008. Furthermore, the company registered strong
growth in its profitability position. The operating profit of the company from Asia increased to JPY256,356m
(approximately $2,250.8m) in 2008 from JPY117,595m (approximately $1,032.5m) in 2007.The vehicle sales
of the company in the Asian region increased by 21% to reach 956,509 units for the financial year ended
March 2007, from the unit sales of 789,637 units in 2007. The company registered favorable sales in
Indonesia and increased its production capacity in Thailand responding to the increase in demand for IMV
models (Hilux and Fortuner) from outside Asia. Furthermore, the production in Asia also increased by 27.3%
to reach 961,000 vehicles in 2008. Increasing vehicle sales and operating profits in the Asian region indicate
an opportunity for the company to consolidate its operations in this emerging automotive market, and become
a leading player in this region.

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Company Spotlight MarketWatch: Automotive

Research and development activities

Toyota Motor has strong research and development (R&D) capability. The company incurred large
expenditure for its R&D activities. For instance, the total R&D costs of the company stood at JPY959 billion
(approximately $8.5 billion) in FY2008, JPY891 billion (approximately $7.8 billion) in 2007 and JPY813 billion
(approximately $7.1 billion) in 2006. Furthermore, the company employed nearly 34,000 engineers and
technicians for its R&D activities.

The company’s R&D activities focus on the environment, vehicle safety, information technology and product
development. In recent years, the company has come up with new innovations across product categories
such as hybrid vehicles, electric vehicles, fuel cell hybrid vehicles, gasoline engines and diesel engines. For
instance, in May 2008, the company developed Toyota FCHV, a fuel cell hybrid vehicle which can start and
operate in cold regions at temperatures as low as -30 degrees Celsius. The strong R&D capability enables
the company to build a broad range of vehicle portfolio and improves its competitive strength in the
automotive industry.

Toyota production system

Toyota developed the internationally recognized production system known as the Toyota Production System
(TPS) to achieve mass-production efficiencies even for small production volumes. The TPS is based on the
just-in-time and Jidoka principles. Just-in-time is a production method through which the company plans to
manufacture and deliver necessary parts and components in the right quantity in a timely manner and allows
the company to maintain low levels of inventory. Through Jidoka (an automation process used in the
manufacturing operations), the company can stops the work immediately when problems arise in its
production process to prevent the manufacturing defective products. Furthermore, some of the leading
companies like GE, Bayer, across the world adopted the TPS to improve the efficiency of their manufacturing
operations. This system helped Toyota to build quality into the production process by avoiding defects and
preventing the waste in its manufacturing operations. Furthermore, it improved the company’s brand image.

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Company Spotlight MarketWatch: Automotive

Weaknesses

Poor profitability of ‘financial services’ segment

Toyota’s financial services segment’s operations mainly include loans and leasing programs for customers
and dealers. The company’s ‘financial services’ segment witnessed poor operating performance in the last
five year period. During 2004–08, the revenues of the company from this operating division grew at a CAGR
of 19.7% to reach JPY1,468,730m (approximately $12,895.4m) in 2008. Although the revenues grew at a
higher rate, the operating income from this division declined significantly. The company recorded the
operating profit of its financial services operations at JPY86,494m (approximately $759.4m) for the FY2008,
representing a compounded annual decline rate of 12.3% from the operating profit of JPY145,998m
(approximately $1,281.9m) in 2004. With operations across the world, the ‘financial services’ segment
consumes considerable resources of the company. For instance, the total assets of the financial services
operations of the company stood at around JPY13,942.3 billion (approximately $122.4 billion), constituting
43% of the company’s total assets, which stood at JPY32,458.3 billion (approximately $285 billion) as of
March 2008. Continued poor profitability of the financial services division is likely to pull down the overall
financial performance of the company.

