Friday, October 17, 2008

Another Toyota Advantage

Toyota has announced a $250 million ad campaign to introduce 0% financing on 11 of its models. At first glance, it looks like another attempt by an automaker to generate business during the latest slowdown in U.S. auto sales. After all, Toyota sales have been hit hard during the last several months – last month showing a 32% drop over September 2007. Digging a little deeper into this campaign, however, gives a little more insight into the Toyota way of doing business and how they are able to offer a type of incentive that would be very difficult, if not impossible, for its U.S. rivals to match.

Toyota has approximately $19 billion in cash, while Ford and GM are hemorrhaging. While the growth in Toyota sales over the last several years, as well as sales of high margin cars like the Prius, is part of the reason that the company is sitting on such a large amount of cash, it doesn’t give the whole picture. It wasn’t very long ago that GM and Ford were selling SUVs and pickup trucks at record levels and hauling in huge amounts of profits. The difference is that Toyota holds on to its cash so it can weather a downturn in business while Ford and GM (as well as many other U.S. businesses) give theirs away as bonuses to executives. Toyota executives are paid well, but their compensation does not come close to the amounts received by their counterparts at U.S. companies.

Although reading reports from analysts would make one think otherwise, it is ridiculous for any company to assume that it can achieve growth and profitability every year. Toyota understands this and puts away a portion of its profits every year to provide a cushion for years when business drops off. Fortunately for Toyota, it has been a number of years since they experienced a downturn, so their level of cash reserves has grown to enormous levels.

Keeping cash from the good years enables Toyota to offer 0% financing to its customers now while GMAC and Ford Motor Credit struggle to find the cash to stimulate sales. And this situation has even more far reaching consequences than are visible at first glance. If, for example, GMAC does not have the cash to offer customers financing, its sales will continue to slide, causing a further decline in profits which forces it to use more cash to finance its operations. This results in further declines in the amount of cash available to offer customers and further reduces sales and profits. This type of downward spiral is difficult to escape. This type of situation appears to be driving the move by GM to purchase Chrysler which, at the moment, has several billion in cash reserves.

Another benefit to Toyota’s cash position is its ability to keep paying workers while it temporarily shuts down production in its factories. Workers at the Toyota plants affected by the shutdown are still paid to come into work. Instead of building new cars and increasing inventories, however, they attend training classes in safety, quality, and productivity, and work to improve the processes so when production starts up again, they are even more efficient. This practice also keeps employee morale high and increases the level of commitment people have to the company.

Time will tell if Toyota’s 0% financing offer will work to stimulate sales. It may be that people are not willing to buy a new car when they don’t know if their jobs are secure or their investments will recover. About the only certainty in the foreseeable future, though, is that “The Big Three” will be GM, Toyota, and Honda. By purchasing Chrysler, GM will hold onto the top spot for a little while longer.

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