Toyota’s European Operating Exposure

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Hang Tian (Nathan) FIN627-11 Toyota’s European Operating Exposure Q1: Why do you think Toyota waited so long to move much of its manufacturing for European for sales to Europe? Running a business is not as easy as doing a case study, especially for the business empire like Toyota, automobile industry is very complex, building a new plant is not as easy as it appears to be. First of all, building a factory is very costly, Toyota has to do millions of researches and investigations, it takes time to choose a country and a city, then Toyota has to make a forecast about the future cash flow and payback period, most important point is that Toyota must persuade both local government and Japanese government, this process takes a long time. Second, Toyota’s income statement may suffer from the exchange rate change between Yen and Euro, the movement of manufacturing into local and regional markets could solve this problem, but there are also other issues bothering, that is, the high tax rate and the expensive workforce payment, besides, the construction of a new plant needs a big amount of cash flow, even for the company like Toyota, this may be a big pressure. Toyota’s CFO must make a detailed financial report to the board to convince them building a new factory in European country will bring profit as a whole. Third, from the economic point of view, the product like automobile benefit from the economy of scale, taking a part of the production of out Japan may somehow affect the average unit cost, therefore, building an oversea branch arbitrarily may influence the balance in Japanese market. For those reasons, time runs out. Q2: If Britain were to join the European Monetary Union, would the problem be resolved? How likely do you think it is that Britain will join? It is really hard to say whether the Britain will join the European Monetary Union, but I have

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