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Morningstar | Toyota Seeks More Scale Through TNGA While Also Investing for an Autonomous World

President Akio Toyoda's vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops multiple vehicles at the same time using common parts. The first cars from this move came in 2015 and focused on three front-wheel-drive platforms that make up about half of Toyota's production. The goal is to streamline engineering and increase product development efficiency by at least 20%. Management targets at least 60% of its global volume in 2021 will be on TNGA platforms. A big change on the parts side is that the company will use more parts on a global standard as opposed to Toyota-specific standards. The long-term goal is for vehicles that share a platform to have 70%-80% common parts, but the commonality will start at 20%-30%. This efficiency will increase the risk of a major recall should a part be defective, but we think these changes are necessary to keep pace with other major common platform moves under way across the industry. We think giving local designers more control is finally letting Toyota make more exciting vehicles.More plants outside Japan will also help Toyota deal with foreign exchange risk, which can dramatically affect earnings. In calendar 2018, about 79% of Toyota's vehicle sales were outside Japan, but only 60% of production was based outside the country. The company has long pledged to produce at least 3 million vehicles a year in Japan, but this promise had become very hard to keep when the yen is strong. Every JPY 1 change in the dollar affects Toyota's operating income by about JPY 35 billion, more than twice the impact at Honda. Management has said that the Japanese operations break even at JPY 85/$1, and below JPY 80/$1 is where management has to reconsider its Japanese production levels, especially for compact cars. We'd like to see Toyota produce more of its vehicles where it sells them, so a new Mexico plant in 2020 for Tacoma and a new Corolla U.S. plant in 2021 in Alabama will free up existing plants for more North American light truck production and reduce imports from Japan.