Toyota Relocates Mfg Plant to Europe to Absorb Exchange Rate Volatility - Essay Sample

Introduction

The move by Toyota to relocate the manufacturing plant to Europe was a result of Toyota's reaction to the volatility in exchange rates. Since the Yen was increasing against the Euro, this led to an increase in the price for Toyota to sell cars produced in japan to the market in Europe. To retain its competitiveness in prices, Toyota would need to absorb the changes in exchange rate volatility. It would be a reaction to Yen's strengthening that Toyota would develop a manufacturing plant in France. Later, they planned that the facility of their central plant for the production of the car in the European market, such as the Yaris (Shimizu, 2003).

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Correspondingly, I agree with Toyota's decision to wait as a result of the financial strain as the then performance of various facilities that the European subsidiary controlled. Toyota has reported losses of over 9 billion Yen. According to a particular interview by Fujio Cho, TMC's presidents, the decision to wait and build the manufacturing plant in Europe was tied to the intention to boost the performance of sales for Yaris in the European market. Hence, the success experienced during the process of building Yaris and in the sales performance was an evident indication as to why the company had to wait for so long.

Resolution of Toyota’s Currency Problem Through Consolidation of the British Pound in the EU

If the British pound was to join with the Euro, it means that there would be a reorganization of the Euro, which would likely increase the exchange rates. In different ways, this would help resolve the currency problem of Toyota selling the Yaris. For instance, Toyota would consolidate the hedging criteria against one single currency instead of two currencies. As such, if the British accepted the Euro as their primary currency, then Toyota would no have to worry about the currency exchanges from pound to Euro in the sale of care in the European markets. However, I think that it is unlikely for Britain to join the European Union and recognize the Euro as its currency. The adoption of the Euro would mean a removal of the boundaries of free trade across the national borders (Conybeare, 2004). Also, it would likely allow customers to evaluate the prices of similar products in the European market.

Categorizing Toyota's Problems and Solution

In the case of Mr. Shuhei, I would categorize my problems and solution by considering the monetary value of operating in different markets. Also, I would maintain a proper focus on the various ways to ensure an appropriate distinction between the rates of exchange and how to reduce the cost of production. Thus, the short-term problem is the operating losses or rather pricing problems that were as a result of the high exchange rates. As a solution to the problem, the TMEM would focus on offsetting the increase in the Yen-based input costs by the fall in the margin within the European markets. It was likely that the company would not make profits for the following two years, resulting in the ability for hedging applying the derivatives (Pardi, 2007).

On the other hand, the long-term problem was TMEM's operating profits. Under this problem, the solution would be made on the exchange market volatility. By this, it means that Toyota would have to move most of the company's production components and ensure the manufacturing practices were kick-started in the European market. This would slowly make an impact on the operating profits and increase them as they would not be any significant effects from the exchange rates.

Solution for Toyota Europe's Problem of Continuous Operating Losses

For Toyota's Europe's problem of continuing operating losses, it would recommend the following solutions; first, if Toyota had the willingness to continue incurring the losses from the European market and develop market share goals that were above the profit goals, it would mean that the pricing problem would be resolved in the long run. There were signs that the Euro had reacquired some of the weaknesses against the Yen for several years now (May2007). Furthermore, to ensure that Toyota resolved the operating losses issues, the company could consider the application of derivatives such as futures contracts, options, and forward contracts. Through future contracts, Toyota would purchase a British pound contract and later selling to the euro contract to ensure that the losses pushed by the exchange rates volatility were limited. Using the forward contract, it would mean that Toyota would buy the British pound contract as well as trading the euro contract to ensure a limitation of the exchange rates volatility. On the other hand, the options derivatives would provide a solution for Toyota losses problem in that the company would buy the Buying pound by considering the buying-option as well as purchase the euro selling options to draw a significant limit on the losses due to volatility in the exchange rates.

Conclusion

Toyota's major operating exposure issue relates to the effects of exchange rates on automobile manufacturing and production prices. With the decision of Toyota move to the European market, this step was much calculating since the company had to evaluate the stock movement as well. Based on the exchange rates problem, it is only right for Toyota to focus on the various ways to ensure that the company is not majorly affected by the volatility of the rates. To bridge this gap, the company should also maintain a proper focus on the trend in the automobile industry as the EU market in general. The move is a reflection of the action to solve the operating losses problem and ensure zero effects by the exchange rates to sales performance.

References

Conybeare, J. A. (2004). Merging traffic: The consolidation of the international automobile industry. Rowman & Littlefield.

May, M. E. (2007). The elegant solution: Toyota's formula for mastering innovation. Simon and Schuster.

Pardi, T. (2007). Redefining the Toyota Production System: the European side of the story. New Technology, Work and Employment, 22(1), 2-20.

Shimizu, K. (2003). A maverick in the age of mega-mergers? Toyota's global strategies. In Globalization or Regionalization of the American and Asian Car Industry? (pp. 119-143). Palgrave Macmillan, London.