- Kristian Harianja - Oktawidya Intan - Putri Rizky D.

- Rizky Yulianto P. - Ratna Nawang S. - Vivi Agustin

OPERATING EXPOSURE
To what extent a company's future cash flow will be altered by exposure to changes in the exchange rates combined with price changes

History
1937 : Toyota Motor Co., Ltd is established 1967 : Business partnership with Daihatsu Motor Co., Ltd begins 1974 : Toyota foundation is established 1982 : Toyota Motor Co., Ltd. and Toyota Motor Sales Co., Ltd. are merged into Toyota Motor Corporation. 1992 : Toyota Motor Manufacturing (United Kingdom) Ltd. begins production. : Turkey ? : Portugal ? 2000 : Sold 634,000 automobiles in 2000 2001 : over 60% of Toyotas North American sales were locally-manufactured. In 2001 only 24% of the autos sold in Europe were manufactured in Europe (including the U.K.), the remainder being imported from Japan. For fiscal 2001 the unit reported operating losses of 9.897 billion ($82.5 million at 120/$). 2005 : TMEM expected significant growth in European sales, and was planning to expand European manufacturing and sales to 800,000 units

Toyota Motors European Currency Operating Structure in 2001

Consolidated Performance Highlight 2005

Consolidated Performance Highlight 2013

Consolidated Performance Highlight 2013

Source : Annual Report Toyota 2013

Problem Analysis
Toyota a leading global automobile manufacturer whose stock is widely held in MFS portfolios Domiciled in Japan, but generates the largest amount of sales in North America (making up 35% of group unit sales in the fiscal year compared to 27% in Japan) followed by Europe for foreign market for Toyota Euro falling against the Japanese yen, would be mismatch between its cost base (largely in Japan) and its export sales to the Euro

Consolidated Financial Statement

Problem Analysis
Toyota profits is negatively affected in two ways : when they attempted to align the prices of their vehicles sold in the Europe with those prices being charged by the Detroit big three manufacturers (despite higher costs due to the strong yen); When they translates Euro profits back into yen at disadvantageous exchange rate

CASE QUESTION

1. Why do you think Toyota had waited so long to move much as its manufacturing for European sales to Europe
Answer : 1. Automobile are complex and capital intensive industry. Building new manufacturing facilities are very costly. Toyota has to do lots of researches and investigations. It takes time to : - Choose a country, city (location) and analyze its risk in targeted country (Source: Damodaran, data year 2000)
Country Japan Portugal Turkey United Kingdom

Long-Term Rating Aa1 A3 B1 Aaa

Adj. Default Spread 60 95 450 0

Total Risk Premium 6.11% 6.46% 10.01% 5.51%

Country Risk Premium 0.60% 0.95% 4.50% 0.00%

1. Why do you think Toyota had waited so long to move much as its manufacturing for European sales to Europe
Answer (cont.) : - Survey of market share in order to achieve targeted profit and its sustainable growth

1. Why do you think Toyota had waited so long to move much as its manufacturing for European sales to Europe
Answer (cont.) : - Make forecast about the future cash flow, including required ROI, NPV, IRR and payback period - Must persuade both local government and Japanese government which may take long time to process

1. Why do you think Toyota had waited so long to move much as its manufacturing for European sales to Europe (cont.)
Answer : 2. Toyota income statement may suffer from exchange rate between Yen and Euro. Movement of manufacturing into local and regional market may rise an issue of high tax rate and expensive workforce payment including training cost and retaining labour 3. In terms of economic point of view, taking part of production of out Japan may affect the average unit cost. Thus, building an overseas branch may influence the balance in Japanese market.

1. Why do you think Toyota had waited so long to move much as its manufacturing for European sales to Europe (cont.)
Answer : 4. Toyota need good reason to build manufacturing plant in a region e.g. Sales performance Reporting its highest-ever consolidated vehicle sales approx 979,000 units in fiscal 2005, Toyota extended its record-breaking run in Europe to seven years and claimed almost 5% of the market. Among Toyota brand vehicles, Yaris further reinforced its position as flagship mass production model by besting its previous sales record for the 6th consecutive years to pass 220,000 units. The success of Yaris could explain why the automaker waited so long (source : Annual report 2005).

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Japan\

2163

1913

1872

Norh America Europe

3098 858

2031 796

798 1327

Asia

979

1255

1284

Ohers

1139

1313

5281

2. If the British pound where join the European Monetary Union would the problem be resolved? How likely do you think this is?
Answer : If British currency is converted to Euro, it will only eliminate the currency risk between UK and Europe but not eliminate currency risk between Europe and Japan.

Recommendation
Enters into short-term (three to six months) currency hedges in order to make internal planning easier Adopting operating and financing policies that offset anticipate foreign exchange exposures : Matching currency cash flows Risk sharing agreements Back-to-back loans Currency swap Contract/hedging to local (Euro currency) vendor Recruit financial analyst SPOT option