CAR INDUSTRY ANALYSIS

Toyota vs. Honda

By:

Blaire Davidowitz, Greyson Katkaveck, Sara Wall, and Yati Vaghani

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CONTENTS

Part I: Describe Two Publicly Traded Business Rivals...............................................................................................3

Total Assets.........................................................................................................................................................................6

Operational Efficiency....................................................................................................................................................7

Share of Market.................................................................................................................................................................7

PART II: OPPORTUNITY...........................................................................................................................................................8

PART III: INDUSTRY ANALYSIS.........................................................................................................................................10

Threat of Rivalry............................................................................................................................................................10

Threat of Suppliers.......................................................................................................................................................11

Threat of Substitutes....................................................................................................................................................11

Threat of Buyers............................................................................................................................................................ 12

Threat of New Entry.....................................................................................................................................................12

PART IV: STRENGTH ASSESSMENT.................................................................................................................................15

Works Cited................................................................................................................................................................................ 19

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PART I: DESCRIBE TWO PUBLICLY TRADED BUSINESS RIVALS

1. Toyota and Honda are two publicly traded businesses that compete in the same industry.

a. Both companies are headquartered in Japan. Toyota is located on 1 Toyota-Cho in

Toyota City, Japan, while Honda is located on 1-1, 2-ChomeMinami-AoyamaMinato-ku in

Tokyo, Japan (Standard).

b. According to Standard and Poor’s, Toyota Motor’s and Honda Motor’s corporate

overviews respectively are:

“Toyota the world's largest vehicle manufacturer based on sales and production

volume.” They actively use information technology to increase their customer loyalty

and company and brand image (Standard).

“Honda Motors is a leading manufacturer of automobiles. The company aims to create

value by offering high-end innovative products, establishing advanced customer

relations activities, and building a foundation for new business projects (Standard).”

c. According to IBISworld.com, Toyota and Honda compete in the Automobile

Manufacturing Industry (IBIS).

2. According to the Bureau of Labor Statistics, the automobile manufacturing industry was one of

the largest manufacturing industries in 2008. This industry employs over 877,000 individuals

in the United States (Bureau). Where in the past there was demand for a quantity of workers,

now there is more demand for multi-skilled workers. This means that the automobile

manufacturing industry expects its workers to have a wide variety of skills. Companies are

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hiring fewer employees, however, these employees are better skilled and more capable of

performing multiple tasks.

Along with increased demand for a multi-skilled worker, there is an increase in employability

for workers with higher technical education. For instance, workers should have a two-year

technical degree whereas in the past, education was not a key factor in employability.

Additionally, the automobile manufacturing industry is extremely volatile. Because the

industry follows economic cycles job increase in business and workers increases in up-swings,

and decreases in recessions (Standard).

In the future, this industry can expect to see a large increase in job openings due to a large

number of auto workers reaching retirement. In the 1980s business was booming and there

was a large increase in the demand for cars called the business boom. The business boom along

with the aging baby boomer population will soon retire leaving vacant positions. To fill these

jobs the industry will be looking for more highly skilled workers. As the industry progresses

automobile manufacturing jobs are expected to shift from the Midwest to the Southeast

(Bureau).

3. Over the period of 2006-2011, there have been some obvious trends in strategic and financial

ratios for Honda and Toyota. The following graphs depict the trends in return on equity, share

price, total assets, operational efficiency, and the share of the industry value.

+ All financial data came from Standard and Poor’s.

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RETURN ON EQUITY

Return on equity (ROE) measures how well a company uses reinvested earnings to generate additional

earnings.

Both companies show an ROE trend with some similarities from 2006 to 2010. In 2006 both

companies had fairly strong ROEs with Honda’s being slightly higher. As more customers became

concerned with energy efficiency Toyota experienced an increase in revenues from 2006 to 2007,

while Honda, late to respond, performs slightly lower. In 2008 when the recession hit, the entire

automobile manufacturing industry took a negative hit in revenues and experienced large

decreases in ROE. Up until 2010 both companies have been working to stay afloat as the recession

subsides. Honda has been more effective at increasing ROE than Toyota (Standard).

SHARE PRICE

Share price can demonstrate how a company is performing, or how others perceive a company is

performing.

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While Toyota’s share price has been historically higher than Honda’s, it has also been more volatile.

In both graphs you can see a decrease in stock price beginning in 2007 and ending in 2009. This

can be explained by the recession that hit all businesses, especially this industry. Also, the credit

crunch caused an increase in price of materials in 2008 affecting most companies in the automobile

manufacturing industry.

