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Toyota Motor Corp (TM) SEC Filing 20-F Annual report for the fiscal year ending Tuesday, March 31, 2015

Toyota Motor Corp

CIK: 1094517 Ticker: TM
Table of Contents

As filed with the Securities and Exchange Commission on June 24, 2015

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: March 31, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-14948

 

 

TOYOTA JIDOSHA KABUSHIKI KAISHA

(Exact Name of Registrant as Specified in its Charter)

TOYOTA MOTOR CORPORATION

(Translation of Registrant’s Name into English)

Japan

(Jurisdiction of Incorporation or Organization)

 

 

1 Toyota-cho, Toyota City

Aichi Prefecture 471-8571

Japan

+81 565 28-2121

(Address of Principal Executive Offices)

Hiroaki Shimizu

Telephone number: +81 565 28-2121

Facsimile number: +81 565 23-5800

Address: 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan

(Name, telephone, e-mail and/or facsimile number and address of registrant’s contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class:

 

Name of Each Exchange on Which Registered:

American Depositary Shares*   The New York Stock Exchange
Common Stock**  

 

* American Depositary Receipts evidence American Depositary Shares, each American Depositary Share representing two shares of the registrant’s Common Stock.
** No par value. Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the U.S. Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 3,146,813,631 Shares of Common Stock (including 82,545,759 Shares of Common Stock in the form of American Depositary Shares) as of March 31, 2015

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934: Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨             Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  x             International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨              Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item  17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

ITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      1   

ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE      1   

ITEM 3.

   KEY INFORMATION      1   

 3.A

   SELECTED FINANCIAL DATA      1   

 3.B

   CAPITALIZATION AND INDEBTEDNESS      4   

 3.C

   REASONS FOR THE OFFER AND USE OF PROCEEDS      4   

 3.D

   RISK FACTORS      5   

ITEM 4.

   INFORMATION ON THE COMPANY      8   

 4.A

   HISTORY AND DEVELOPMENT OF THE COMPANY      8   

 4.B

   BUSINESS OVERVIEW      9   

 4.C

   ORGANIZATIONAL STRUCTURE      51   

 4.D

   PROPERTY, PLANTS AND EQUIPMENT      52   

ITEM 4A.

   UNRESOLVED STAFF COMMENTS      53   

ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS      53   

 5.A

   OPERATING RESULTS      53   

 5.B

   LIQUIDITY AND CAPITAL RESOURCES      84   

 5.C

   RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES      87   

 5.D

   TREND INFORMATION      89   

 5.E

   OFF-BALANCE SHEET ARRANGEMENTS      89   

 5.F

   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS      90   

 5.G

   SAFE HARBOR      91   

ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      91   

 6.A

   DIRECTORS AND SENIOR MANAGEMENT      91   

 6.B

   COMPENSATION      99   

 6.C

   BOARD PRACTICES      100   

 6.D

   EMPLOYEES      101   

 6.E

   SHARE OWNERSHIP      102   

ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      103   

 7.A

   MAJOR SHAREHOLDERS      103   

 7.B

   RELATED PARTY TRANSACTIONS      104   

 7.C

   INTERESTS OF EXPERTS AND COUNSEL      104   

ITEM 8.

   FINANCIAL INFORMATION      104   

 8.A

   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION      104   

 8.B

   SIGNIFICANT CHANGES      105   

ITEM 9.

   THE OFFER AND LISTING      105   

 9.A

   LISTING DETAILS      105   

 9.B

   PLAN OF DISTRIBUTION      105   

 9.C

   MARKETS      106   

 9.D

   SELLING SHAREHOLDERS      106   

 9.E

   DILUTION      106   

 9.F

   EXPENSES OF THE ISSUE      106   

ITEM 10.

