May 15, 2018

Toyota announces record profit

Toyota Motor Corp. announced on Wednesday that it booked a record net profit of $23 billion for the last business year, despite uncertainty caused by once-in-a-century changes faced by the automobile industry and rising protectionism.

Toyota said its net profit reached ¥2.49 trillion ($23 billion) for the business year that ended in March, surging 36.2 percent. 

Back ground 

Toyota's origins lie in the Japanese weaving industry. Sakichi Toyoda invented the world's first automatic loom and, subsequently, set up the Toyoda Spinning and Weaving Company in 1918. His invention reduced defects and increased yields since a loom would stop and not go on producing imperfect fabric after a problem occurred. This principle of designing an equipment to stop automatically and call attention to problems immediately (jidoka) remains crucial to the Toyota Production System today.

The loom impressed a British Company, the Platt Brothers, and in 1929, they bought the production and sales rights for £100,000. Sakichi gave those proceeds to his son, Kiichiro, to develop automotive technology at Toyoda. This in turn led to the launch of the Company's first ever passenger car in 1936, the Model AA, and in 1937, the Toyota Motor Company was born. 

Kaizen 

Kaizen is the practice of continuous improvement. Kaizen was originally introduced to the West by Masaaki Imai in his book Kaizen: The Key to Japans Competitive Success in 1986. Today Kaizen is recognized as an important aspect of an organizations long-term competitive strategy. One of the key guiding principle of Kaizen is that good processes brings good results. A notable feature of Kaizen is that big results come from many small changes accumulated over time. 

Analysis 

Toyota believes that the increased profitability and sales is primarily due to weaker yen and the various cost cutting measures the company had taken. Annual sales jumped 6.5 percent from the previous year to ¥29.4 trillion, also a record high. Operating profit rose 20.3 percent to ¥2.4 trillion. Globally, the Aichi-based automaker sold a total of 10.44 million units during the period, and it expects to sell 10.5 million units for the following year. 

Summing up the brisk performance in the last business year, President Akio Toyoda said the results reflect “the true character” of Toyota’s continuous improvement — known as kaizen. Akio Toyoda had remarked in last year’s forecast that the company was expecting two straight years of decline in operating income. He had further used a sporting analogy and mentioned that “a losing streak is unacceptable.” 

Toyoda said the company needs to push forward efforts to further avoid redundancies as the carmaker enters a “life-or-death battle” with technology companies — which he calls the company’s “new rivals” amid the rise of connected cars and autonomous driving. 

One of the basic principles of the Toyota Production System of TPS is to reduce cost rather than operate on a cost basis. This means that, rather than setting prices by adding reasonable profit to cost, the only thing that they can do is lower costs, based on the key premise that sale prices are determined by the market. 

“The more we advance new technologies, such as those related to electrification, automated operation and connectivity, the broader the potential of automobiles will become. This will lead to an era in which Toyota’s strengths can be more fully employed,” he said. 

For the current business year, which started in April, Toyota forecasts sales will drop 1.3 percent to ¥29 trillion. It also sees net profit falling 15 percent to ¥2.12 trillion. 

Assessment 

Our assessment is that such results come in the backdrop of continuing pressure from the US, which often cites Japans automakers as an example of “not reciprocal” trade practices. This bodes well for the Japanese automobile industry. We believe that the automobile industry will be benefited significantly due to reduced corporate tax rates in the US. 

We also believe that technology companies with an operating speed many times faster and backed by abundant funding will pose serious challenge to the conventional automobile industry. We feel that in the future, it will be critical for companies to anticipate customer needs and provide incremental personal mobility in a more direct and timely manner. We reckon that we will be soon be living in a world where services are provided only when needed and in the amount that is needed.

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