Expenses related to post retirement benefits for employees

Toyota Motor provides pension benefits and other post-retirement health and life insurance benefits to
employees. During the FY2008, the company incurred post retirement benefit expenses of JPY80,761m
(approximately $709.1m). The company also paid a total of JPY76,476m (approximately $671.5m) for the
post retirement benefit plans during 2007. Furthermore, by the end of March 2008, the company's projected
pension and post-retirement benefit obligations stood at JPY1,693,155m (approximately $14,865.9m) as
compared to the planned assets of JPY1,282,048m (approximately $11,256.4m), resulting into an unfunded
status of JPY411,107m (approximately $3,609.5m). Sizeable unfunded post retirement benefits would force
the company to make periodic cash contributions towards bridging the gap between post retirement benefits
obligations and planned assets, which would reduce cash available for growth plans.

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Company Spotlight MarketWatch: Automotive

Opportunities

Increasing demand for hybrid electric vehicles

Worldwide demand for light hybrid electric vehicles (HEV) is estimated to reach 4.0 million units by 2015.
Rising energy costs and increased emissions regulations are likely to increase the demand for HEVs, as
hybrid engines are more fuel efficient and less polluting than conventional gasoline and diesel engines. Cost
disparities between HEVs and conventional light vehicles are expected to decline as production volumes
increase. The primary markets for HEVs will be within Triad countries (the US, Western Europe and Japan),
although the rapidly growing Chinese market is also expected to experience relatively strong demand for
these fuel efficient and environmentally friendly vehicles. Toyota Motor is keen to capitalize on the growing
demand for hybrid electric vehicles. The company has spent a large amount of money for the development of
hybrid vehicles over the years. The cumulative total of Toyota Motor’s hybrid vehicle sales reached 1.5 million
in June 2008. Furthermore, the company plans to expand its hybrid lineup and achieve annual sales of one
million hybrid vehicles by early 2010. For this, the company plans to introduce demand-creating products. For
instance, the company scheduled to launch the iQ ultra-efficient package vehicle in Japan and Europe in
2008. The iQ was specifically designed to reduce CO2 emissions and realize higher fuel efficiency.
Furthermore, in January 2008, Toyota Motor announced its plans to commence sales of lithium-ion battery-
equipped plug-in hybrid vehicles to fleet customers in the US and elsewhere by 2010. The company also
launched models such as the Prius and LS600h hybrids at the 2008 Beijing International Automotive
Exhibition, held at the new China International Exhibition Center in Beijing. The company’s emphasis on
hybrid technology will enable it to capitalize on the positive market trends in this segment to enhance its
market position.

Opportunities in Asian market

The Asian automobile market is expected to drive global demand for light vehicles through much of this
decade. China, India and Association of South-East Asian Nations (ASEAN) countries are the major driving
markets for the Asian automotive industry. For instance, new car production in China is expected to increase
from 6.3 million units in 2007 to 9.4 million units in 2012, while new car production in India is forecast to
increase from 1.3 million units to 2.5 million units during the same period. The company is taking significant
steps towards increasing its presence in the Asian markets. In China, Toyota Motor operates seven joint
ventures and two wholly-owned foreign enterprises. Guangzhou Toyota Motor Company (GTMC), a joint
vehicle production and sales company established with Guangzhou Automobile Group, is an important joint
venture for the company in China. The company aims at expanding its model line up in China. For instance,
the company started the production of new Corolla at Tianjin FAW Toyota Motor plant in May 2007, and Yaris
at Guangzhou Toyota Motor in May 2008. In India, the company operates Toyota Kirloskar Motor (TKM) to
design, manufacture and market automobiles. Furthermore, Toyota decided to construct a second plant in
India with an annual production capacity of 100,000 units. This plant is scheduled to commence production of
the Corolla and other passenger vehicles such as newly developed compact cars in 2010. Furthermore, the
company is also looking to increase its production capacity in countries like Thailand, Indonesia and Malaysia.
The strong manufacturing and marketing operations in Asian markets would help the company to achieve
higher market share in this growing market.