   ADDITIONAL INFORMATION      106   

 10.A

   SHARE CAPITAL      106   

 10.B

   MEMORANDUM AND ARTICLES OF ASSOCIATION      106   

 10.C

   MATERIAL CONTRACTS      114   

 10.D

   EXCHANGE CONTROLS      114   


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 10.E

   TAXATION      115   

 10.F

   DIVIDENDS AND PAYING AGENTS      121   

 10.G

   STATEMENT BY EXPERTS      121   

 10.H

   DOCUMENTS ON DISPLAY      121   

 10.I

   SUBSIDIARY INFORMATION      121   

ITEM 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      122   

ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      123   

 12.A

   DEBT SECURITIES      123   

 12.B

   WARRANTS AND RIGHTS      123   

 12.C

   OTHER SECURITIES      123   

 12.D

   AMERICAN DEPOSITARY SHARES      124   

ITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      125   

ITEM 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      125   

ITEM 15.

   CONTROLS AND PROCEDURES      125   

ITEM 16.

   [RESERVED]      126   

 16A.

   AUDIT COMMITTEE FINANCIAL EXPERT      126   

 16B.

   CODE OF ETHICS      126   

 16C.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES      127   

 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      128   

 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      128   

 16F.

   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      129   

 16G.

   CORPORATE GOVERNANCE      129   

 16H.

   MINE SAFETY DISCLOSURE      132   

ITEM 17.

   FINANCIAL STATEMENTS      133   

ITEM 18.

   FINANCIAL STATEMENTS      133   

ITEM 19.

   EXHIBITS      134   


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As used in this annual report, the term “fiscal” preceding a year means the twelve-month period ended March 31 of the year referred to. All other references to years refer to the applicable calendar year, unless the context otherwise requires. As used herein, the term “Toyota” refers to Toyota Motor Corporation and its consolidated subsidiaries as a group, unless the context otherwise indicates.

In parts of this annual report, amounts reported in Japanese yen have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for this translation was ¥120.17 = $1.00. This was the approximate exchange rate in Japan on March 31, 2015.

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, or the SEC, including this annual report, documents incorporated by reference, reports to shareholders and other communications.

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as the information is identified as forward looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information. Toyota relies on this safe harbor in making forward-looking statements.

Forward-looking statements appear in a number of places in this annual report and include statements regarding Toyota’s current intent, belief, targets or expectations or those of its management. In many, but not all cases, words such as “aim”, “anticipate”, “believe”, “estimate”, “expect”, “hope”, “intend”, “may”, “plan”, “predict”, “probability”, “risk”, “should”, “will”, “would”, and similar expressions, are used as they relate to Toyota or its management, to identify forward-looking statements. These statements reflect Toyota’s current views with respect to future events and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those which are anticipated, aimed at, believed, estimated, expected, intended or planned.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ from those in forward-looking statements as a result of various factors. Important factors that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements are identified in “Risk Factors” and elsewhere in this annual report, and include, among others:

(i) changes in economic conditions, market demand, and the competitive environment affecting the automotive markets in Japan, North America, Europe, Asia and other markets in which Toyota operates;

(ii) fluctuations in currency exchange rates, particularly with respect to the value of the Japanese yen, the U.S. dollar, the euro, the Australian dollar, the Russian ruble, the Canadian dollar and the British pound, and interest rates fluctuations;

(iii) changes in funding environment in financial markets and increased competition in the financial services industry;

(iv) Toyota’s ability to market and distribute effectively;

(v) Toyota’s ability to realize production efficiencies and to implement capital expenditures at the levels and times planned by management;

(vi) changes in the laws, regulations and government policies in the markets in which Toyota operates that affect Toyota’s automotive operations, particularly laws, regulations and government policies relating to vehicle safety including remedial measures such as recalls, trade, environmental protection, vehicle emissions and vehicle fuel economy, as well as changes in laws, regulations and government policies that affect Toyota’s other operations, including the outcome of current and future litigation and other legal proceedings, government proceedings and investigations;


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(vii) political and economic instability in the markets in which Toyota operates;

(viii) Toyota’s ability to timely develop and achieve market acceptance of new products that meet customer demand;

(ix) any damage to Toyota’s brand image;

(x) Toyota’s reliance on various suppliers for the provision of supplies;

(xi) increases in prices of raw materials;

(xii) Toyota’s reliance on various digital and information technologies;

(xiii) fuel shortages or interruptions in electricity, transportation systems, labor strikes, work stoppages or other interruptions to, or difficulties in, the employment of labor in the major markets where Toyota purchases materials, components and supplies for the production of its products or where its products are produced, distributed or sold; and

(xiv) the impact of natural calamities including the negative effect on Toyota’s vehicle production and sales.


