Toyota: domestic orders signal still higher production

by SR on April 24, 2012

Let the good times roll

Toyota's global auto production compared to previous record level

An article in the Chubu Keizai daily newspaper on 24 April 2012 said that Toyota’s domestic orders for March 2012 rose by 35% year-on-year to 162,000 units. Note that in Japan cars are ordered rather than bought from the dealer lot and popular models may not be delivered for months, so although figures for March may sound like old news, they are in fact a meaningful indication of future production. Indeed, the article concludes with the comment “it looks as if [Toyota’s] domestic production will be higher than expected.” As shown in the chart above (click for a larger image) Toyota’s global auto production is already very close to a record level and this additional piece of news just provides more evidence for the argument that Toyota will post several months of record production, perhaps starting in March. (We should get that March 2012 figure in a day or two.) The key conclusions I draw from this article are as follows.

  • Continuation of existing strong trend.The “Chukei”, as it is nicknamed in its home city of Nagoya, has excellent sources related to Toyota and the Toyota group and the information it publishes is usually reliable. Domestic orders are not officially disclosed by Toyota so there is no time series data available, but my checks suggest that orders rose 30% YoY in February 2012 to 167k units and 60% YoY in January 2012 to 143k units. That strength in January 2012 was probably the result of new model launches and also customers coming back to the market after being discouraged from ordering by the production disruption of the floods in Thailand. It is not surprising that March rose more, in year-on-year terms, than February 2012 because March 2011 orders will have been affected by the Tohoku earthquake. It is tempting to seize on this “+35% YoY” figure and push it hard, but I think it would be stretching it to say more than “confirmation of robust demand”.
  • Tight capacity positive for Toyota. Auto companies usually expect to run their production facilities at close to maximum capacity to cover their fixed costs, which include of course accounting items such as depreciation. That has been difficult for Toyota for the past few years, due to volatile production as a result of the Toyota recall starting in early 2010, the Tohoku earthquake of March 2011 and the Thai floods of September-November 2011. Toyota cannot make decent margins without a certain level of capacity utilisation and it looks as if for the first time since the financial crisis they may be able to attain and sustain high output. (Scroll down the page to see a comparison of Toyota’s output by region.)
  • Suppliers benefit before Toyota. While higher output is positive for Toyota, as we just mentioned, it is an immediate driver of higher sales for auto parts suppliers such as Denso and Aisin Seiki. Toyota has to manufacture the vehicle, ship in some cases overseas then put it into the distribution channel to get it to the point of sale. So there is going to be a 3-6 month wait before output is converted into revenue. For the parts companies the revenue is generated at the point that they ship the parts to Toyota, and their quarterly revenues and profits should reflect that early on. I’ve said before that Denso could have a huge year in March 2013 (remember that it has a March financial year end like most companies in Japan) and I still think that is the most likely outcome. Note that Denso has underperformed both Toyota and Aisin Seiki year-to-date, as noted in this post.

    Toyota’s global production

    As the chart at the top of the page shows, as of February 2012 Toyota’s global output had reached 811.3k units, just shy of the 821k record posted in October 2007. This was a good month. How good? The graphic below takes the month-on-month percentage change in production for all the months of February since 1999. Basically this shows you the seasonal shape of production at Toyota, globally, in the month of February. February 2012 grew 13.5% compared to the previous month (January 2012), which was the highest rate of growth for February since the year 2000 and thus an atypically strong performance.

    Toyota global production, month-on-month change for each month of February since 1999

    Getting back to the road ahead, I have already made the point that the previous record level set in October 2007 is likely to be surpassed very soon, but the interesting question is why. Let’s take a look at each region and see where Toyota’s production was in February 2012 and how that compares to the previous peak level.

    First, Japan. Note that the previous highwater mark was in March 2006, at 413k units. February 2012 output was 346.2k units, so the company was operating at a theoretical 83.8% of capacity in February. Given some restructuring and retrenchment over the past few years, the effective capacity utilisation was probably a bit higher, but well under 90%.

    Toyota Japan auto production compared to previous record level

    Nevertheless this was some way below peak. North America is not a great deal better: it posted output of 140.8k units in February 2012, about 87% of the 161.7k units manufactured in North America by Toyota in October 2007. Again, “real” capacity utilisation was probably slightly above this level, making the situation in North America better than Japan, but not by much.

    Toyota North America auto production compared to previous record level

    So what has been the source of strength driving Toyota’s global output to close to record levels? The answer is developing markets, mostly Thailand, Indonesia, China and Russia. (Brazil is not a significant market for any of the Japanese big three.) As the chart below shows, Toyota has raised total capacity several times in the “Rest of World” production network, even since the global financial crisis of 2008. Indeed. the 324.3k units produced in February 2012 were a new record, surpassing the 309.3k units manufactured in the ROW in September 2011. This demand is what is driving output and in many cases these are not low-cost vehicles.

    Toyota Rest of World auto production compared to previous record level

    It’s instructive to see how these developing markets have taken the baton from Japan and North America and run. The chart below shows output in Japan, North America and Rest of World since the year 2000. As you can see, ROW has gone from a fraction of output of Japan 12 years ago to being about the same size as Japan in February 2012. ROW is also twice the size of North American production. While Japan will remain for the forseeable future the heartland and the most important centre of design and engineering for Toyota, it’s clear that within a year the centre of gravity in terms of units manufactured will shift towards emerging markets and away from Japan. The king is dead. Long live the king.

    Toyota global auto output by region from 2000 to 2012

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