Toyota’s European challenge
Can Toyota re-define its brand image in Europe and achieve its objective of 5% market share in 2004/5? In recent interviews with Toyota personnel at the Paris Mondial auto-show and AutoCee, the conference in Prague for Eastern Europe organised by Worldwide Business Research, just-auto challenged Toyota to outline its strategy for Europe and specifically for achieving its sales objectives.
The challenge is set …
While Toyota has surpassed Nissan to become the number one Japanese manufacturer in Europe it is still not achieving the market position that it commands in North America or Japan, and aspires to in Europe. Despite European sales of just under 650,000 units in 2001 it still only recorded a market share of 3.7% - which by any standards is disappointing for one of the world's top four vehicle manufacturers. With a sales target of 800,000 units by 2005 at the latest, it seems there is some way to go and market share increases for both the Toyota and Lexus brands are needed if this objective is to be realised.
The general feeling among Toyota personnel is one of optimism, and in Paris Mr Okuda, Chairman of Toyota Motor Corporation said it was likely that Toyota would capture 5% of the European market (800,000 units) in 2004, a year earlier than originally expected. He commented that "Europe offers the most stable business environment these days" and appeared confident that Toyota would realise its ambitions in this reduced timescale.
But how is it going to achieve its objectives?
Initially, the sales target seems somewhat optimistic, particularly given that installed capacity in Europe currently stands at around 500,000 units and the 800,000 figure excludes output/sales from the new Toyota/PSA joint venture plant in Kolin in the Czech Republic. However, there are signs that sales are picking up and in the 8 months to August 2002, Toyota's stated market share had risen to 4.4% as opposed to 3.7% for the same period in 2001.
Total European sales for 2002 are forecast by Toyota at 740,000 units, which compares to around 650,000 units for 2001. If these projections are right, Toyota's sales will have grown by 14% in a market that is expected to have been down by some 14% overall. Whatever the outcome it does look as if Toyota may be on the way to achieving its targets in 2004.
Market share is slowly improving
Toyota's European Market Share in 2001 by country was as follows:
- Italy 5.0%
- UK 4.5%
- Germany 2.7%
- France 2.7%
- Spain 2.1%
Toyota has increased its market share in Europe but has still failed to make gains in key markets. The big five European markets now account for some 58.5% of European sales for Toyota (including Lexus). Italy has proved to be a good market for the Yaris while the UK has always been a strong market, reflecting Toyota's manufacturing presence in the country. Germany has also seen a strengthening of Toyota's position in recent times and in 2001 it was the number 10 brand on the market.
"..it does look as if Toyota may be on the way to achieving its targets in 2004."
In Europe Lexus had a 1.2% segment share in 19 countries in the period January to June 2002 and 3.5% in the UK.
But Toyota product is seen as dull and conservative
One of the main problems is that in the past Toyota products have been regarded as dull and its brand image has been poor. So given its current sales volumes across Europe, which although improving are still relatively low, and its poor market showing, what is Toyota's strategy for reversing this position?
Jim Rosenstein, VP Toyota Motor Europe told just-auto that it was product that has been the key to its rapidly improving position in Europe and that it will be largely product that enables it to achieve its sales objectives.
"In 1999 we launched the Yaris in a core segment but the real difference comes from the fact that it was designed by Europeans, for Europeans," he said.
This may well prove to be right as the Yaris is far removed from the traditional styling we have come to expect from Toyota. It combines interior space with "perky" performance and in the 4 years since launch it has continued to turn in sales growth. This has been followed in 2002 by the new Corolla - again designed by Europeans and according to Rosenstein "the touch and feel of the interior have been perceived as quality attributes by customers in the year since its launch".
… and the youth market is key
Not only have recent models added a real European dimension to Toyota's line-up but they have also been designed and styled to appeal to the "youth market" a move that was desperately needed to get away from the hitherto somewhat conservative, middle-aged image of the brand. While RAV 4 was designed to appeal to the younger market it was always going to be a niche model and small in terms of sales volume. RAV 4 may be the best selling SUV in its segment in Europe with a 34% market share, but in volume terms it is small at around 60,000 units in 2001 in a market that may not be sustainable in the longer term.
Hopes are high for Toyota's new Avensis
There are other examples of segments where Toyota has done well, such as the MPV (minivan) sector where not only is it market leader with a 32% share but it has the broadest range of any vehicle manufacturer on the market when including the Corolla Verso, Yaris Verso, Avensis Verso and the Previa. Despite this overall sales volumes are low at 36,000 units in 2001. Toyota claims that sales in this segment are growing and there is increasing evidence that its MPV range is taking sales from other manufacturers' mainstream C and D segment offerings.
If this continues, as Toyota expects it to, it will certainly help boost Toyota's overall share in Europe but it is not enough and it is in its mainstream models that a serious re-definition of its brand image is required.
Toyota claims that sales have been artificially depressed
In its defence Toyota argues that it has been hampered in the past by the restrictive quotas levied on Japanese marques in Europe and that if it had been able to compete freely then it would have increased sales of its mainstream models at a much quicker rate. Whether these "artificial barriers" to Toyota's performance have actually held back sales by any significant amount is debateable.
Without doubt a large part of the problem has been its brand image which despite extensive marketing has steadfastly refused to move away from the conservative and somewhat unexciting image it has acquired. Recent marketing campaigns have been devoted to changing this position but changing people's ingrained perceptions is a difficult and drawn out process. It therefore comes as something of a surprise when Toyota points out that the average age of it European models is in fact 3 years - taking into account the Yaris (4 years), the Corolla (1 year) and the new Land Cruiser launched in Paris in September and the forthcoming Avensis, it may have a point.