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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

3.A SELECTED FINANCIAL DATA

You should read the U.S. GAAP selected consolidated financial information presented below together with “Operating and Financial Review and Prospects” and Toyota’s consolidated financial statements contained in this annual report.

U.S. GAAP Selected Financial Data

The following selected financial data have been derived from Toyota’s consolidated financial statements. These financial statements were prepared in accordance with U.S. GAAP.

 

     Year Ended March 31,  
     2011     2012     2013     2014     2015  
     (Yen in millions, except share and per share data)  

Consolidated Statement of Income Data:

          

Automotive:

          

Revenues

     17,337,320        16,994,546        20,419,100        23,781,404        25,062,129   

Operating income

     85,973        21,683        944,704        1,938,778        2,325,310   

Financial Services:

          

Revenues

     1,192,205        1,100,324        1,170,670        1,421,047        1,661,149   

Operating income

     358,280        306,438        315,820        294,891        361,833   

All Other:

          

Revenues

     972,252        1,048,915        1,066,461        1,151,280        1,255,791   

Operating income

     35,242        42,062        53,616        64,270        65,650   

Elimination of intersegment:

          

Revenues

     (508,089     (560,132     (592,039     (661,820     (744,548

Operating income

     (11,216     (14,556     6,748        (5,827     (2,229

Total Company:

          

Revenues

     18,993,688        18,583,653        22,064,192        25,691,911        27,234,521   

Operating income

     468,279        355,627        1,320,888        2,292,112        2,750,564   

Income before income taxes and equity in earnings of affiliated companies

     563,290        432,873        1,403,649        2,441,080        2,892,828   

Net income attributable to Toyota Motor Corporation

     408,183        283,559        962,163        1,823,119        2,173,338   

Net income attributable to Toyota Motor Corporation per share (yen):

          

Basic

     130.17        90.21        303.82        575.30        688.02   

Diluted

     130.16        90.20        303.78        574.92        687.66   

Shares used in computing net income attributable to Toyota Motor Corporation per share, basic (in thousands)

     3,135,881        3,143,470        3,166,909        3,168,989        3,158,851   

Shares used in computing net income attributable to Toyota Motor Corporation per share, diluted (in thousands)

     3,135,915        3,143,470        3,167,155        3,170,911        3,160,429   

 

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     Year Ended March 31,  
     2011      2012      2013      2014      2015  
     (Yen in millions, except per share and numbers of vehicles sold data)  

Consolidated Balance Sheet Data (end of period):

              

Total Assets:

     29,818,166         30,650,965         35,483,317         41,437,473         47,729,830   

Short-term debt, including current portion of long-term debt

     5,951,836         5,963,269         6,793,956         7,780,483         8,963,492   

Long-term debt, less current portion

     6,449,220         6,042,277         7,337,824         8,546,910         10,014,395   

Toyota Motor Corporation shareholders’ equity

     10,332,371         10,550,261         12,148,035         14,469,148         16,788,131   

Common stock

     397,050         397,050         397,050         397,050         397,050   

Other Data:

              

Dividends per share (yen)

     50.0         50.0         90.0         165.0         200.0   

Number of vehicles sold

              

Japan

     1,913,117         2,070,799         2,278,796         2,365,410         2,153,694   

North America

     2,031,249         1,872,423         2,468,804         2,529,398         2,715,173   

Europe

     795,534         797,993         799,085         844,003         859,038   

Asia

     1,255,016         1,326,829         1,683,578         1,608,355         1,488,922   

Other*

     1,313,123         1,283,885         1,640,401         1,768,867         1,755,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Worldwide total

     7,308,039         7,351,929         8,870,664         9,116,033         8,971,864   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East, etc.

