Toyota Recall Financing Dilemma
"Toyota
Motor Corporation is a Japanese multinational corporation and the world's
second largest automaker making automobiles, trucks, buses and robots and
providing financial services. Based in Toyota, Aichi, Japan,
the company boasted a total vehicle production of 9.018 million vehicles in 2006.
It is also the world's eighth largest company with revenue of $179 billion as
of 2006. Toyota is the world's most profitable automaker Toyota sells its
vehicles in Japan, North America, Europe and Asia.
The company was founded in 1933 and is based in Toyota City, Japan."
(Toyota)
Dealing with a recall is never a positive situation and will cost Toyota $925 million
dollars which it will most likely borrow from its future earnings at nominal
discount rates. However, given Toyota’s
positioning as the world’s eight largest and most profitable automobile company
they will be able to take this problem in stride. The biggest danger associated
with the recall will not be short term capitalization. To maintain its
impressive rate of growth Toyota
will have to conduct effective public relations damage control in an attempt to
safeguard its pristine reputation as a manufacturer of highly reliable
automobiles.
The Toyota Motor Corporation has been around for
greater part of last century. It really started to make a strong entry in the
North American and European car markets in the mid 1970’s. Their successful
product offering combining low prices and high reliability have been huge
factors in its successful profitable market-share growth ever since.
"For
more than a quarter of a century, we at Toyota
have relied on the talents of American designers and engineers to help ensure
that our vehicles meet local tastes and standards” (Toyota)
Toyota is increasingly becoming a more dangerous competitive threat to European
and North American car manufacturers. During the 1970’s their North American
product line focused mainly on economy cars and pickup trucks. Today they are
present in practically every key American automotive demographic with competing
products. They also entered what was once the domain of the European luxury
sedan manufacturers by introducing its line of luxury “Lexus” automobiles.
Although American and European car manufacturers have improved their product
reliability and they still have not managed to catch up with Toyota.
Japanese and European automobile manufacturers
benefit from a higher degree of degree of intra-governmental cooperation than
their American counterparts. Many of the worker benefits provided by US auto
manufacturers are provided to European and Japanese auto workers by their respective
governments. Furthermore, Japanese and European corporations are more heavily
subsidized than in North America. This allows
them to operate at a higher rate of return and gives them access to more
expansion and contingency capital which in situation like the aforementioned Toyota recall can come in
quite handy.
The costs of Japanese government subsidies to Toyota are passed onto
Japanese and European citizens via higher income and sales taxes. This
diminishes their purchasing power and negatively affects the size of their
automobile markets. Despite some of its drawbacks, this system has given Toyota a significant
competitive advantage abroad which it has been slowly building upon over the course
of the past 50 years.
Although borrowing against future earnings is the
most financially sound option available
to solve the recall dilemma, Toyota can avail of other options. Toyota could repeal some
if its sales incentive programs thereby raising the price on some of their automobiles
in an attempt to generate cash in the short-term. This would have a negative
effect on overall sales in the long term substantially reducing market-share.
"In
the United States, Toyota Motor Corporation's stock is offered in the form of
American Depositary Receipts (ADRs) on the New York Stock Exchange (NYSE). The ADRs are
traded under the symbol TM on the NYSE and are based on Toyota
shares traded in Japan.
Each ADR represents two shares of Toyota common
stock” (Toyota)
Toyota could
increase its capitalization by selling some of its stock off of any of the
international markets. The drawback of such a strategy would be reduced
leveraged control over any of its international subdivisions. Toyota
could also request, however unlikely, that the Japanese government invest or
provide Toyota
a industrialization grant. The money could be moved around eventually find its
way towards paying for the recent recall.
Dealing with a recall is never a positive situation
and will cost Toyota
$925 million dollars which it will most likely borrow from its future earnings
at nominal discount rates. However, given Toyota’s
positioning as the world’s eight largest and most profitable automobile company
they will be able to take this problem in stride. The biggest danger associated
with the recall will not be short term capitalization. To maintain its
impressive rate of growth Toyota
will have to conduct effective public relations damage control in an attempt to
safeguard its pristine reputation as a manufacturer of highly reliable
automobiles.
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