Economic Research Analysis

Analysis of Toyota

Toyota is one of the largest auto manufactures in the world. The company began in Japan but attained true success when it entered the U.S. auto market in 1957.  The first Toyota dealership was built in Hollywood, California. From that single dealership, Toyota expanded to 10 manufacturing facilities located throughout the U.S. Each year, Toyota produces 1.25 million vehicles in the US (Reuters, 2014). Toyota also maintains business competencies in financing and lending as well as housing and communications (Reuters, 2014).  Toyota is one of the most successful companies in the research and development. Currently, Toyota creates more patents per year than any other car or technology based company.

Market Structure

Toyota has a market structure somewhere between oligopolistic and monopolistic.  Toyota is considered to be an oligopoly in the automotive manufacturing market. There are limited numbers of large automotive manufacturers that compete in this market including companies such as: Ford, GM, Honda, etc. Of the different manufacturers, Toyota is the largest maker and seller of cars. As an oligopoly, this market is defined by specific barriers to entry:

  • Has a few number of firms
  • Entry is difficult due to high cost
  • Has both, standardized or differentiated products
  • Has a limited control over price by mutual interdependence(O’Sullivan & Sheffrin, 2003)

Toyota Inc. is also a monopolistic market when it comes to automotive selling.  This market structure is defined by the many competitors and products to choose from such as Ford’s and Volkswagen. While there are many different brands, there is somewhat of a monopoly in terms of imports in the US.  The largest importer and seller in the US is Toyota. This gives Toyota an (almost) monopolistic market structure that is defined be specific characteristics:

  • Has differentiated products
  • Has some control over price, but within rather narrow limits
  • Has a considerable emphasis on advertising, brand names, trademark(O’Sullivan & Sheffrin, 2003).

While Toyota is an extremely successful company it has many issues with long term selling stability. These issues can be seen through the analysis of macro level trends.  Studying factors such as interest rates, the business cycle, the GDP, unemployment, fiscal and monetary policy, and international trade can provide a view of what is impacting the automotive industry.

The Business Cycle

The business cycle is a revealing factor because it provides important factors regarding purchasing and timing. Timing can impact the pricing and financing of the automobile, making it a beneficial time to purchase a car. This factor of timing can be viewed in terms of the business which contains economy-wide fluctuations in production or economic activity over many months or years. When viewing the fluctuations, trends tend to develop over time with shifts between periods of relatively rapid growth and periods of relative stagnation or decline (O’Sullivan & Sheffrin, 2003). These fluctuations are measured using the GDP.   The business cycle provides one with a view of the direction of the economy compared with prior years provides a predictive movement for the economy and thus the automotive industry (O’Sullivan and Sheffrin, 2003).

The GDP has grown since 2014 by 2.211% which is a good sign for recovery and strengthening of the automotive market (BEA, 2017).  However, this growth has been small and has not provided a strong future for the automotive manufacturing market.

GDP

The cyclical movements of the economy within the business cycle are reflected in the changes in GDP.  Because the pattern is generally cyclical, one can make reasonable predictions concerning the future of industries and sales.  For example, periods of slow economic progress cause reductions in interest rates, and are therefore generally the best times to purchase automobiles which is currently what has been occurring since the great recession (O’Sullivan and Sheffrin, 2003). In contrast, a growth in the business cycle will have the impact of increasing interest rates overtime but this has not been occurring.  The automotive market has remained in a state of slight growth since 2008 as the economy crashed.  As such, automotive buying remains a favorable area for buyers but few people are purchasing.

Real Personal Consumption

The real personal consumption measure provides some revealing data which the fact that consumption of the GDP has remained in a state of slight growth many years.  This ultimately means that Americans are not purchasing and consuming at an accelerated rate. The reasons for this may be focused on other issues such as unemployment.

CPI

The CPI has remained relatively static since 2006.  This is a measure of inflation which has a large impact on the automotive industry.  This change in inflation is the result of many different factors such as cost of oil and taxes. Increased oil prices cause increases not only in fuel costs but in production costs of cars. This same affect is seen when taxes are raised on fuel prices. Taxes inflate the cost of fuel and thereby increase cost for the automotive industry. To fully understand this relationship one need only study the CPI increase between 2003 and 2008. The CPI rose 19.71% due to natural disasters coupled with shortages and political unrest in oil production countries:

Higher oil and gas prices therefore accounted for 37.48 percent of the percent change in the all-items CPI in 2008. Rising oil and gas prices accounted for a substantial amount of the inflation both over the entire period from 2003 to 2008 and in 2008 (Ajmera, Kook, & Crilley, 2017).

FED Funds

Despite low interest rates, spending has remained low at a macro level. This is most likely due to employment figures and income.  When Americans are employed at higher rates, more cars are purchased and as spending increases.           Currently, the conditions for spending in the U.S. are favorable for purchasing a car.  Prices are low, since the market has still not fully recovered from the recession. However, the automotive industry has grown only slightly in terms of sales.

All numbers in thousands

Sales Revenue 3/31/2016 3/31/2015 3/31/2014
Total Revenue 252,708,000 227,096,000 249,472,000

(Toyota Investor Relations, 2017)

As one can see, Toyota sales have only begun increasing in 2016.  This shows that the market is not favorable for consumers due to certain conditions. Most likely, it is due to loss of income from the recession and fear of buying.


 

Recommendations

Toyota may wish to consider a longer term pricing strategy to help individuals who are still recovering from losses during the recession. The quality and long life of Toyota cars allows for longer terms of financing such as 8 years.  This would entice many buyers back to the automotive market.  Another non-price strategy would be to offer more add on to the purchase such as radios and alarms which could entice buyers while adding to the financing of the vehicle.

References

Ajmera, R., Kook, N., & Crilley, J. (2017). United States. U.S. Department of Labor – Bureau of Labor Statistics. Impact of commodity price movements on CPI inflation.

O’Sullivan, A., & Sheffrin, S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey : Pearson Prentice Hall.

Reuters. (2014). Toyota Motor Corp (TM). Retrieved from Reuters

Toyota Investor Relations. (2017). 2017 Financial Report. Retrieved from Toyota Corporate

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