Dividend Information

Toyota normally pays dividends twice per year, including an interim dividend and a year-end dividend. Although Toyota’s articles of incorporation provide that retained earnings can be distributed as dividends pursuant to the resolution of its board of directors, Toyota’s board of directors recommends the payment of a year-end dividend to holders of common shares and registered pledgees of common shares of record as of March 31, the record date, in each year. Year-end dividends are usually paid to shareholders immediately following approval of the dividend at the general shareholders’ meeting, normally around the middle of June of each year.

At the 111th Ordinary General Shareholders’ Meeting held in June 2015, Toyota’s shareholders approved amendments to Toyota’s articles of incorporation permitting the issuance of Model AA Class Shares in the future. The articles of incorporation now provide that in the event that Toyota pays a year-end dividend to holders of common shares, it will pay a year-end dividend to any holders of Model AA Class Shares or registered pledgees of Model AA Class Shares of record as of the record date for the year-end dividend, in the amount payable on the Model AA Class Shares pursuant to their terms (“AA Dividends”), in preference to holders of common shares or registered pledgees of common shares.

In addition to these year-end dividends, Toyota may pay an interim dividend in the form of cash distributions from its distributable surplus to holders of common shares and pledgees of common shares of record as of September 30, the record date, in each year by resolution of its board of directors. Toyota normally pays the interim dividend in late November. The articles of incorporation now provide that in the event that Toyota pays such interim dividends, Toyota will pay an amount equivalent to one-half of the AA Dividends (“AA Interim Dividends”) as an interim dividend to any holders of Model AA Class Shares or registered pledgees of Model AA Class Shares of record as of the record date for the interim dividend, in preference to holders of common shares or registered pledgees of common shares.

If the amount of the dividends from surplus paid to holders of Model AA Class Shares or registered pledgees of Model AA Class Shares is less than the prescribed amount of AA Dividends in any fiscal year, the amount of the shortfall will be carried forward to and accumulate in the following fiscal year and thereafter. Dividends from surplus will be paid to holders of Model AA Class Shares or registered pledgees of Model AA Class Shares in preference to the payment of interim and year-end dividends until such payment reaches the amount of the accumulated unpaid dividends on the Model AA Class Shares.

 

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For a further discussion of Model AA Class Shares, please see “Additional Information — Memorandum and Articles of Association.”

In addition, under the Companies Act of Japan (the “Companies Act”), dividends may be paid to holders of common shares and pledgees of record of common shares as of any record date, other than those specified above, as set forth in Toyota’s articles of incorporation or as determined by its board of directors from time to time. Toyota’s articles of incorporation permit Toyota to pay dividends, in addition to interim dividends mentioned in the preceding paragraph, by a resolution of its board of directors. Toyota has incorporated such a provision into its articles of incorporation in order to enable a flexible capital policy. Under the Companies Act, dividends may be distributed in cash or (except in the case of interim dividends mentioned in the third preceding paragraph) in kind, subject to limitations on distributable surplus and to certain other conditions.

The following table sets forth the dividends declared by Toyota for each of the periods shown. The periods shown are the six months ended on that date. The U.S. dollar equivalents for the cash dividends shown are based on the noon buying rate for Japanese yen on the last date of each period set forth below.

 

       Cash Dividends per Common
Share
 

Period Ended

   Yen      U.S. dollars  

September 30, 2010

     20.0            0.24      

March 31, 2011

     30.0            0.36      

September 30, 2011

     20.0            0.25      

March 31, 2012

     30.0            0.36      

September 30, 2012

     30.0            0.38      

March 31, 2013

     60.0            0.63      

September 30, 2013

     65.0            0.66      

March 31, 2014

     100.0            0.97      

September 30, 2014

     75.0            0.68      

March 31, 2015

     125.0            1.04      

The payment and the amount of any future dividends are dependent on the amount of Toyota’s future earnings, its financial condition and other factors, including statutory restrictions on the payment of dividends.

