Toyota and Daewoo

Abstract

This paper describes the methods used by the Toyota and Daewoo car industry during the Asian crisis of the year 1997. Toyota and Daewoo are the names of two renowned major firms in the car industry. They have accomplished years of successful business, which was interrupted by the Asian crisis. This paper also highlights the strategies used by Toyota after the Asian crisis to meet up its target sales and it also highlights the issue of bankruptcy of Daewoo.

The main causes of the Asian Crisis

The Asian crisis of the year 1997 is seen as a crisis that is explained as being macro and financial and which comprised of economic sectors such as banks, non-banks and borrowers. This viewpoint implies that the reason behind this financial crisis was the structural weaknesses of the developing economies in East Asia. Furthermore there are a number of structural weaknesses that caused the crisis which are:

-The inaccurate and insufficient regulation of banks and their banking systems.

-A Pre-modern corporate sector: non-transparency, family dominance, non-separation of ownership and management, archaic accounting, etc.

-The pernicious affiliations of the government and big business such as Korean chaebol; corporate groups in Indonesia, Thailand, etc

-The hurdles, which affected business operations of productivity and competitiveness such as the low rate in technical advancement, lack of skilled experts and managers, lack of supporting (parts) industries.

-The complete dependence on export sector especially on US markets and IT products

-The prevailing of injustice and political favoritism (J Orlin Grabbe 1997).

Toyota and Daewoo Car Industry and the Asian Crisis

The Asian crisis impacted the economy of a number of organizations and companies of the world of different natures of businesses. The car industries of Toyota and Daewoo were also adversely affected by the Asian Crisis and formulated strategies to deal with it.

Daewoo is a company that deals with a wide range of products such as electronics, telecom, construction, heavy industries and motors. In 1995 Daewoo Motors was established in UK. The launch of Daewoo motors was held in UK and it began with the slogan of the ‘Biggest Car Company You’ve never Heard Of’. The major tool Daewoo used to attract potential customers was to break all the rules and innovate a new way  instead of a traditional kind of build up with a dealer network, it managed its own direct selling operation, which used ‘Halfords’ as its nation-wide service network (Wikipedia 2006-Daewoo).

Daewoo held a distinction at that time in terms of being the solitary manufacturer which did not operate by the method of traditional dealerships. The method it used for running its successful business operations was that it possessed and ran its own retail network. It was the peak time of its popularity and it had grabbed a large market share. It was the golden business period for Daewoo motors as it was renowned as to stand close in the list of top ten motor companies with respect to production. All this glory was enjoyed by Daewoo motors before the melancholic incident of the Asian crisis or the Asian Financial Crisis. Daewoo motors suffered greatly due to this crisis and even went through a state where it got bankrupt and it had to hand over some part of the companies sector to General Motors. Daewoo motors got into an immense financial crisis and the reason behind it was its own poor financial management.

The sudden bankruptcy of Daewoo motors put the company into deep trouble where there was no choice but to handover some percentage of the companies’ assets to General Motors. This collapse of Daewoo motors caused a loss of billions of dollars to both South Korean banks and the government. Nevertheless, the incident of its bankruptcy was not only termed as a financial but also a political crisis (Wikipedia (2006): Daewoo). Due to the financial crisis that began in the year 1997, Daewoo generated total proceeds of $197.8 million and made an irreducible loss of $10.43 billion (after tax), in the financial year ending 1999-2000. Since 1999 the company’s revenues decreased by a huge percentage of 94%. This loss of Daewoo motors was stated to be three times higher than the one declared  in 1999, and it was then placed at the position of South Korea’s largest ever company loss.

Moreover, as a consequence of this crisis, the corporation’s domestic market share reduced from 33 %( 1998) to 23 %( 2000). As per studies conducted by analysts to investigate the reason for this downfall of Daewoo motors, it was revealed that it happened due to Daewoo’s loans or other financial aids in order to expand programs. The corporation’s domestic and foreign outstanding amount summed up to more than $16.06 billion in December 1999. At first, Daewoo motors formulated the strategy to deal with the Asian crisis through expanding the company into markets such as of Vietnam, and then it devised to sell its products at extremely low rates in order to gain market shares. These strategies instead of improving the situation worsened it and brought Daewoo motors to a state where it was declared to be bankrupt and hence it had no choice but to be sold (Center for Management Research 1999).

After the Asian financial crisis started in 1997, Daewoo motors was gradually running into financial troubles and hence in the year 2001, the motor company General Motors resolved to buy the majority of Daewoo Motor’s assets to form a new company with the title of ‘GM Daewoo’. This was the strategy used by Daewoo motors to stop further damages to the company. The innovative company ‘GM Daewoo’ began operating on October 17, 2002, along with its partners Suzuki and SAIC by holding a venture of 66.7% with investments of US$400 million. The residual equity venture which amounted to 33.3% was taken by the Korea Development Bank and many other Korean creditors with investments of US$197 million. This contract did not comprise of the Daewoo’s 15 plants, mainly Daewoo’s oldest plant in Bupyeong. This plant now operates with the name of ‘Daewoo Incheon Motor Company’ and functions as a provider to GM Daewoo (Wikipedia 2006: GM Daewoo).

