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Using one specific company with which you are familiar, examine the actual and potential impacts of globalization on that company. Explain the reasoning behind the points you make. Evaluate possible strategies going forward which the company might use to respond to impacts of globalization you have identified.
Globalization can be described as a historical transformation in political, social, economy and cultural diversity (J.H. Mittelman, 2001). The United Nations on the other hand to describe globalization as a concept that “refers both to an increasing flow of goods and resources across national borders and to the emergence of completely set of organizational structures to manage the expanding network of international economic activities and transactions” (UNCTAD, 1997a, p. 70).
In simple terms it is a process of interaction and integration among peoples, companies and different countries. Which includes the corporate strategies, consumption patterns, regulatory capabilities and governance, technology, the globalization of financial markets, and socio-cultural processes. The globalization can be detected from the increase of manufacturing Foreign Direct Investment (FDI), and financial capital flows. In today’s business environment, most of company’s activities are naturally become globally. Gradually, organizations have recognized that globalization creates unlimited opportunities of worldwide market. However at the mean time, its also brings negative parts such as: highly competitive environment and threats.
On this paper, the Toyota Motor corporation being chosen as reference company, where based on China market to identify what is exist and potential effect of globalization on business, and provide possible solutions for Toyota sustainable development. While, the PEST analysis tool will apply for Toyota’s business situation analysing to explain how Toyota influence by political, social, economic, and technological.
The multinational enterprise (MNE).
A multinational corporation (MNC), sometimes called a transnational corporation(TNC). Is a company that has headquarters in home country but manages production in other counties.
In the past two decade, the multi-national corperation (MNCs) plays a role of monopoly, they were able to get business advantages from host country by using the colonial power. In other word, they can get concessions from host countries by using home government’s influence (Ohmae, 1995). Whereas, since the rapid growth in world trade and investment, this colonial power no longer existed. Instead, the world market becomes to more competitive. Most importantly, the rising of global practice and thinking between companies and countries has made business interests and orientations more necessary than ever (Abbas, J. 2000).
Background on Toyota
Since the rapid development of global integration the automobile industry becomes one of the world’s most important economic sectors by revenue. Toyota is one of representative multinational enterprise in the world. It’s established in 1937 by Sakichi Toyoda, till present day Toyota was conducts both domestic and global marketing with 52 oversea manufacturing companies in 27 countries. Toyota market and sold the vehicles approximate 7 million in more than 170 countries every year, worldwide employees is 320.808 (Annual report, 2009). As a market leader Toyota holding 15 per cent market share among all the other automobile brands (Business week, 2009).The key success element of Toyota is commitment to designing, engineering and build cars to every target market area. Due to this reason Toyota faced great impact from globalization; the impact can be both negative and positive and differs by context such as new markets, cheaper location for investment, multi-choice of suppliers for raw material and services, and cheaper labor cost. However it can also carry the negative parts. First, the world automobile market is change in economic conditions affecting, and highly competitive environments in which Toyota operates. Second the market highly volatile. Last the global auto crisis was seriously hit down Toyota’s market profit.
The Global Expansion of Toyota
In 2008, Toyota to officially become world largest automaker, the rapid expansion is the main reason Toyota able to overtake GM as world’s top car firm. Toyota operated business across the entire world, which including: Sales vehicle in Africa and Russia and sales leader in Australia. Toyota were Launched Lexus and SCION in United States and norther American market.
Figure Toyota sales by region. (Source: Toyota annual report, 2009)
In recent years, Toyota has focus on global market expansion, especially, China market. Because the tendency of Chinese consumption pattern is change.
Toyota FDI in China.
China overtake United States become to new fdi destination by 2004. This is due to the China adoption reform and opening up policy in the late 1970. Toyota believes that China’s market is potentially as large as the U.S. Market. Toyota aims consistently increase investment in China to grow production capacity and add to product lineup along with begin to produce Camry at Guangzhou Toyota Motor Co., Ltd on May 2006.
According to XinHua News report that Toyota intend to invest about $700 million in its first fully-fledged research and Development base (R&D) in China. Because, Toyota wants to increase the production in China.
Since 2005, Toyota through the form of join-venture with Chinese company (FAW Group Corporation) to build first plant in SiChuan province until now, Toyota was invested to build seven plants in China, and another six plants of Toyota also joint-ventures with FAW.
