Third Avenue Management Comments on Toyota Industries
TOYOTA INDUSTRIES (TYIDY)
Toyota Motor is a business school case study in the making. Since 2009, Toyota Motor has faced quality issues, increasing competitive pressures and the impacts of a strong yen exacerbated by production/supply chain issues wrought by the Great East Japan earthquake/tsunami and subsequent massive flooding in Thailand. Against these headwinds, the company has been taking steps to reinvigorate itself, including recruiting a family member, Akio Toyoda, back to the helm. He has so far succeeded in aggressively addressing quality issues at Toyota.
The story is still unfolding, but so far, the plot is enticing: (i) the perception of the Toyota franchise has improved with 19 Toyota (along with Lexus and Scion) models named as "Top Safety Picks" by the Insurance Institute of Highway Safety, and Kelly Blue Book giving Toyota brands 18 best resale value awards; (ii) Toyota launched 19 new or significantly updated models in 2012 and plans to launch nine new or updated products in 2013; (iii) the company has focused on increasing local content to provide more of a natural currency hedge, albeit this is an ongoing process and it still has substantial production capacity in Japan. The Fund doesn't own Toyota Motor common stock; rather our investment is via Toyota Industries ("TICO"). TICO spun off Toyota Motor in 1937 but remains the single largest shareholder of Toyota Motor common. It also has a sizeable investment portfolio of other marketable securities, of which the largest, by percent of assets, are also part of the Toyota Group (e.g., Denso).Operationally, Toyota Industries has a number of different industrial businesses, the largest being automotive, where it assembles vehicles and manufactures auto parts, including car air conditioning compressors,engines and electronic components for hybrids, and materials handling where it manufactures equipment such as fork lift trucks. Our initial attraction to TICO was as a cheaper way to invest in Toyota Motor — TICO common traded at a discount to its investment portfolio—while also enabling us to get TICO's profitable operating businesses for free. Over time, we believed the company had the ability to grow its NAV. TICO has been a perennial holding since 1997 and while we have lived through its ups and downs, it has been a modestly profitable investment for the Fund that we still believe has potential to offer more, particularly after recent steps taken by management to improve operations and profitability both at TICO and Toyota Motor.
Since late 2012, the yen has depreciated by about 22% versus the US dollar. For Toyota Motor, a one yen move vs. the US dollar has an estimated ¥35 billion impact on operating profits and vs. the Euro about a¥5 billion impact. The direct currency effect is less dramatic for TICO, but the company clearly benefits, both operationally as well as from its ownership of Toyota Motor.
Over the past year,TICO acquired Cascade Corp., a manufacturer of materials handling attachments; acquired the rest of Uster Technologies, a textiles testing machinery company, in what amounted to initially a hostile bid; and has continued to focus on increasing its value add, particularly in the electronics area for hybrids. The company continuesto hold the number one marketshare position in industrial trucksworldwide
From Third Avenue Management's semi-annual 2013 commentary.