Toyota to Expand Thailand Capacity - Analyst Blog

Toyota Motor Corp. (TM) announced that it will enhance its production capacity in Thailand by 20% to 600,000 vehicles per annum by mid-2011 in order to boost its sales in Southeast Asia. According to the Nikkei business daily, the Ban Pho facility – one of the three assembly facilities of Toyota in Thailand – will see an expansion in production capacity by 120,000 units to 200,000 vehicles per year.

Apart from China, India and Japan, other Asian countries including Indonesia and Thailand have been experiencing a spurt of growth in the automotive industry. In the first nine months of 2010, new car sales in six major Southeast Asian markets, including the above two countries, surged 36% to 1.8 million units.

In order to tap the growing market potential, other major automakers are foraying into these Asian markets. According to Peter Fleet, Ford Motor Co.'s (F) president for the 10-country Association of South East Asian Nations (ASEAN), Asia is expected to account for 40% of growth in the auto industry over the next five to seven years.

Recently, Ford and Japan's Mazda Motor announced their plan to invest $350 million in their Auto Alliance joint venture plant in Rayong, Thailand. This comes on top of a $450 million investment for a new plant at the same location made in June this year. Overall, the new investment in Thailand will enhance Ford's production capacity in Southeast Asia by more than 50%.

The benefit from Toyota's expansion in Thailand and in other Asian countries may offset its sluggish sales in the U.S. due to its tarnished reputation on the back of its latest string of safety recalls. Last month, the automaker's sales slid 3% to 129,317 vehicles in the U.S. Meanwhile, its market share declined to 14.8% from 17.9% in November 2009.

Since September last year, Toyota has recalled about 11 million vehicles globally through more than 15 recalls, more than any other automaker. The recalls were related to problems such as faulty accelerator gas pedals, slipping floor mats and defective braking systems.

Despite the backlash from safety recalls, Toyota showed a fivefold increase in profit to ¥115.5 billion ($1.34 billion) or ¥31.47 per share (37 cents) in the second quarter of its fiscal 2011 from ¥22.19 billion ($258.26 million) or ¥6.96 per share (8 cents) in the same quarter of previous fiscal year. The profit was boosted by marketing strategy as well as cost reduction measures incorporated by the company during the quarter.

As a result, Toyota retains a Zacks #3 Rank on its stock, which translates to a recommendation of Hold for the short term (1–3 months). In line with this, we also reiterate our Neutral recommendation on the stock for the long term (more than 6 months).