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Company Spotlight MarketWatch: Automotive

New models

Toyota Motor launched several new models in FY2008. For instance, in April 2008, Toyota Motor displayed a
total of 50 concept vehicles at the 2008 Beijing International Automotive Exhibition, held at the new China
International Exhibition Center in Beijing, China. The company launched its models including the compact
Yaris, the new Vios and Lexus LX570 SUV, along with concept cars such as the iQ compact and the personal
mobility vehicle ‘i-REAL’. The company also displayed models such as the Prius and LS600h hybrids and the
GOA (Global Outstanding Assessment) collision-safety body represented by a Camry and Crown models. In
the following month, the company launched its redesigned Alphard (a luxury multi-purpose vehicle) as two
different vehicle series, the ‘Alphard’ and the ‘Vellfire *2’. Furthermore, in June 2008, Toyota Motor developed
Toyota FCHV, a fuel cell hybrid vehicle, which can start and operate in cold regions at temperatures as low as
-30 degrees Celsius. Besides helping to garner additional revenues, new models will also help the company
to revamp its aging model line up.

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Company Spotlight MarketWatch: Automotive

Threats

Competition in the global automotive market

The worldwide automotive market is highly competitive. Toyota Motor faces strong competition from
automotive manufacturers in its various markets. The competition among various auto players is likely to
intensify in light of continuing globalization and consolidation in the worldwide automotive industry. The
factors affecting competition include product quality and features, the amount of time required for innovation
and development, pricing, reliability, safety, fuel economy, customer service and financing terms. Increased
competition may lead to lower vehicle unit sales and increased inventory, which may result in a further
downward price pressure and adversely affect the company’s financial condition and results of operations.

Tightening emission standards

The European Union (EU) Commission and the EU Parliament have adopted a directive that establishes
increasingly stringent emission standards for passenger and light commercial vehicles for model years 2005
and thereafter (known as EURO 4). Under the directive, manufacturers will be responsible for the emission
performance of these vehicles for five years or 100,000 kilometers, whichever occurs first. A more stringent
emission standard (EURO 5) is also on the table of the EU legislative bodies and is likely to be effective from
2009. The EU Commission intends to define even more stringent emission standards (EURO 6), which, if
adopted, would become mandatory around 2014 or 2015.

In 2005, the states of New York, Massachusetts and Vermont adopted the California Zero Emission Vehicle
(ZEV) regulation, while the state of Maine adopted the ZEV regulation as of the 2009 model year. The state of
New Jersey will adopt the ZEV regulation starting from 2009.China adopted Step3 and Step4 emission
regulations for light-duty vehicles in 2005. These regulations are similar to EURO3 and EURO4. Step3 was
implemented from 2007 and Step4 will be implemented in 2010. South Korea adopted the enforcement
regulation of the Special Act on Capital Region Air Quality Improvement. Accordingly, some manufacturers
shall be required to sell low emission vehicles which meet a more stringent emission standard than those
meeting the national standard. In addition, several Asian countries adopted regulations which are similar to
EURO2 and EURO3. In Australia, EURO4-equivalent regulation was implemented in July 2008.The emission
standards adopted across various regions can result in additional costs for product development, testing and
manufacturing operations of Toyota.

Appreciating yen against the dollar

Toyota is sensitive to the fluctuations in foreign currency exchange rates and is principally exposed to
fluctuations in the value of the yen, the dollar and the euro. Toyota’s consolidated financial statements, which
are presented in yen, are affected by foreign currency exchange fluctuations. The changes in foreign currency
exchange rates may affect Toyota’s pricing of products sold and materials purchased in foreign currencies.
Most of the company’s business transactions are conducted in dollars, which are then converted to yen.

In recent years, the yen appreciated significantly against the dollar. For instance, the average exchange rate
for the yen in the first half of FY2009 (from April 1, 2008 to September 1, 2008) stood at $1=JPY106.1, a
decrease of 11% (per $1) over the first half of FY2008 (whose average was $1=JPY119.3). Similarly, the
average exchange rate for the whole of FY2008 was JPY114.3 to $1, which is significantly higher to the
average exchange rate for the first half period of FY2009. The strengthening of the yen against the dollar can
have a material adverse effect on Toyota’s reported operating results, which may in turn affect the valuation
of the company.

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