Global Insight Perspective | |
Significance | Toyota has announced that it will increase its stake in Fuji Heavy Industries to 16.5% and widen co-operation between the two businesses. The Japanese automaker has also revealed details of a second plant it is planning to build in India. |
Implications | By increasing its stake in FHI, Toyota will protect the automaker by allowing it to widen its range through OEM deals with two of its brands, but focusing its R&D expenditure on its core products. In return, Toyota will gain the expertise of FHI's engineers, helping it to develop a joint small, rear-wheel-drive platform that will allow it to expand its own range and offer a more rounded line-up. |
Outlook | Although Toyota will expand its production with the acquisition of this increased holding in FHI, it remains focused on an organic growth strategy that is now aimed at India; given its plans for new products in the latter country, it should be well positioned to increase the number of vehicles it sells there. |
Toyota has announced that it will increase the co-operative ties between itself and Fuji Heavy Industries (FHI), owner of the Subaru brand, and will seal the deal by raising its stake in the business. Toyota will expand its stake in the company from 8.7% to 16.5% by acquiring 61 million FHI shares from the company for ¥31.11 billion (US$307.5 million), giving the shares an average price 10% higher than the average closing share price between 11 December 2007 and 10 March 2008. This deal will require the approval of Japan's Fair Trade Commission before it is completed, but the president of Toyota, Katsuaki Watanabe, has already said that its stake in the business could rise further in future.
As part of the deeper relationship, Toyota will provide FHI with a small vehicle on an original equipment manufacturing (OEM) basis from 2010. Before that, the Daihatsu brand will supply FHI with kei-class minivehicles, also on an OEM basis, in the second half of 2009, although this will be supplemented by the introduction of a rebadged Daihatsu Coo at a rate of 600 units per annum (upa) from October 2008 to bolster FHI's model range at the lower end of the market. FHI and Toyota will also join forces on the research and development (R&D) of a new small, rear-wheel-drive (RWD) sports car that will be marketed under both the Toyota and Subaru brands. Details released by the automakers have stated that it will utilise FHI's horizontally opposed engine and will be built at FHI's Gunma Manufacturing division from late 2011.
Second Plant for Toyota in India
Toyota has also revealed that it will build a much-rumoured second facility in India. The company is hoping to begin operations at the plant, which will be located next door to its existing facility on the outskirts of Bangalore, by 2010, and it will initially have an annual production capacity of 100,000 units. The automaker will invest around ¥35 billion into the facility, which will build both the Corolla C1-segment model and a yet-to-be-announced compact vehicle for both the domestic and overseas markets.
In addition, according to a report in India's The Hindu newspaper, the Japanese automaker has already been issuing letters of intent (LoI) to component suppliers in India that will supply components for the new compact vehicle.
Outlook and Implications
The decision to expand the relationship between Toyota and FHI comes just over two years after Toyota announced that it was acquiring an 8.7% stake in FHI from General Motors (GM). With this move it hoped to boost its global production capacity and to gain technical expertise in the areas of hybrid and all-wheel-drive (AWD) vehicles. Toyota’s decision to increase its stake redoubles its commitment to the Subaru brand and offers it security and the chance to flourish in a difficult global environment by providing it with a wider product line-up through OEM deals. It can also focus its R&D budget on core products such as the Impreza, Legacy, and Forester, and away from low-profit areas such as the kei-car segment.
Most interesting though is the pair’s plan to develop a small, RWD sports-car architecture focused on the enjoyment of the driver. In an age when legislation and environmental pressures are increasingly turning automakers against this type of vehicle, it is refreshing to see something like this taking place. Although Subaru continues to produce a line-up of vehicles that has a high performance emphasis at the top end, reflecting its involvement in the World Rally Championship, it has only ever made a half-hearted attempt to break into the sports-car market in the shape of the XT (known as the Alcyone in Japan) and the SVX, while Toyota, despite having a long history of sports-car manufacturing, including the Celica, Supra, and MR-2, currently has a range of vehicles that is considered rather bland by comparison. A driver-orientated RWD vehicle is likely to garner greater enthusiasm for the brand, especially if it offers a similar package to the much-missed AE86 Corolla from the mid-1980s, which continues to have a strong following both in domestic and mature overseas markets.
However, although Toyota will see some growth in vehicle sales following its decision to raise its stake in FHI, the automaker remains focused on an organic growth strategy centred on a market in which it has yet to make a significant impact: India. The addition of a second facility will raise its capacity in the country to 160,000 units per annum (upa). At present, its manufacturing unit in the country Toyota Kirloskar Motor Private Limited, builds just its Corolla and Innova multi-purpose vehicle (MPV), but in order to ensure a significant increase in growth in the Indian market an automaker requires a vehicle that falls into the A or B segment, and such a model will be built at the new plant. What form this vehicle will take is currently not known, although some believe that it will be spun off the Toyota Aygo architecture, with some costs pared to allow it to be sold at a competitive price in the country. Once this vehicle is put into production Toyota will be in a good position to take a significant slice of this market segment, which is expected to account for 85% of the entire passenger car market by 2013. It may find, however, that it comes under pressure from automakers already with huge investments in India, such as Maruti Suzuki, Tata, and Hyundai, while others such as Honda, Volkswagen (VW), Fiat, and General Motors (GM) all have similar strategies.