TOTAL ASSETS

Assets are anything capable of being owned. Assets can be tangible or intangible, or can be

controlled to produce value. An asset is normally held to have positive economic value.

As evidenced in these graphs, companies in the automobile industry benefit from access to capital

and assets such as maximizing capacity (economies of scale). Having adequate funds also allows for

access to the latest available and most efficient technologies in the industry. These graphs have a

very similar pattern to each other. Assets increase throughout 2006-2008 as more people buy cars

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and the huge demand from Toyota for Hybrid cars. As the economy hits a recession, the total assets

start to level out because the companies are holding on to the assets that they have, while fewer

cars are being sold.

OPERATIONAL EFFICIENCY

For these companies the inventory turnover ratio (operational efficiency) is used for evaluating

sales effectiveness and how fast new inventory is purchased and then resold to customers.

The operational efficiency, also known as the inventory turnover ratio, is used to determine how

fast new inventory can be purchased and then resold to customers. This is an important factor in

the auto manufacturing industry. A higher inventory turnover rate is better. Toyota has the highest

operational efficiency, allowing them to convert inventory into sales faster than Honda. Higher

turnover ratio in 2008 for Toyota can be attributed to the shortage in energy efficient cars. In other

words, Toyota was able to sell their cars faster than usual as they were in higher demand.

SHARE OF MARKET

For the share of industry value, or team is using market share because in this industry, these two

rivals compete with very similarly priced products. It should be mentioned that market share

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drives profitability. Very often, a higher market share means greater economies of scale and a

higher rate of return.

(Washington Post) (The Operations Room)

Honda has experienced a lower market share because it has been less aggressive about vamping

production. Instead od producing more automobiles Honda has been hesitant, often waiting to see

demand before excess production. This shortage has made the inventory and allocation system of

automobiles between Honda and its dealerships less efficient. Toyota’s decrease in market share is

contributable to the mass recall issued in 2009. Toyota has had a difficult time regaining market

share in light of the defective automobiles.

PART II : OPPORTUNITY

1. According to IBISWorld, this industry is “involved in manufacturing motor vehicle parts and

accessories other than engines, engines parts, batteries, tires, bodies and chassis (IBIS )”. How

the vehicles are actually made and assembled is not included in this industry definition.

Manufacturers like Toyota and Honda normally supply parts to the inventive equipment

manufacturers who in turn use the parts to manufacture new automobiles or replace old parts

(IBIS).

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2. The graph below details the geographic spread of sales from 2010 in regard to revenue

generated. Keep in mind that this is right in the recession. Europe (specifically UK, France, and

Germany) and North America are the leaders of the geographic market in relation to revenue.

This graph shows that most revenue comes from Europe, however, the most cars that are out on

the streets and in the sellers’ lots are in the United States, which consists of the 50 states,

Canada, and Mexico). Therefore, as far as the highest demand goes, the United States is the

leader (IBIS)

REVENUE BY AREA FOR 2010

  Region Percentage

Europe 30.3

North America 27.5

North Asia 26.0

South America 5.9

South East Asia 4.9

India & Central Asia 1.9

Africa & Middle East 1.8

Oceania 1.7

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(WSJ 2)

The graph above shows the number of vehicles sold (in millions) in the United States from 2009-

2011. We can see that demand in industry is still increasing.

Cars 17.9Light-Duty Trucks 22.6Total SUV/Cross-over 21.9Total SUV 28.4Total Cross-over 19.0(WSJ 2)

The graph above shows the percent change in segment totals, year to date for the year from

March 2010- March 2011 for the type of cars sold in the United States. Sales are definitely increasing.

PART III : INDUSTRY ANALYSIS

1. This industry is competitive and has multiple high power threats to profits such as the threat of

rivalry, suppliers and buyers. On the other hand, threat of new entry and substitutes are low in

this industry.

THREAT OF RIVALRY

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Threat of rivalry is high in this industry. The most significant competitive bases are price, quality,

efficiency, supply chain integration, industrial relations, types of car manufactured and product

innovation, such as development of hybrid vehicles (Thormahlen 22). The car and automobiles

manufacturing industry has a moderate market share concentration, with top four firms accounting

for 55.6% of industry output in 2011. The next four largest companies are not too far behind. The

top eight companies account for 85.3% of industry output. IBISWold expects the market share

winners over the next five years to 2016 will be the companies that can most effectively balance

affordability, technological advancement and attractive product styling (Thormahlen 20).