Toyota establish oversea plant in response to incentives such as tariffs, reduction of labour cost, and
Toyota production system
The PEST analysis on Toyota
The auto industry is subject to various governmental rules and policies. The political environment of China does favor enterprises with foreign investment. According to Government policy 2009, the Chinese government levies low tax on enterprise with foreign investment, and preferential tax policies are offered to the sectors and regions where investment is encourage by the state. And the low tax policy reflected in three aspects: income tax, circulation tax, and import-stage value-added tax. At the same time, the China government announced several preferential policies to encourage auto consumption, which include the people who living countryside can enjoy 10% subsidy of the original vehicle price for their buy it. Second, the tax of purchase small-displacement vehicles was cut from 10% to 5% (Chinavestor, 2010). These preferential policies stimulated auto consumption significantly, and attract more foreign automobile company invest in China.
On the other hand, government play the role of savior. For example, the government bailout policy: in 2009, Toyota was require for emergency loan from the Japan Bank, with the amount of more than 3 billion US dollars. The purpose of the emergency loan is to dealing with cash flow problem or some other cases.
The People’s Republic of China is the second biggest economy in the world (first is United States), and it is world’s fastest-growing economy as well with annual economic growth averaging nearly 9% over the last three decade. The role of China in the world are “the factory of the world”, because China provides a cheap labour cost, and low cost base for export-oriented production.
The major advantage of Toyota is the strong cash position. However, if compare with GM, Toyota still existed weak credit ratings, rising health-care and pension costs, and losses in its automotive division. Toyota expects through use its strong cash position to expanding all over the world increase its commitment to R&D.
The population of China is beyond one billion, it is a largest country in the world by population. The households size: 3.1, total households in China were 351,233,698, as we know the Toyota segmenting group is Households, usually, this group of people in China have middle or upper of income level with good education background age around 25 to 65.
The Toyota product line consist of: Electric technology, Plug-in hybrids, All-electric vehicles, Cars, Pickup trucks, Luxury-type vehicles. Toyota is one of largest automobile companies to promote hybrid vehicles in the market. Beside the production lineup, there are have one more important factor able to shapes technology adoption at Toyota plants, which are governments foreign investments control power. The business in China, Chinese government controls type of technological standards on firms operating in the country.
The impact of globalization on Toyota.
Operating in global market is a challenge for Toyota. Even though the globalization created unlimited opportunities for Toyota, but the adverse affect should not be ignored.
The impact of exchange rates on Toyota.
The currency exchange rates are very powerful can affect trade investment, finance, tourism, oversea economic transactions, import and export prices of goods and services.
Toyota attaches great importance to the fluctuation in foreign currency exchange rates and this is particularly evident in fluctuation between the value of the Japanese yen, the U.S. dollar, Chinese Yuan, and the euro. The negative impact resulting from fluctuation in foreign currency exchange rates may affect Toyota’s global performance.
The following table illustrates Japanese yen per $1.00 during the periods display
Fiscal Year Ended or Ending March 31.
At End of Period
(of month-end rates)
(¥ per $ 1.00)
(through June 19,2009)
(Source: Toyota annual report 2009)
This table shows that, the yen has been strong when translation with US dollars.
According to Toyota’s annual financial statement, which clearly present a financial situation of Japanese yen are affected by translation risk and foreign currency transaction risk. The fluctuation of foreign currency change rates may affect the price of Toyota’s products in worldwide market and use foreign currencies to purchases materials. Since 2009, Japan central bank to show sign of Japanese yen will further appreciates against U.S. dollars. It can cause adverse effect to Toyota’s reported operating results and financial condition. Because Japanese yen is rapidly, consistently appreciates against other foreign currencies that will force Toyota to markup the price of all the export products. But the rapid increase value of Japanese yen can have favorable effect on material purchased, but it only inside of Japan. For Toyota oversea operations still suffered with high raw materials, and gasoline, due to the profit margins was fallen, when translated from dollars back to yen.
The impact of consumer preferences on Toyota
(Source: Annual Repot, 2006)
This table illustrate that, Toyota has build different product line across the China to fulfill local market demand.
The consumer preferences are one of the most important factors shaping international production for Toyota. The trend of distinct national preferences is spread every corner of the world. The homogeneity of preferences lead to Toyota’s product reduces the benefits of manufactory in China, because of complicated relationship between car design and differences in consumer preferences as a typical example, the Ford promote new car “Mondeo” to the worldwide but the sales was not good as they expected, because Ford neglected focus localizing production.
