Toyota’s European Drive1
Anna Kessler put the key into the ignition of her brand-new Toyota Yaris, started the engine, and began to navigate her way home from work through the crowded streets of Berlin, Germany. Having owned the car for just over a week, she was already satisfied with her decision. She liked the car’s distinctive European look, the generous warranty it had come with, and its low fuel consumption. The name, Yaris, even has a European flare since it is derived from “Charis,” the Greek goddess of charm and beauty.
Her decision the previous week marked the first time Anna had ever owned a vehicle manufactured by an Asian company; in fact, it was the first time she had considered one. When she had made her last car purchase, the thought of buying a car from Toyota—then known for its lackluster designs, limited options, and seven-month-long waiting lists—had not even entered her mind. However, as she was researching different vehicles, she found that Toyota had ranked the highest in several categories in a recent quality survey and that the Yaris had achieved an outstanding four-star Euro NCAP safety rating, which led her to investigate the car more thoroughly.
With her purchase, Anna became another one of the millions of Toyota vehicle owners located around the globe. Toyota, the largest auto manufacturing company in the world, sells vehicles in 170 countries and regions, has 54 manufacturing companies in 28 countries and regions outside of Japan, and has R&D facilities worldwide. In Europe Toyota has manufacturing facilities in 10 countries, including France where the Yaris is manufactured. It also has R&D facilities in Belgium, the U.K., Germany, and France.
So why has it taken Toyota so long to crack into the competitive European market, and why are European companies only now beginning to feel the pressure from Asian manufacturers? Many analysts have pointed to an agreement between the Japanese government and the European Community (predecessor to the European Union) in which the two negotiated a quota each year for the number of Japanese cars imported into Europe. The quota amounts agreed upon each year depended on such factors as the level of consumer demand and sales growth in the region and were fixed at 11 percent of the European market.
The arrangement was set up to allow European carmakers to become more competitive as the EC made the transition to a common market; prior to this, each country had its own import and registration restrictions on Japanese cars. Italy, for example, limited the number of imported Japanese vehicles to 3,000, while France kept them at a 3 percent share of its market. Britain, Spain, and Portugal imposed similar restrictions. This policy goes back to the end of World War II when the Japanese government asked the European automakers to curtail exports to Japan to help the nation rebuild its industry. The Europeans reciprocated by limiting the access of Japanese autos to their market. At the time, that wasn’t a problem. However, when the Japanese auto companies became export conscious, they wanted access to the European markets. The quota system helped protect the domestic industry.
Under the new system, these countries had to abandon their individual policies, but French carmakers fought to include an 80 percent local-content rule and an allowance to export 500,000 cars a year to Japan, five times the then-current level. In the end, the EC disregarded these additional requests, and in the first year of the agreement, 1.089 million Japanese cars could be imported.
The quota, however, also fixed separate caps for each participating country and then divided this amount among the Japanese automakers according to their historical market shares. The caps essentially prevented the Japanese from being able to transfer their excess imports from countries where their quotas weren’t being met to ones where they were unable to meet demand due to having already reached the maximum limits. It was primarily for this reason that they never actually met their quota for the EC; during the seven years the quota system was in effect, Toyota was held to a 2 to 3 percent market share in most EU countries.
Although the system seemed to be having the desired effect, even some French auto officials admitted that the eventual opening of the market was inevitable. One noted, “Can we put off change for years? Officially, yes. But honestly, I don’t think so.” That statement proved prophetic when the EU lifted the import quota in 1999 and made it easier for Japanese auto manufacturers to expand distribution and sign up dealers. Although this move did not necessarily cause the Japanese to flood the European market with their products, it did open the way for them to invest more heavily in design and manufacturing facilities in the EU, to broaden the range of products they marketed there, and to customize their offerings to better appeal to European tastes.
Toyota responded to the drop in barriers by introducing a new strategy of designing vehicles targeted specifically at European customers. This involved setting up a European Design and Development center in southern France and allowing design teams across the globe to compete for projects. The Yaris, Toyota’s best-selling vehicle in the EU, was designed by a Greek and was the first to be developed within the region. It subsequently was named Car of the Year in both Europe and Japan. As another key element of its European strategy, Toyota set up additional production centers in the region.
The collapse of the auto industry in Europe has been hard on all manufacturers, which is one reason for Toyota’s investment in Russia. In addition, Japanese competitors continue to open facilities in the Eastern bloc countries that are now members of the EU. As noted above, Toyota has already set up state-of-the-art production plants in the Czech Republic and Poland. Because of the elimination of internal tariffs in the EU, Toyota can manufacture automobiles and parts anywhere within Europe and ship them to all markets duty-free. Riding on its success in Europe in the mid-2000s and its growth internationally, Toyota had ambitious goals for the future. However, Europe is now considered a mature market, which makes it less attractive than the emerging markets, including China. Toyota has only 5 percent of the European market, well behind market leader VW with 24.2 percent.
Toyota is continuing its push to increase its share of the European market by restructuring its Brussels-based European division, including transferring more decision-making power from Japan, and focusing on the values of European consumers. This includes placing renewed focus on hybrid technology in Europe, in which the company still retains a comparative advantage over its global rivals. In 2012, Toyota introduced a hybrid engine for the Yaris, giving potential Yaris customers access to hybrid technology, such as the hybrid electric Yaris model in the opening photo. But, Toyota faces steep R&D challenges as the future of automobiles moves to electric cars and self-driving technology.
This week, we will explore and dissect the following topics: trade theories, trade agreements, and instruments of control governments rely on. Integral to this is what, if any, trade agreement exists, and what that means for companies with foreign operations. Present arguments for the following:
Were any trade agreements in place between the countries identified in the case?
If so, how much impact did any relevant trade agreement have on actions taken by the country whose action sought to protect the industry?
If there was no trade agreement between the countries, would the actions taken to protect the industry have been more or less significant?
What would you conclude overall on the effectiveness of trade agreements?