Industry profit margins are low compared to other industries, which leads to a highly

competitive climate and higher fixed costs (Thormahlen 21). Overall, the industry experiences high

material costs, which have been on the rise during the past five years due to an increase in the price

of steel. These high costs are partly responsible for the industry’s low profit margins even when

demand and economic conditions are favorable (Thormahlen 21). Automakers try not to reduce

material costs because it might hurt the quality of product, which is very important in this industry.

Every year, there are recalls in this industry due to defects on parts, which in turn can hurt the

reputation of companies in the short and long term.

THREAT OF SUPPLIERS

The threat of suppliers for the automobiles industry is high. Modern production methods, such

as just-in-time production, require full and efficient collaboration across the supply chain. By law,

automakers must source their components from different companies. Because of this law,

competitors in this industry need to have strong relationships with all their vendors in order to

ensure the smooth flow of production. An example of this factor is when Toyota had to cut its

production by 75% because supply of parts was limited due to the earthquake in Japan (NY Times).

Honda also had to cut its production as they work to obtain inventory it needs from parts made in

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Japan. As they become more global, suppliers have been consolidating. In the process, they have

expanded their product offerings and gained economies of scale to keep pricing competitive (Levy

18).

THREAT OF SUBSTITUTES

The threat of substitutes is low in this industry. External competitions come from substitutes

like public transportation and bicycles in urban areas for commuting and recreational purposes

(Thormahlen 22). The rental car industry has been generally rising, as industry revenues peaked at

19.40 billion in 2000. Another trend in the vehicles rental market is the rise of car-sharing/hourly

rental car companies verse the traditional rent-by-the-day or longer services (Levy 12). Used cars

could also be another substitute for new cars, which are typically more expensive (Levy 16).

THREAT OF BUYERS

The threat of buyers in the automobile industry is high. Keeping up with product demand trends is

an important competitive strategy. When consumers want more fuel-efficient motor vehicles, the

automakers that respond to this change in demand the quickest will have a competitive advantage

over their competitors (Thormahlen 22). Toyota’s US market share fell from 19.5% to 16.8% as

panicked and angry car buyers opted to purchase cars from other companies after Toyota’s

enormous recall of eight million vehicles. Consumers still want vehicles that are safe and fun to

drive. Demand for latest technology continues to drive growth in automotive electronics (Levy 12).

Cars are a major purchase for most families, and consumers need to feel comfortable before they

spend so much of their hard-earned money. Safety has captured vehicle buyers’ attention in recent

years and has become a pervasive theme in automakers’ ad campaigns (Levy 24). A high level of

consumer confidence generally signals that people feel good about the economy, their job

prospects, and their future earning ability (Levy 28).

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THREAT OF NEW ENTRY

The threat of new entry is low for this industry. The industry is capital intensive, with wages accounting

for a low proportion of revenues. Large-scale production requires significant capital to install automated

processes (Thormahlen 31). Large capital commitments are required to keep pace with product

development and model changeovers. With outsourcing on the rise, some automakers are requiring that

their suppliers pick up an increasing share of capital spending (Levy 22). Government regulation is

medium with regulations regarding safety; fuel consumption and pollution control (Thormahlen 34).

2. There are two low-power forces, which are the threat of substitutes and the threat of entry. Since

there are two low power forces, for a company with no particular strengths or weaknesses on key

success factor, the expected profitability will be about equal to the cost of capital. Since

financially this industry has higher risk of credit, it is more greatly affected by changes in the

economy. If there is an increase in price of raw materials, profit will shrink more, making it hard

to maintain market share in the industry.

3. Key Success Factors (KSFs) are “specific resources and activities any competing company

must be good at if it is to be profitable in satisfying demand and defending against high-

power competitive threats” (Measuring 4). In order to be profitable in the motor vehicle and

parts manufacturing industry there are numerous KSFs needed. These KSFs include

Inventory Turnover, Economies of Scale, G Star, and Manufacturing Efficiency.

Inventory Turnover is how often inventory is sold and replenished over the course of a

normal operating cycle. A high inventory turnover means that a company is selling their

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products quickly, which in turn brings in more revenue. In order to measure Inventory

Turnover the total revenue is divided by the average inventory (Measuring 5).

Another KSF that is beneficial for companies in the motor vehicle and parts manufacturing

industry is Economies of Scale. Economies of scale are when business activity chains

combine or share resources (Corporate 6), and this is important because it significantly

helps companies reduce costs. It can be measured by dividing the costs by the total assets,

and the lower the results the better (Measuring 5).