Another company that was hit hard by the Asian crisis was Toyota. There were many automobiles that worked out a policy to close down their productions for a diminutive period and then reopen after some months when things would become better. The general manager of Toyota’s Asia Division Takemoto Motonobu also devised an analogous plan to deal with the calamity as he shut down its Hilux pickup in Thailand in November of the year 1997 and intended to revitalize this operation in January but at a lesser capacity around one-quarter of it. The GM of Toyota further created a tactic that consisted of getting the plant back to at least half the capacity by selling trucks overseas to Australia and commencing progressively in order to improve the production quality to the Japanese level.  The Toyota division in Indonesia, the policy that was used to deal with the calamity was of operating its assembly plant one week out of the whole month, and rationalizing assembly line of impermanent workers and contract workers in order to reduce and save costs. An additional strategy which was used was that an internal exchange rate of ‘Rupiah 8,000’ to the U.S. dollar, which was in dissimilarity to the market rate of ‘Rupiah 13,000’, to the components brought from Japan (Chalmers Johnson 2004). The strategy that was used by Toyota Motor Thailand Co., to deal with the Asian crisis was to close down assemblage lines and suggest early-retirement packages. (Emily Thornton 1999).

The Contrast between the Strategies of Daewoo and Toyota Car Industry

There is a clear contrast between the strategies used by Daewoo and Toyota Car industry before and especially after the Asian crisis. Toyota, which is a large auto manufacturer, used the method of declaring to close down its two assembly plants in Thailand, for the rest of the year (1997) as a result of the Asian crisis, which caused the downfall of domestic scales and the qualms of manufacturing for export with a dropping local currency (Socialist Equality Party 1997). On the contrary, Daewoo formulated and used the tactic of selling some percent of the company’s assets to General motors as to deal with the losses incurred by the Asian Crisis. The reason for this contrast in the strategies of the two companies can be explained as; both were even though suffering from the same incident but were in different situations. Daewoo had lost all its sales and was high in debt whereas the case of Toyota was totally different.

Daewoo had no other choice but to be sold to the U.S auto car manufacturer General Motors whereas there was some hope for revitalizing Toyota’s operations again successfully, after a short period they shut down temporarily. Bankruptcy is a stage which when a company reaches it has no other choice than to sell off its assets to another company and the same happened with Daewoo motors. The Bankruptcy and failure of Daewoo motors is also sometimes explained to be due to the irresponsible acts of Kim Woo Kong, who was a famous tycoon. After the losses incurred by the financial crisis of 1997, Kim hid from the public view as his companies collapsed under $65 billion in debt, which is one of the largest bankruptcies in history. Kim stated the reason for Daewoo motors failure to be political intrigue and management errors and he also accepted fatal misjudgments that led to this failure, he said ‘My big mistake was being too ambitious, especially in autos, I tried to do too much too fast’ (Louis Kraar, 2003).

           The Asian crisis of 1997 caused an immense loss to both the car industries. Toyota faced a lot of criticism as it downsized its workers and its operations; there were many protests and strikes regarding this matter. With its strategy to deal with the aftermath of the crisis, today Toyota is successfully emerging and flourishing as an automobile manufacturer again. As now the financial crisis has come to an end, Toyota will surely be increasing the profits of Indonesia, where the major industry of Toyota is situated.

 The Asian Crisis had adverse effects on the automobile industries of Thailand and Indonesia mainly. At one time Thailand had been the world’s second-largest producer of motorcycles and pick-up trucks. Hence the Thai automobile producers made huge investments in this industry as they visualized and expected that this area would expand more with time and demands would grow to about one million cars a year, but there expectations proved to be wrong due to Asian financial crisis. Due to the Asian financial crisis the production rate reduced from 35.6% to 360,303 units in 1997 and then 56.1% to 158,130 units in 1998. However, recovery did start but in the year 1999 at the rate of 106.9% increase to 327,101 units, and 2000, with a further 25.9% increase to 411,721 units. Thailand’s automobile sector included seventeen companies, Toyota Motor Thailand was among the four largest ones (Thomson Gale 2006).

Today Toyota has emerged again and further plans to avoid losses due to any financial crisis which might occur again by making innovations with other auto companies such as the Toyota Motor Corp, which produced its innovative international multi-purpose vehicle (IMV) project, which aimed to build vehicles outside Japan and export them to countries around the world. An example of this is The Hilux Vigo, which is Toyota’s first vehicle that was developed completely outside of Japan, and is available in three versions, with 2.5- to three-liter engines, and is priced from 391,000 baht (about US$9,400) for the standard version to 861,000 baht for the top-range model. The production of this truck by Toyota began in Thailand August, 2004 and there was an expectation that 280,000 a year would be manufactured, of which half would be exported to Europe, Australia, and elsewhere in Asia. In Thailand, Toyota produced IMV pickup trucks and sport-utility vehicles and diesel engines for the domestic market and for exporting to Asia and hence it helped in boosting its economy which would prevent it from a loss similar to the Financial Crisis of 1997. As discussed above, Thailand is one of the greatest leaders in the automobile industry; its output level is expected to exceed 900,000 each year (Chris Grooves 2005)

Conclusion:

After the Asian crisis in 1997, the worldwide investors were hesitant to give loans to the developing countries, which led to financial decline in the developing countries. In the 1990s the major rising of the financial systems of Brazil and Argentina also fell into crisis. In general the crisis was a component of the global reaction in opposition to the Washington Consensus and the organizations; IMF and World Bank which at the same time became disliked in the developed countries subsequent to the rise of the anti- globalization movement in 1999. A lot of states started too built up foreign exchange reserves as a prevaricate in opposition to the attacks;

 Japan, China, and South Korea were also a part of it.

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