Unsurprisingly, Toyota is redoubling efforts to gain the trust from their customers. There are three elements of Toyota's financial strategy which are growth, efficiency and also stability. These elements of Toyota are then give impact on the profitability of Toyota vehicles as well as the trust of customers.
In year 2010, the announcements of recalls and other safety measure of Toyota certain models of vehicles in several countries and this incident getting worse have eventually affect the financial results of the automotive and the financial services operations. Besides, it leads to a number of claims, lawsuits and government investigations. It show a net loss of ¥436,937 in year 2009, and a slowly recovery in year 2010. Besides, it leads to a number of claims, lawsuits and government investigations and those recalls and safety measure are implemented as compensation to Toyota vehicles user and to the public as well.
Toyota announced a safety campaign in North America for certain models of Toyota and Lexus vehicles related to floor mat entrapment of accelerator pedals during November 2009. Also, Toyota has recalled in Europe and China in certain models of Toyota vehicles related to sticking accelerator pedals in January 2010. In February 2010, Toyota has announced worldwide recalls associate with the software program that controls the antilock braking system (ABS) in certain vehicles models including the Prius. Therefore, it would be one of the factors that impacted the financial results.
Financing Activities
In the past, Toyota's capital expenditures are mainly focus on research and development activities through cash generated from operations. In order to ensure and create a sound financial base, Toyota has funded cash partially through additional loans and issuance of notes in the fiscal 2010.
In the fiscal 2011, Toyota is expected to have sufficient fund its capital expenditures and research and development activities through cash and cash equivalents on hand, and cash generated by operations. Hence, Toyota will use its funds for the development of environment technologies, introduction of new products and so on. As we can see, the cash and cash equivalents of year 2010 decreased from ¥2444280 (2009) to ¥1865746, it indirectly implied it is funded at their research and development (as a part of capital expenditures).
Due to the variety of contraction of automotive markets, the worldwide automobile financial services industry has become competitive. Hence, customers able to get financing for Toyota vehicles from alternative sources when competition increases, margins on financing transactions decrease and market share also decrease.
Apart of this, Toyota also funds its financing programs for customers and dealers. Their mainly financial services operations consist of loans and leasing programs which from both cash generated by operations and borrowings by its sales finance subsidiaries. In fact, the profitability of Toyota's financial services operations can affect by funding costs. To be honest, these are a number of factors that affected by funding costs, some of these are not in Toyota's control. The funding costs decreased during fiscal 2009 and 2010 because of the lower interest rates. By the way, Toyota has enlarged its network of finance subsidiaries due to provide financial services in many countries. In other words, Toyota is looking forward to broaden its ability to raise funds in the local market from the worldwide by expanding its network of finance subsidiaries.
Capital Structure
2009
2010
Total Liabilities
63.52%
63.98%
Total Equity
36.48%
36.02%
Table 1.0 Capital Structure of Toyota in year 2009 and 2010
As we can see, the capital structure for year 2009 and 2010 didn't make any major changes. This means that Toyota's good practice in managing their capital structure doesn't caused Toyota damaged by the current brake issues, even it played seriously.
In addition, Toyota's current asset remained in range 1.067 and 1.22, which implied the liquidity management are in their control, it have also extra cash to funding and for emergency purposes. Besides, it also shows that the current issue doesn't damage the whole capital structure as well.
Financial Risks Management
In order to hedge the risk of exposure in foreign currency risk, interest rate risk, and other systematic risk, Toyota enters into a variety of derivative financial instruments due to they have to manage the risk arising from changes in foreign currency exchange rates and interest rates. The financial instruments consist of all of Toyota's cash and cash equivalents, marketable securities, financial receivables, securities investments, long-term and short-term debt and all derivative financial instruments. Portfolio of derivative financial instruments for Toyota consists of forward foreign currency exchange contracts, foreign currency options, interest rate swaps, interest rate currency swap agreements and interest rate options.
Toyota has foreign currency disclosures linkage to buying, selling and financing in currencies other than the local currencies. In order to operating cash flows and a variety of financial instruments that are denominated in foreign currencies, Toyota is disclosures the foreign currency risk related to future earnings. The most important foreign currency exposures of Toyota are U.S. dollar and the euro. Meantime, Toyota uses a value-at-risk analysis (VAR) to evaluate the changes of foreign currency exchange rates. The VAR of the combined foreign exchange position showed a loss in pre-tax earnings that was estimated to be ¥114.1 billion as of March 31, 2009 and ¥148.9 billion as of March 31, 2010.
Toyota has its interest rates changes in the market risk related to financing, investing and cash management activities. Toyota enters into various financial instrument transactions to maintain the desired level of the risk of interest rate changes and to minimize interest expense.
By the way, the commodity price risk of Toyota is the higher or lower costs due to changes in the prices of commodities (raw materials) which Toyota uses in the production of motor vehicles such as those metal commodities in Tokyo Commodity Exchange (TOCOM). Unfortunately, Toyota does not use derivative instruments to hedge the price risk with the purchase of those commodities. Apart of that, Toyota handles investments in various available-for-sale equity securities that are subject to price risk. The fair value of available-for-sale equity securities was ¥798.2 billion as of March 31, 2009 and ¥852.7 billion as of March 31, 2010.