G star is the index of sustainable growth for a company. It is measured by subtracting the

dividend payout ratio from one and multiplying the result by the Return on Equity

(Measuring 5). If the result is more than the company growth rate, then cash is available to

flow to the corporation, but if the result is less than additional financial resources to keep

up with the growth so its cash does not flow to the corporation (18).

Finally, the last KSF is Manufacturing Efficiency. In order to measure this KSF cost of goods

sold is divided by sales revenue. This is important to success because the more efficiently a

motor vehicle and parts manufacturing company can produce, the less time and money is

wasted. A lower manufacturing efficiency is sought after in order to attain a profitable

outcome (Measuring 5).

4.

KSF’s Honda Toyota

Inventory Turnover

(revenue/average inventory on balance sheet)

6.4 11.3

Economies of scale .9145 .62

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(costs/total assets)

G*

((1-Div Payout)*ROE)

9.6 1.3

Manufacturing Efficiency

(cogs/sales revenue)

.74 .84

5. Economies of scale helps protect against the threat of rivalry because economies of scale are

an excellent way to cut costs. By combing and sharing resources throughout different

business activity chains, companies are able to spend less money on those resources. If a

company can cut costs while still providing the same quality service or product then they

have an advantage over rival companies in their industry.

Manufacturing efficiency helps protect against the threat of buyers. As companies find new

and innovative ways to efficiently manufacture automobiles and automobile parts, buyers

are more likely to purchase those products. Buyers are looking for parts that will work with

the least amount of problems, so their decision is based on which company can produce the

most reliable product

PART IV: STRENGTH ASSESSMENT

1) To assess the strengths of Honda and Toyota, we used the following Key Success Factors.

Inventory Turnover: Because of the expense of excess inventory in Honda and Toyota’s industry, it

is important to examine the inventory turnover ratio. Inventory turnover is calculated by dividing

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revenues by the average inventory on the balance sheet. A higher inventory turnover rate means that

the company has been more successful at turning inventory into sales in a given period.

G *(Index of Sustainable Growth): The index of sustainable growth indicates how much access to

financial capital a company has. In other words, G* reveals how much a company should be able to

grow if they efficiently use all of their resources. A higher G* indicates that a company is more

capable of growth in the future. In the Motor Vehicles and Parts Industry to keep up with consumer

wants and needs, these companies must be able to invest money into research and development. The

Index of Sustainable Growth also supports economies of scale. A company that experiences more

growth is better prepared to cut internal costs, thus realizing economies of scale.

Manufacturing Efficiency: Manufacturing Efficiency indicates how efficiently a company is able to

complete their manufacturing process. Because of the high costs of materials such as steel, it is

important for manufacturers in this industry to efficiently manage the manufacturing process to lower

internal costs where possible.

Economies of Scale: Economies of scale demonstrates how well a company has been able to cut

down on internal costs, thus allowing for a higher profit. As production increases costs per individual

pieces of production tend to decrease. Economies of scale are an important factor because it allows a

company to offer a better price to customers without having to give up profit.

Financial data for the calculation of the following key success factors came from Bloomsberg

Business Week, Standard and Poor’s NetAdvantage, ADVFN.com, Stock Analysis on Net and

Forbes.com for the year 2010.

Key Success Factor Honda Toyota

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Inventory Turnover

(Revenue / Average Inventory on Balance Sheet)

6.4 11.3

G *- Index of Sustainable Growth

(1 – Dividend Payout Ratio) * ROE

9.6 1.3

Manufacturing Efficiency

(COGS / Sales Revenue)

.74 .84

Economies of Scale

(Costs / Total Assets)

.9145 .62

Key Success Factor Honda Toyota

Inventory Turnover 1 5

G* 5 1

Manufacturing Efficiency 5 1

Economies of Scale 1 5

2)

Key Success Factor Honda Toyota

Inventory Turnover 1 5

G* 5 1

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Manufacturing Efficiency 5 1

Economies of Scale 1 5

Total 12/4=

3

12/4 =

3

3) Upon completion of the strength assessment test, we find that Honda and Toyota are equally poised

for success in their industry. Honda performed better on index of sustainable growth and

manufacturing efficiency, while Toyota performed better on inventory turnover and economies of

scale. Honda’s advantage on the index of sustainable growth suggests that they will be better able to

pursue growth, research, and development, allowing them to better meet consumer demand. On the

other hand, Toyota’s advantage in inventory turnover suggests that they have been more effective in

selling their product than Honda.

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http://www.bls.gov/oco/cg/cgs012.htm (visited APRIL 26, 2011 ).

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