Thursday, 24 January 2008

Company Focus – Toyota (Motor) Corp vs General Motors Corp

Given GM’s 77 year hold over the title, the global #1 has encouraged perhaps over-enthusiastic coverage regards the “battle” between American and Japanese counterparts. Given GM’s recent woes, the badge of honour may mean more in corporate credibility terms than the oft touted idea of executive ego. And for Toyota, its release of a rounded 2007 sales figure of a basic 9.37m units; compared to GM’s specifically accurate 9,369,524. It’s a nice talking point, but the reality is about running a profitable, growing business, and the sales volume parallel pales massively when the Market Capitalisation of the 2 are considered - Toyota worth 10.5 times more than GM ( $152.07bn vs $14.5bn)

The financial data and key metrics tell all:

Metric GM($) vs Toyota($)
Sales 185.4bn vs 239.1bn
Income -40.8bn vs 17bn
Gross Profit Margin 13.91% vs 19.30%
Pre-Tax Margin -1.4% vs 10.1%
Net Profit Margin -22.05% vs 6.33%
Earnings/Share -65.48 vs 5.31
ROE -42.9 vs 15.5%
ROA -13.2 vs 5.0%
ROC -17.2 vs 8.1%

Of course these figures are the business and market interpretation of 2 very different entities, originating from 2 very different nations with 2 very different commercial cultures and 2 very different growth vs decline paths. Though it is easy to compare the headline basics the world’s 2 biggest auto-companies, in truth it is a futile exercise for those working within the industry or those looking to invest the companies. As ever, “god and the devil are in the detail”. And it is only at such an operational level that learning can be gained by either counterpart.

In very basic terms GM started from (then typical) big cars and the desire to satisfy the motoring masses of the US, and Toyota started from small cars and the wish to motorise Japan. Where as GM bought its way into new geographical markets through M&A (eg Adam Opel, Vauxhall, Holden), Toyota grew its way globally with suited vehicles (esp. Corolla) – the 2 automakers temporarily uniting in the early 80s US recession to create NUMMI.

Historically obvious contributions to the foundations of todays industry are:

GM’s development of the multi-brand product ladder aimed at alternative buyer types employing core platform engineering [central tenants for GM’s founder William Durant and hence its name].....&
Toyota’s concentration on production and product quality baring Kansai & Six Sigma and the development of Lean Production through Just-In-Time logistics.

Hence these two companies essentially set the 4 operational cornerstones of today’s auto-industry Relative to these firsts, “Quantity vs Quality” was the comparitor byword through the 1980s and ‘90s. However, such once perhaps all too true generalisations have been diminished over the last decade as both counterparts and all automakers adopted eachother’s best practices.

The rest of the story behind Toyota’s rise and GM’s decline hardly needs retelling; summed up in the words “Corolla”,“Camry”, “Lexus”, “Scion” and “70s Oil Crisis”, “80s unreliability”,”90s incurred costs”, “00s near collapse”. OK, these summaries are overtly simplistic, but they do demonstrate the very different management approaches and routeways that each company has trodden.

For Toyota it was successful products = successful business
For GM it was successful business = successful products.

This isn’t surprising given each company’s roots and linked contemporary cultures. The detail focus of Kiichiro Toyoda is today matched by the fervency of Katsuaki Watanabe. In comparison, the big picture appreciation of William Durant & Alfred P Sloane is just as evident in Rick Wagoner. Beyond culture, both are inextricably tied to their respective national politics, especially their country's position in the international scheme of things. From that context they have very different levels of political leverage on the global stage, the US and GM far more able.

Financial analysts pitch for Toyota as the more apparently, very obvious value-creation machine given a near perfect 50 year growth track record generated from product performance, market penetration and customer loyalty; the core Toyota attributes spanning Mainstream, Luxury and Small segments. As stated today’s financial figures are worth a thousand words. And pertinently Toyota has tried to be as self-supporting as possible, maintaining independence and growing its own sub-company and cross-holding network as supporting pillars of that endeavour.

In comparison GM has been the very antithesis, cyclically changing shape often to react to and befit changing US and global business conditions, and a major client of the US bulge bracket (and beyond) banking.

In truth the 2 are very very different beasts, driven by very very different national business cultures that prominently reflect the historic differences between East and West Capitalism.

GM has obviously worked wonders in re-developing global ambitions with efforts such as the Daewoo takeover to form GMDAT, Russian interests with Avtovaz, Chinese interests with Shanghai GM and Wuling GM.. The Japanese were slower in developing JV interests, only having done so on almost a project basis and opposed to business basis, hence later to partner with the likes of PSA on European small cars and legally necessarily with FAW Sichuan Toyota & FAW Tianjin Toyota - preferring to stay as independent as possible.

But what of the future?

Toyota although prodigious hasn’t ever rushed forward to grow, it’s late entry into BRIC+ regions evident and sometimes (wrongly) criticised. Those in the know, including itself, recognise that Toyota’s amazing reputation has preceded before it, as those emerging markets that all are keen to jump-into, have long been the domain of the 3rd/4th hand import Toyota, Nissan and Mitsubushi in the form of pick-ups, vans, mini-buses and cars. It was the durability of these vehicles that made Toyota’s name by the mid 80s in developing regions as far afield as the Baltics to Mozambique. LandCruiser dominating Land-Rover said it all in the extreme climate of Africa. So continued slow but meaningful product push will continue to be the lead business philosophy in the US and as slow but strong followers in BRIC+ regions. (Expect the Toyota low-cost car in development to provide both massive volume and major cost savings)

For GM perhaps a very different story. At this critical point in its history all possibilities must surely be places on the table and assessed. And perhaps the most radical is the reversal of Durrant’s ideology that brought many nameplates and companies together to for ‘The General’. Would it be inconceivable to break-up the giant into smaller, more distinct, regional or divisional parts? Indeed is that part of the ultimate game plan with the newly globalised Chervrolet playing a leading role? Small Cars made in Korea and India, Compact and Mid in China, Medium and X-Overs in the US etc? Creating a newly re-structures General that could be fragmented to create higher value off-spring. Perhaps…but there’s some time to go yet. Perhaps when we see the signs of such a truly ‘horizontal’ (not old vertical) strategy become apparent, and when the value chain behind such a will is streamlined, will we see dramatic turn of fortune in investor confidence and stock-price climb.

But what of the meantime, that intermediary period. What of the migration of Jim Press et al from Toyota America to GM NA? Could that be a sign of the 2 car-makers seeking a possible coalition through what will certainly be testing times for the American market. A NUMMI Part 2? Or less complex, other shared/dual badge-engineering vehicles, spiritual successors to the 1972 Chevy-Isuzu LUV pick-up. (Toyota still has a sharehold of Isuzu). Possibilities across all those vehicles with over-capacity vs segment demand cannot be ruled out.

There'll be much discussion in the Board rooms of Detroit and Nagoya.