Financial Risk Management at Toyota

Abstract: Toyota Motor Corporation (Toyota) is Japan's largest and the world's fourth-largest automobile manufacturer. The company offers well-known car models like Camry, Corona, Corolla and Lexus. Though a late entrant, compared to General Motors and Ford, Toyota has become one of the strongest players in the automobile industry. Toyota has continued to set new benchmarks for providing value to customers more effectively than competitors.

Toyota is exposed to market risk due to changes in currency rates, interest rates and certain commodity and equity prices. In order to manage these risks, Toyota uses various derivative financial instruments. These instruments are in general executed only with creditworthy financial institutions. The case outlines the various financial risks Toyota faces and how the company manages them.

Introduction Toyota Motor Corporation (Toyota), Japan's largest and the world's fourth-largest automobile manufacturer offered well-known car models like Camry, Corona, Corolla, and Lexus.

Though a late entrant, compared to General Motors and Ford, Toyota had become one of the strongest players in the automobile industry.

In an industry, generally considered to be mature in terms of technology, Toyota had continued to set new benchmarks for providing value to customers more effectively than competitors. Toyota had also redefined the rules of the game in various areas – product development, manufacturing, vendor management and human resources management.

A recent Business Week issue had Toyota on the cover with the caption "Can anything stop Toyota?" Background Note Sakichi Toyoda, born in 1868, founded Toyota. He showed little interest in the family's carpentry business. Instead, Toyoda concentrated on improving the handloom machinery used in textile factories. These efforts led to the Toyoda Automatic Loom.

In 1926, Sakichi founded Toyoda Automatic Loom Works (TALW) to make looms. He entrusted his son Kiichiro with the task of using the profits from the textile machinery business to develop a motor car. In 1933, Kiichiro opened an auto department within the loom works and began copying US engine designs.

After Sakichi died in 1930, Kiichiro faced stiff competition from Ford and General Motors, who had set up their manufacturing units in Japan. Family members including brother Risaburo showed little interest in Kiichiro's plans. In spite of these difficulties, the articles of association of the company were amended in 1933 to permit automobile manufacturing... Credit Risk

Toyota used various financial instruments, in the normal course of business. These instruments were in general executed only with creditworthy financial institutions. Virtually all foreign currency contracts were denominated in U.S. dollars, euros and other currencies of major industrialized countries... Market Risk

Toyota was exposed to market risk due to changes in currency rates, interest rates and certain commodity and equity prices. In order to manage these risks, Toyota used various derivative financial instruments... Derivative financial instruments: Accounting & Valuation

Toyota employed derivative financial instruments, including foreign exchange forward contracts, foreign currency options, interest rate swaps, currency swap agreements and interest rate options to manage its exposure to fluctuations in interest rates and foreign exchange rates...