Toyota Australia

Executive Summary

In the aftermath of the global financial crisis in 2008, the Australian automobile manufacturers operated in an adverse environment. Two of the top manufactures in Australia, General Motors Holden (Holden) and Ford, expressed the hardship of operations and planned to exit car manufacturing in Australia, which would impact the operation of Toyota including supplier networks. As a result, Toyota started to think of its future plan if Toyota should follow Holden and Ford to exist manufacturing in Australia or continue operating in Australian manufacturing market. In this essay, we used SWOT analysis and the Five-Force Model of Competition analysis to analyze the current situation for Toyota. It dealt with high production cost, low local demands, suppliers with strong bargaining power and intensive competition from imported vehicles. At the same time, Toyota Australia also received assistance from government, and exported its cars in a highly open-trade environment. In all, we recommend that Toyota should not exit the market and continue operating as a low cost provider by conducting “Kaizen” continuously, hiring experts and adopting advanced technology, integrating with suppliers and retailers vertically, exporting its products to balance the low local demand and restructuring its organization by outsourcing.

Stakeholders

Shareholders of Toyota Motor Corporation Japan: They want to maximize their overall returns, and reasonably allocate their resources and capacities worldwide.

Management of Toyota Australia: They want to keep their business and continued operating as a market leader in Australia by adopting a Low-Cost Provider Strategy, however, it is a must for Toyota Australia to incorporate its operations with its parent company’s the overall strategy.

Employees: Employees of the Toyota Australia want to make sure they have job securities, receive fairly good compensation and have a work life balance. Specifically, the manufacturer workers, protested by Australian Manufacturing Workers’ Union, did not support the proposal of reducing workers’ overtime payments and allowances in order to reduce the production costs.

Constraints

First of all, the local low demand is very critical for Toyota, but there is very little they could do about it due to population limit of Australia. It is very tough for Toyota to operate in such environment and make profits for its stakeholder. In addition, the supplier network as well as dealership network are very critical for Toyota to reduce its costs when producing vehicles. The existence of Holden will negatively influence the local supplier network, and some of the suppliers may think of quitting their business or increase their prices. Lastly, one of Toyota’s missions is to enrich community and Toyota need to take social responsibility. All of its employees are protected and supported by AMWU, therefore, Toyota need to cooperate with AMWU if they want to cut labor and their wages.

Issues: Given the facts that Holden plans to exit car manufacturing by the end of 2017 and Ford will stops making vehicles in Australia in 2016, Toyota is uncertain if they should stay manufacturing vehicles or not, while facing a undesired demand and cost situation in Australia.

Criteria for Decision Making

First, the management of Toyota should make sure decisions are aligned with company's vision - “most admired and respected company” - and mission - “We deliver outstanding automotive products and services to our customer, and enrich our community, partners and environment”.  Second, every action taken by Toyota Australia should comply with applicable laws, rules, regulations and professional ethics. Third, the management should take the feasibility into account, in other words, if Toyota has the capacity and resources (physical plants, technology and human capital) to complete the tasks. Lastly, the management should make sure Toyota fulfill its corporate social responsibility in the process of making profits - if Toyota create long term shared value for its shareholders, employees, customers, environment etc.

Analysis of Current Situations

SWOT Analysis

Strength:

• Toyota Australia was founded in 1958 in Australia with long history of vehicle manufacturing, and emerged as the market leader in Australia since 1991 with strong brand-name image and loyal customers.
• As we know steels and metal products are critical for car manufactures. Australia is the country of origin for mine and steel, Toyota can save a lot on the transportations and can negotiate conveniently with local suppliers.
• Toyota follows “Just in time” approach, “Kaizen”, and “Jidoka”, which allow Toyota save unnecessary production costs, improve quality and function of cars continuously, and pay attention to problems immediately if something goes wrong during the production.
• Toyota builds three models in Australia - Camry, Camry Hybrid and Aurion. Camry was the number-one selling car in Middle East. And from later 2012, Toyota started to manufacture more fuel efficient engines for Camry and Camry Hybrid in order to meet customers’ needs.
• A transformation project was implemented, aiming to improve efficiency and reduce cost.