In particular, after the second oil crisis, Toyota was enhance the production aims to provide an effective and creative production design to gain more market share in China (i.e., Toyota’s Corolla produce by global platform and modified for different region to match consumer’s needs). But Toyota has ignored the preferences are not yet homogeneous across all of China, even in the target region, there are have several differences local tastes of demand. In contrast, the Honda’s Accord is also use the global platform but modified the car’s exterior body to different specific market area, thus, Honda has completely different automobile production line for each target market, i.e., the difference platforms between Japan, Thailand and China. Due to this reason Toyota fall into extremely passive position compare to other competitors.
The Impact of United States Financial Crisis on Toyota .
The United States financial crisis of 2007 has considered being the worst economic crisis since the 1930’s great depression. The main factor trigger of the financial crisis was the United States real estate bubble was busted, caused property price tied by the value of securities, then the price of house was decline straightly, not only America this financial tsunami has wave to the entire world. Which contributed consumer lost approximate hundreds of billions of U.S. Dollar, several key businesses have failed, and the stock markets have fallen significantly. Obviously, the financial crisis has been hit down United States economy heavily; even the bailout of banks by national government has measured. But the financial markets haven’t showed the sign of recovery.
As biggest auto-maker in north America “Toyota” was faced an unprecedented situation by the financial recession. The adverse results are largely, the vehicle sale hardest hit in northern America and Europe market with drop in sales of 673 thousand vehicles() especially, the sales of Toyota’s luxury division Lexus was drop significantly.
Moreover, increase price of crude oil and iron and steel raw material impact Toyota’s operation, this fiscal year was drop 68 percent of benefits compare with previous fiscal year and according to Toyota annual report, the net profit loss of 4.2 billion U.S dollars (Toyota Annual Report, 2009). Last the financial market recession resulted negative impacts to Toyota’s accumulation of capital. Due to the financial downturn, the organizations or financial institutions may unable to provide capital to the market.
The impact from competitive environment to Toyota.
Figure:share of U.S. Auto market. (Source)
According to this pie chart, GM, which is 18.2%, is the biggest automaker in U.S. among all the motor corporations, then is Toyota with 15.8%, followed by Ford, making up 14.3%: and the next coming is Chrysler at 12.1%. From the pie chart is obviously shows that the big three automaker are still the largest domestic producers which making up 44.6% market share.
The United States market always has been a prime concern for Toyota.. Due to its trade liberalization, highly developed, market demand(U.S. Auto market is about ten times bigger than the Canadian market). Especially, the demanding of Toyota luxury division Lexus was increased in recent years.
However the U.S. automotive market is highly competitive at least fifteen auto company was market their product in U.S. market. Toyota as a foreign brand faces intense competition from other competitors. The highly competitive business environment lead to cause lower vehicle units sales and inventory backlog. This caused Toyota downward price pressure. The factors influence competition including: quality of product, post-purchase services, and reliability. However, Toyota faced unexpectedly quality problem with sudden unintended acceleration, which caused Toyota economic damages nearly $7 billion, the 94,000 vehicles has been recalled.
Sustainability development of Toyota
Establishment of Global Special Committee for Global Quality control
Implemented approaches to address a deterioration in information gathering and information sharing practices between headquarters and the regional offices. These problem are seen to be the harmful side effects of the rapid globalization.
The function of this committee are restructure the quality management system
Strategies of interest rate swaps and localized in respond to fluctuation of Money exchange rate.
In order to reduce the adverse affect of fluctuation foreign currency exchange rates, Toyota use some certain derivative financial tool such as interest rate swaps and increase the target market production of localized. Likewise, increase the investment in target market to increase production capacity and build local raw material supply chain, that can as possible as minizing losses on currency translation. Nonetheless, the adverse affect still existed, Toyota have to maintain a high level of vigilance the dynamics of international exchange market.
Product diversification in respond to highly competitive auto market.
In the highly competitive global business environment,
In todays global business environment multinational enterprise become more important, because countries adoption of opening oriented to promote the economic growth by attract Foreign Direct Investment (FDI). The multinational enterprise plays the role of investor between countries. Whereas, the business environment will become more competitive follow with the increased FDI. As the world forth largest multinational enterprise, Toyota faced several affect from globalization, which can be classified as political, government regulations, economic environment, social lifestyle, and technological factors. Due to those of factor Toyota will continue to seek the way of sustainable development that use some strategy or approach to solve problems, such as, open a new market with innovative product. But there are not ensure Toyota will have a bright future.
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