Operational Risk and Toyota

Identify and explain the risks faced by a multinational company and how the multinational company deals with the risks faced by them.

Toyota Motor Corporation, common known simply as Toyota, is one of the famous automaker all over the world. Toyota is a multinational corporation headquartered in Japan and the world’s largest automaker by sales. Toyota is the largest automotive manufacturers. In 2007, Toyota Motor Corporation listed in the world’s 500 largest companies (Fortune Global 500). Nowadays Toyota is the world's largest automotive manufacturers, are sold worldwide every year up to 7.5 million different types of vehicles. Toyota is also the brand’s parent company of Lexus, Daihatsu and Hino. Until to the March of 2003, the company's total numbers of 65,551 employees, with all associated companies, there were totaling 264,096 employees. It is the largest in Japan, and the world's third-largest business. Toyota’s overseas production networks have 50 foreign located in 27 countries and regions (Not included Japan). In addition, Toyota has also sold more than 170 countries worldwide. The company risk faced by the Toyota’s such as the operation risk which includes industry and business risk, financial market and economic risks, political, regulatory and legal risks and other risk that faced by the company could significantly influence the decisions of the investors. Toyota is also facing the same risk in their global market where the demand for automobiles is affected by a number of factors which includes the social, political and general economic conditions, introduction of new vehicles and technologies, and price incurred by customers to purchase and operate vehicles. Industry and business risk that Toyota regularly faces in the automotive market is highly competitive in the market which may influence Toyota to deal with the competition from the same automotive manufactures it operates. In the market where Toyota compete with other automotive manufactures are from the aspects of product quality and features, safety, reliability, the amount of time required for innovation and development, pricing, fuel economy, customer service and the terms of financing. The highly competitive market may lead to the lower the sales unit of the vehicle. Besides that, Toyota is also faced with the risk which comes from the worldwide automotive industry which is highly volatile. Toyota market can be considerable volatility in demand and it is largely dependend on the social, political, and economic conditions. The weakness in the demand of Toyota will affect the financial condition and results of operations. Therefore, the volatility demand of Toyota may influence them into lower unit sales and cause the downward price pressure which in turn will affect Toyota’s current financial position and results of operation. (Toyota annual report, 2012) Furthermore, financial market and economic risks is also apparent to Toyota which included the fluctuations in foreign currency exchange rates and interest rate. Toyota are constantly exposed to the fluctuations of the currency in U.S. dollar, euro and to a less extent which is the Australian dollar, Canadian dollar, British pound and other currencies. Toyota primarily uses the currency of Yen in their trade. These fluctuations affect the way Toyota does their business. Other than that, Toyota’s also face with the translation and transaction risk through the unstable of the exchange rate and therefore influence the consolidated financial statements that are presented in Japanese Yen. Changes in the foreign currency exchange rates may cause the company risk to increase because their product pricing and raw material that purchased from the other country can be directly affected. The company must manage effectively to avoid the negative impact from the fluctuation of the foreign currency exchange rate and the changes in the interest rate. (Toyota annual report, 2012) Other than that, Toyota is also facing the risk in the high prices of raw materials which they use in manufacturing their products. In the manufacturing work the raw material such as the steel, precious metals, non-ferrous alloys, aluminum, and plastic parts. The increase in price of the material cost may lead to the higher production cost for Toyota. The high price in the production cost must be bear by Toyota because they can’t pass all those costs on to its customers or absorb by their suppliers. In the long term, the high price of the production cost will affect the Toyota’s future profitability. Therefore, the increase in price of the raw material cost must be manage well by the Toyota, if not it may lead to the company risk. (Toyota annual report, 2012) Political, regulatory and legal risk is also facing by the Toyota. The automotive company may face the various governmental laws and regulations which may influence the way of company doing their business. Most of the governmental and regulatory risk facing by the Toyota which regard to vehicle safety and environmental matter such as those emission levels, fuel economy, noise and pollution. Toyota is required to implement the safety measures. The safety measures that must be implementing are like recalls for vehicles that do not or may not comply with the safety standards of laws and governmental regulations. The significant costs that incur for the Toyota in order to implementing the safety measures which is to meet the laws and governmental regulations may cause the Toyota’s financial condition and results of operations adversely affected. (Toyota annual report, 2012) There are various legal proceedings that Toyota may face. The legal proceedings of various issues are regarding the product liability and infringement of intellectual property. Lastly, the political instabilities, fuel shortages or interruptions in transportation systems, natural calamities, wars, terrorism and labor strikes is the risk which subject to Toyota that conducting their business worldwide. Any occurrence of these events in the market that Toyota purchases materials part and components may result in delays in the operations of Toyota’s business which may adversely affect Toyota’s financial condition and their operation performance. (Toyota annual report, 2012)