Toyota deems the benefit of its shareholders as one of its priority management policies, and it continues to work to improve its corporate structure to realize sustainable growth in order to enhance its corporate value. Toyota will strive to continue to pay stable dividends aiming at a consolidated dividend payout ratio of 30% while giving due consideration to factors such as business results for each term, investment plans and its cash reserves. In order to successfully compete in this highly competitive industry, Toyota plans to utilize its internal funds for the early commercialization of next-generation environment and safety technologies, giving priority to customer safety and reliability. Considering these factors, an annual dividend of ¥200 per common share was paid for fiscal 2015, consisting of a year-end dividend of ¥125 per common share and an interim dividend of ¥75 per common share.

In fiscal 2015, Toyota repurchased 55,521,900 shares of its common stock at a total cost of ¥359.9 billion, excluding shares constituting less than one unit that were purchased by Toyota upon request. Since Toyota began repurchasing common shares in fiscal 1997, the cumulative number of common shares repurchased as of the end of March 2015 was 792.5 million shares at a total cost of ¥3,228.7 billion. The following table shows the approximate number of common shares repurchased and the approximate cost of repurchase of those shares for each of the periods indicated:

 

     Year Ended March 31,  
     2011      2012      2013      2014      2015  

Number of shares repurchased

     0         0         0         0         55,521,900   

Amount paid

     0         0         0         0         359,994   

 

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Toyota’s future share repurchases will be influenced by factors such as Toyota’s future earnings and financial position. For a further discussion of Toyota’s share repurchases, please see “Purchases of Equity Securities by the Issuer and Affiliated Purchasers”.

Exchange Rates

In parts of this annual report, yen amounts have been translated into U.S. dollars for the convenience of investors. Unless otherwise noted, the rate used for the translations was ¥120.17 = $1.00. This was the approximate exchange rate in Japan on March 31, 2015.

The following table sets forth information regarding the noon buying rates for Japanese yen in New York City as announced for customs purposes by the Federal Reserve Bank of New York expressed in Japanese yen per $1.00 during the periods shown. At the end of May 2015, the noon buying rate was ¥123.98 = $1.00. The average exchange rate for the periods shown is the average of the month-end rates during the period.

 

Fiscal Year Ended or Ending March 31,

   At End of Period      Average
(of month-end rates)
     High      Low  
            (¥ per $1.00)                

2011

     82.76         85.00         94.68         78.74   

2012

     82.41         78.86         85.26         75.72   

2013

     94.16         83.26         96.16         77.41   

2014

     102.98         100.46         105.25         92.96   

2015

     119.96         110.78         121.50         101.26   

2016 (through May 31, 2015)

     123.98         121.92         124.18         118.80   

 

Month Ended

   High      Low  
     (¥ per $1.00)  

December 31, 2014

     121.38         117.28   

January 31, 2015

     120.20         116.78   

February 28, 2015

     120.38         117.33   

March 31, 2015

     121.50         119.01   

April 30, 2015

     120.36         118.80   

May 31, 2015

     124.18         119.09   

Fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect the dollar equivalent of the price of the shares on the Japanese stock exchanges. As a result, exchange rate fluctuations are likely to affect the market price of the American Depositary Shares (“ADSs”) on the New York Stock Exchange (“NYSE”). Toyota will declare any cash dividends on shares in Japanese yen. Exchange rate fluctuations will also affect the U.S. dollar amounts received on conversion of cash dividends.

Exchange rate fluctuations can also materially affect Toyota’s reported operating results. In particular, a strengthening of the Japanese yen against the U.S. dollar can have a material adverse effect on Toyota’s reported operating results. For a further discussion of the effects of currency rate fluctuations on Toyota’s operating results, please see “Operating and Financial Review and Prospects — Operating Results — Overview — Currency Fluctuations”.

3.B CAPITALIZATION AND INDEBTEDNESS

Not applicable.

3.C REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

 

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3.D RISK FACTORS

Industry and Business Risks

The worldwide automotive market is highly competitive.

