But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Look forward, not backward
The chart below is from Toyota’s (TM) recent slide deck. Toyota is global, but it’s underrepresented in high-growth markets.
Toyota is more exposed to Japan, North America, and Africa plus the Middle East than its global market share would indicate. Toyota’s management projects fiscal 2015, ending March 31, 2015, growth of 0%, as 4% growth in the U.S. and 1% in the rest of the world is offset by a 7% decline in Japan. This is where the strong growth in China would support revenue growth for Toyota. Granted, China may not reach the 8%+ GDP growth, but it’s doubtful China will fall below the 7% growth rate. This growth is supported the development of the largest car market in the world. Instead, Toyota is looking to North America and Africa to offset its smaller market share in China. If Toyota had its 12% market share in China, up from its current 6%, Toyota would be selling an additional 1.3 million vehicles. This would bring Toyota’s total annual sales to 10.4 million vehicles. Instead, Toyota is one market share point ahead of GM and Volkswagen.
Market share and operating leverage
Here’s where market share matters: operating leverage. In the fiscal year ending March 31, 2014, Toyota spent $8.3 billion on capital expenditures. Toyota maintains 62 manufacturing facilities globally. If you go from one to two shifts at a plant, you double volume but only have to pay labor and parts, in turn improving manufacturing profitability. The same concept applies to research and development (or R&D). Toyota spent $7.9 billion on R&D in the fiscal year ending 2014, developing technologies for future products. If Toyota develops a differentiating technology, it can use the technology on over 9 million vehicles, leveraging its technology investments. This should provide Toyota higher margins.
Let’s take a look to see if Toyota’s market share reflects in its earnings. Read on to the next part of this series to find out.
© 2013 Market Realist, Inc.