Weakness:

• The manufacture costs are high for the following reason. First, the production is well below the optimal scale of operation, and the capacity is always underutilized. Second, the local auto component manufacturers sell products at a higher price level compared to import, however, Toyota needs to spend additional money for reviewing the source of import and its quality.
• The carbon tax and the luxury car tax also contributed to the high cost of manufacturing cars.
• Toyota Australia highly depended on exports, however, it was discouraged by the free trade agreements (FTAs). If Toyota wants to export cars to partner countries, it need to pay high tariff rates on its exported cars, decreasing the potential profits for Toyota Australia.

Opportunity:

• The liberal trade policies had been available since the mid-1980s, and the quantitative restrictions were eliminated and tariff were brought down to 5%. With the direct assistance from Australian government and various free trade agreements, Toyota can export its cars to countries nearby, which not only help generating profits but also optimize the scale of operation.
• Since Holden and Ford will exit from the manufacturing market in Australia, Toyota should consider to communicate to these two companies, if possible, Toyota may be able to purchase desired plant and equipment from them at a discounted price or use their supplies and distribution chain. More importantly, HR of Toyota may also think of hiring expertise from Holden and Ford to add value to the value chain.
• Australian government also provided direct assistance in Toyota’s investment, research and development expenditures - Toyota received $1 government support when it spent at least $20 related to manufacturing in Australia.

Threats:

• After the global financial crisis, there were structural changes in the geographic distribution of demand that the demand for automobiles shifted to developing countries and composition of demand that consumers prefer to small fuel-efficient cars.
• Working in an adverse external environment, Toyota also need to compete with foreign manufacturers. Given the highly open trading environment and sustained strength of the Australian dollar, it was cheaper for local consumers to purchase imported cars and more expensive for foreign consumers to purchase Australia exported cars, which significantly reduced the profitability of Toyota.
• FTAs with Thailand, Japan and South Korea did not work properly as expected. All the partner countries kept the imported cars out of their domestic markets, in other words, Toyota did not have the opportunities to export cars to these partners counties while their exports to Australia made the local market more competitive.

The Five-Force Model of Competition

• Competition from rival sellers is high. Compared to foreign manufacturers, Toyota and any other automobile manufacturers in Australia operated at small scale of operations with high production costs, given the facts that automobiles became less differentiated in terms of shape, colour and functions. Foreign manufacturers were able to sell at a lower price while providing similar values for customers, they will be able to generate more profits, which led Holden and Ford existing manufacture in Australia.

• Competition from potential new entrants to Australia is low. Given adverse economic environment in Australia - high-costs and low-demand, it is not probable that automobiles are interested in joining Australian market in fifteen years.
• Competition from of substitute products is low. Automobile plays an irreplaceable role for both family and business by taking people to anywhere they want to go at a fairly quick speed.
• Supplier bargaining power is fairly high. The local auto component manufacturers kept prices high because they were affected by the small operation scales like Toyota. Although Toyota managed to import cheaper components, additional costs, such as investigation and transportation, also negatively impacted Toyota’s low cost strategy. More importantly, differentiated inputs, requiring minimal or no modifications, will enhance the efficiency of production and the performance of automobiles, which will help Toyota meet its customers’ needs. Thus, the options available for Toyota are limited and the bargaining power over the price for suppliers is high.
• Customer bargaining power is high. Living in Australia, with highly open trade policies, there are approximately 365 models available for Australian, and it is very easy for them to compare different automobiles using internet. In other words, most customers will be able to have the knowledge about the products in every perspective and the price of similar products. Since the switching cost for consumers is almost zero, they can choose to purchase any products they like with lowest prices.

Alternative Strategic Solutions & Recommendations

Low Cost Provider

Toyota Australia should concentrate on a Low-Cost Provider Strategy as its competitive strategy, by striving to provide a lowest overall costs than the competitors to attract a broad spectrum of buyers. Compared to both local (e.g. GM & Ford) and global car production industries, Toyota’s core competitive value is providing a lower cost and economic vehicle. Hence, the Australian subsidiary should follow the competitive strategy of low cost provider.