Reviewing Toyota's overseas expansion for insights into the current situation of BYD

Toyota's experience in expanding overseas is compared to BYD's opportunities. When targeting the European and American markets, Toyota first launched mid-to-low-end models to win, followed by high-end brands, with profit margins not higher than in China. Although it is currently difficult to find a market similar to China in the 2000s, for BYD, opportunities still exist in early industrialized countries in Southeast Asia, Central Asia, and along the Belt and Road Initiative. A review of Toyota's stock price performance shows that it has gone through stages of excess returns, similar to companies in other industries. Toyota's profitability varies in different regions, with Japan and the Asian region leading in profitability and stability compared to North America and Europe. Overall, Toyota's gross profit margin and net profit margin remain relatively stable

Japan experienced a severe asset price bubble from 1985 to 1990, and since the 1990s, it has been through the bursting of the bubble and the "lost three decades", with significant declines in stock and housing prices. From 1990 to 2000, the Nikkei 225 index fell by 52%, while Toyota Motor Corporation rose by 113%, achieving significant excess returns. We believe that the situation of Toyota at that time is similar to that of BYD now. In a macroeconomic downturn and a saturated domestic market, seeking more opportunities overseas is necessary. We reflect on Toyota's experience to draw insights for BYD today.

1. Stock Price Review and Valuation Analysis: Where do excess returns come from?

Reviewing the trends of the Nikkei and Toyota stock prices from the 1990s to the present day, Toyota's excess returns were evident in the 1990s and 2000s, with the PE ratio experiencing a passive rise to a Davis double-click.

Comparing with other stocks that performed well during the same period, Honda in the automotive industry saw its PE ratio go from 20-80-20X, Denso from 20-60-30X; in the information technology sector, Canon went from 20-80-20X, and leading technology companies that expanded overseas experienced a round of valuation and performance expansion.

2. Breakdown of Profitability by Region: What are the reasons for profit differences?

From a financial statement perspective, Toyota's revenue share from North America and Europe has remained relatively stable since 1999, fluctuating between 20-30% and 8-12% in some years. The contribution from Asia (excluding Japan) started to increase from 2003, with revenue share rising from 6% to the current 15%.

The profitability and stability of Japan and Asia regions are ahead of North America and Europe, with average operating income margins in recent years around 11%, 9%, 4%, and 3%. Overall gross profit margins and net profit margins in recent years are around 17% and 9% (reaching new highs of 19% and 12% in the 24th fiscal year).

We found that when local production in each region exceeds 1 million vehicles, the corresponding net profit margin basically reaches a high level, reflecting that economies of scale are most significant at this stage. The profitability of Europe and the United States after achieving economies of scale is weaker than that of Japan and Asia, mainly due to differences in economic stages, cost factors such as labor/energy, and profit distribution disparities caused by cultural factors (e.g., labor unions in the United States).

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3. What are the similarities and differences between Toyota's overseas expansion and BYD's overseas expansion?

Similarities:

Against the backdrop of slowing domestic demand and facing profitability challenges, both need to go overseas to open up new growth points.
Both have also faced trade frictions and have experienced large-scale overseas factory construction.

Differences:

When Toyota went overseas, although it also faced trade barriers, the overall background was globalization-friendly, unlike the current deepening global trade protectionism trend.
In the early stages of Toyota's overseas expansion, it targeted the equally developed European and American countries with fuel-efficient, cost-effective mid-to-low-end models before introducing high-end brands later. After localization, in terms of profitability, the profit margin is not higher than in the domestic market. On the other hand, BYD's electric vehicles, as a completely new product, had significantly higher profit levels in the early stages of overseas expansion than domestically, taking a high-end route in many countries.
It is currently difficult to find a market equivalent in scale to China in the 2000s in terms of industrialization and early urbanization. However, for BYD, there are still opportunities in early industrializing countries such as Southeast Asia, Central Asia, and countries along the Belt and Road Initiative.

Risk Warning: Unexpected changes in export policies in target regions; increased risks due to trade protection barriers in target regions; risks of declining demand for new energy vehicles and price wars.

Author: Sun Xiaoya (S1110520080009), Article Source: TF Securities Research, Original Title: "TF Securities Sun Xiaoya: Overseas Expansion Special Topic: Reviewing Toyota's Overseas Expansion, What Insights Does It Provide for BYD Today 1".