John Rogers Comments on Toyota Motors
In our international and global portfolios, we recently made a large investment in Toyota Motors (TM), a 75-year old company whose best days, in our opinion, are still ahead. While it is not a play on Cloud Computing or China or the iPhone, it is a multi-billion dollar business that has delighted customers globally with its well-engineered and reliable, low-cost products. Allow us to share our views that drive our investment thesis:
- It does not manufacture in China, yet ranks among the lowest cost producers of its products in the world
- It does not charge the highest prices, yet delivers the best quality in each of its product segments
- It leads in next generation technologies in its industry and is usually the first to commercially deploy them
- Hundreds of books have been published on its business model, yet no company has replicated its recipe to secure sustainable competitive advantages
- It is dominant in its home market and even more successful overseas, with 50% of revenues stemming from exports
- It has one of the strongest balance sheets in its sector
A Perfect Storm
How can such a terrific franchise also be a terrific investment bargain? A perfect storm erupted for Toyota and the stock fell more than -50%. Not only did the industry undergo a severe downturn, but its manufacturing facilities suffered from natural catastrophes, creating cost, quality and supply chain problems. Like any astute leadership team, management took advantage of the crisis and engaged in deeper soul searching to uncover underlying problems hidden by past success. One key problem was that the company had become too focused on production targets, instead of on the changing priorities and tastes of consumers.
A Bold Move Forward
While Toyota has always prided itself on making small but continuous improvements, it made a bold move to fundamentally overhaul its organizational structure, manufacturing base and product lineup. Design engineers were given equality of status alongside production engineers. Sales and distribution channels received a direct voice to Design Teams. This 360 degree feedback loop ensures that products are designed, engineered and produced to 'wow' the consumer on cost and efficiency, as well as on aesthetics and feel.
With industry sales recovering, the company's sales have stabilized, profits have improved and cash-flow generation has increased dramatically. Yet, the stock remains undervalued due to headwinds from currency appreciation. We take solace in the fact that the company has a proven track record of pioneering manufacturing practices, which deliver ongoing improvement in efficiency. There is no reason to believe Toyota Motors won't overcome this currency headwind in the future, just as they have in the past, by reducing costs, improving productivity and increasing their overseas production ratio. Its engineering knowhow and manufacturing prowess has allowed it to offer low-priced, entry-level cars (Corolla & Camry) to next generation technology hybrid cars (Prius) to highend, luxury models (Lexus). The CEO, Akio Toyoda, personally test-drives each car model and recommends design and feature changes. In our judgment, he is the right person to lead a company that needs to master the soft parts of the car (design, soul, feel) as it has the hard ones (reliability, fuel efficiency and value engineering).