Nevertheless, it is hard to think of Toyota as having the youthful brand image it so desperately needs in Europe to ramp sales up to and above the 800,000 level. It is fair to say that it has succeeded in Japan in achieving a " youthful" brand image, and to a lesser extent in the USA, so logically there is no reason why it should not do the same in Europe. How it will do so is the burning question.
Formula 1 racing - a costly venture but will it be effective?
Toyota's entry into Formula 1 racing, while costly and high risk, is undoubtedly aimed at attracting a younger customer into the brand but it is doubtful that this alone will have a significant impact and other more fundamental changes are required. Investment in its distribution network is also vital.
Distribution and dealer re-structuring is inevitable
Toyota believes that the new Bloc Exemption Ruling (BER) will open up opportunities for it to sign up better dealers and accordingly it is looking to assume direct control of its distributors. In France, for example, where its market share remains a poor 2%, it has just acquired its distributor and it is expecting an increase in its French market share to follow. Toyota's recently established joint venture with PSA in the Czech Republic is also expected to raise the company's profile in France.
The situation regarding the distribution of Lexus in Europe is somewhat muddled and continues to be so. It has separate channels to market established in some countries and in others distribution and sales are shared with the Toyota brand. Lexus has under-performed across Europe, with the exception of the UK, where it has more than 5% of the luxury segment. While distribution clearly has a role to play in driving Lexus registrations, Toyota will persist with a mix of channels to market with some countries even looking at the "shop within a shop" approach.
The diesel factor
Historically, one of Lexus's big disadvantages in Europe has been the lack of a diesel powertrain in a market where diesel accounts for an ever-increasing share of total sales. Toyota claims that Lexus "will have a diesel soon" but where from is far from clear. It has a two-litre diesel across its range and Toyota told just-auto that it was "working on a more powerful diesel for Lexus". This could of course be sourced from a third party, a theory flatly denied by Toyota, which claims that rather it is a third party supplier itself (to BMW for the Mini).
Small diesels are to be produced in France and Poland but production will not start in Poland until 2005 and will be restricted to two-litre engines for its cars made in Turkey and the UK. From 2004, Toyota Poland will also supply the petrol engines and manual transmissions for the new PSA joint venture plant in the Czech Republic. However, none of these will satisfy the need for a more powerful engine for Lexus.
Toyota's joint venture in the Czech republic will help build its brand image
In 2005, Toyota will launch its first sub B model in Europe. This will be the fruit of its joint venture with PSA in the Czech Republic. The project, code named B-Zero (BO) is based in Kolin in the east of the Republic and when fully operational will produce 300,000 units a year. Toyota will take 100,000 and the balance will be divided between the Peugeot and Citroen brands. Both Toyota and PSA remain tight-lipped with regard to styling and features but it has been made clear that despite a high level of commonality the exterior will be radically different between the two partner's vehicles.
Our guess at this time is that the vehicle could well be a very small four seater - possibly similar to the upcoming MCC smart - but whatever the styling, a market price, including VAT, of less than 8,000 euros poses a considerable challenge to both companies. Diesel and petrol models will be available with the petrol engine sourced out of Toyota's plant in Poland and the diesel from PSA's joint venture with Ford.
Toyota's overall investment in Europe exceeds 3 billion euros …
Toyota's investments in Europe in recent years (over 3 billion euros since 1992) have resulted in the company becoming as European as its European competitors themselves. In addition to Burnaston in the UK and Valenciennes in France it now sources the Corolla (both sedan and wagon variants) from Turkey. More recently it has started to establish production facilities in Poland for transmissions and petrol engines and small diesels will be introduced into Valenciennes in 2003. This increasing Europeanisation is expected to provide Toyota with the same degree of local manufacturing and presence as its rivals, a factor it hopes will help it be regarded as a mainstream European brand and not just "one of the Japanese transplants operating in Europe."
…and a fifth plant may be necessary
With it nearing capacity in its existing facilities in the region it seems likely that Toyota will need to add extra volume capability in Europe in order to achieve its sales targets and its stated objective of restricting imports to 40% of regional sales volumes. The most obvious option open to it is to establish another plant in the region. While not denying that this is a possibility, Toyota told just-auto that it will be looking first to squeeze maximum volume and production efficiencies out of its existing European plants.
One way of achieving this, currently under consideration, is adding an extra shift in some of its facilities. How much additional volume can be realistically achieved in this way is unclear, but
"we believe that a further production facility will be needed"
Longer term, hybrids will play a role
Another important aspect of Toyota's strategy for Europe is the future role of the fuel hybrid vehicle. Toyota's product offering in this area is the Prius, total sales of which are currently standing at around 100,000 units with a target of 300,000 slated for 2005. Toyota told just-auto that it regards hybrid vehicles as core technology in the long term and that these are central to its plans for Europe. Unlike some of the other manufacturers that have teamed up with partners to develop this technology, Toyota has made it clear that it will undertake the central R&D effort for hybrids on its own. This is despite the recently announced joint venture with Nissan, which Toyota is quick to point out is a "one off" and purely established around component sharing, and driven by SEV regulations in California. Despite its intentions to develop Hybrids as a mainstream technology the main inhibitor to growth for these units will undoubtedly come from the lack of infrastructure and the apparent unwillingness on behalf of the major operators to invest in its development in a timely manner.
On balance it seems Toyota is on track for a 5% market share in 2004
Given its track record we believe that Toyota will achieve its 5% share of the European market in 2004 but it will need to address, as a matter of priority, a number of the issues identified above if it is to sustain the position in the medium to long term.