Besides that, there are other global risks that Toyota may have to face and manage it. Other global risk management that Toyota tries to manage includes those operation risk management, commodity price risk management, and Toyota reputational risk management. Those are also the important strategies that managed by the Toyota to reduce their company risk. Firstly, the operational risk is the risk of loss resulting from the failed or inadequate company internal controls and corporate governance. These risks can occur in many forms including the error in doing business, failure of their internal control and causes by the company’s employees or those contracted to perform services for the company that and the vendors that do not perform in accordance with Toyota’s contractual agreement. Therefore, these event should be well manage to avoid any potentially losses or the damages which may dangerous the position of the company. Toyota managed those operational risks by adopting the several strategies to reduce the risk that they facing globally. They diversifying their company operation and financing which exposure to the risk such as localized much of their production by constructing production units in the countries which they operates globally. Toyota can match the desired currencies of local revenue with local expenses through their local operation because they can easy to purchase most of the supplies and resources used in the production process. For example, Toyota can ask its suppliers in Malaysia to settle all the bills using Ringgit Malaysia. This reduces Toyota’s exposure to changes in the value of Ringgit Malaysia. Other than that, Toyota takes the advantages in interest rate differentials by raising the funds in more than one place. This strategies is called diversify of its finance. For example is like Toyota borrows money from the different country such as Japan, United States or Europe which is simple to take the advantages of the interest rate differentials. They will borrow from the country where they expected the interest rate at that country may fall. For example, if Toyota borrows from America and they expected the fall of interest rate in America which will lead to a fall in the value of dollars in relation to the YEN. Toyota, by taking the advantages of the interest rate in America will make loan and other commitments denominated in dollars less expensive in Yen terms. Therefore, Toyota will gain from the expected depreciation of dollar. Commodity price risk also one of the global risk that facing by the Toyota. As the commodity prices rises, the Toyota exposure to the changes in commodity prices which may directly influence their business operations. The increase in the commodity prices will increase the will increase the company cost as well. The increase in the cost of the customer which cannot pass to the customer or absorb by the supplier can affected the company’s profit margin. The high or low in commodity price like non-ferrous alloys like aluminum, precious metals like palladium, platinum and rhodium and ferrous alloys that use by the company in their production of the motor vehicles may decide the high or low cost in the Toyota production. However, the Toyota does not use the derivative instruments to hedge the fluctuation of the commodity price risk. They manage their commodities price risk by holding the minimum stock levels.
Other than the operational risk management and commodities price risk management, the reputation risk management also important to the company of Toyota that operates globally. Toyota carries out their business with major operations in distant locations from corporate headquarters need to adopt a principle-based, rather than a centralized, rule-based approach to reputation building. Toyota has hundreds of companies headquartered in other countries will have different culture and facing the different situation and image. Besides that, Toyota also putting their effort to built its reputation of the company on quality and reliability of their product. However, the incidence of the brake problem had caused their long-term reputation drops. They are trying to solve the problem and various actions had been taken to gain back their customer confidence toward their product. The reputation is not built by one night but it needs the long term effort to gain the image of customer to a company. Other than that, Toyota always try to create a faster, more flexible framework for making communications decisions across borders, cultures, and time zones when problems merge with globalize reputation management. Toyota is putting their effort to gain back their customer confidence and their company reputation. The reputation is important for a company because it can mainly influence the company sales and profit margin. Other than that, the company also manage their globalize reputation by using the influencer mapping which is the process of identifying technical, social, and political influencers. This program should be the long term implement and ongoing program to build the good relationship between the company’s managers and engineers, and those influential outsiders from the different location. Therefore, Toyota may try to integrated reputation management by building the long term relationship with government leaders and their staff members, regulators, and non-governmental organizations and political parties. This is the important part of the globalized reputational risk management. Lastly, Toyota should continue their effort in building their reputation in globalized so their image in automotive manufactures can be well maintain and increase their profit margin for the company.

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