The worldwide automotive market is highly competitive. Toyota faces intense competition from automotive manufacturers in the markets in which it operates. Although the global economy continues to recover gradually, competition in the automotive industry has further intensified amidst difficult overall market conditions. In addition, competition is likely to further intensify in light of further continuing globalization in the worldwide automotive industry, possibly resulting in industry reorganizations. Factors affecting competition include product quality and features, safety, reliability, fuel economy, the amount of time required for innovation and development, pricing, customer service and financing terms. Increased competition may lead to lower vehicle unit sales, which may result in a further downward price pressure and adversely affect Toyota’s financial condition and results of operations. Toyota’s ability to adequately respond to the recent rapid changes in the automotive market and to maintain its competitiveness will be fundamental to its future success in existing and new markets and to maintain its market share. There can be no assurances that Toyota will be able to compete successfully in the future.

The worldwide automotive industry is highly volatile.

Each of the markets in which Toyota competes has been subject to considerable volatility in demand. Demand for vehicles depends to a large extent on economic, social and political conditions in a given market and the introduction of new vehicles and technologies. As Toyota’s revenues are derived from sales in markets worldwide, economic conditions in such markets are particularly important to Toyota. In fiscal 2015, the Japanese economy continued on a path of moderate recovery, even though weakness could be seen in personal consumption and other areas. The U.S. economy saw ongoing recovery mainly due to increasing personal consumption and the European economy as a whole showed continuing signs of recovery. Meanwhile, economies such as those of China and emerging countries showed signs of weakness. The shifts in demand for automobiles are continuing, and it is unclear how this situation will transition in the future. Toyota’s financial condition and results of operations may be adversely affected if the shifts in demand for automobiles continues or progresses further. Demand may also be affected by factors directly impacting vehicle price or the cost of purchasing and operating vehicles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations (including tariffs, import regulation and other taxes). Volatility in demand may lead to lower vehicle unit sales, which may result in downward price pressure and adversely affect Toyota’s financial condition and results of operations.

Toyota’s future success depends on its ability to offer new, innovative and competitively priced products that meet customer demand on a timely basis.

Meeting customer demand by introducing attractive new vehicles and reducing the amount of time required for product development are critical to automotive manufacturers. In particular, it is critical to meet customer demand with respect to quality, safety and reliability. The timely introduction of new vehicle models, at competitive prices, meeting rapidly changing customer preferences and demand is more fundamental to Toyota’s success than ever, as the automotive market is rapidly transforming in light of the changing global economy. There is no assurance, however, that Toyota will adequately and appropriately respond to changing customer preferences and demand with respect to quality, safety, reliability, styling and other features in a timely manner. Even if Toyota succeeds in perceiving customer preferences and demand, there is no assurance that Toyota will be capable of developing and manufacturing new, price competitive products in a timely manner with its available technology, intellectual property, sources of raw materials and parts and components, and production capacity, including cost reduction capacity. Further, there is no assurance that Toyota will be able to implement capital expenditures at the level and times planned by management. Toyota’s inability to develop and offer products that meet customers’ preferences and demand with respect to quality, safety, reliability, styling and other features in a timely manner could result in a lower market share and reduced sales volumes and margins, and may adversely affect Toyota’s financial condition and results of operations.

 

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Toyota’s ability to market and distribute effectively is an integral part of Toyota’s successful sales.

Toyota’s success in the sale of vehicles depends on its ability to market and distribute effectively based on distribution networks and sales techniques tailored to the needs of its customers. There is no assurance that Toyota will be able to develop sales techniques and distribution networks that effectively adapt to changing customer preferences or changes in the regulatory environment in the major markets in which it operates. Toyota’s inability to maintain well-developed sales techniques and distribution networks may result in decreased sales and market share and may adversely affect its financial condition and results of operations.

Toyota’s success is significantly impacted by its ability to maintain and develop its brand image.

In the highly competitive automotive industry, it is critical to maintain and develop a brand image. In order to maintain and develop a brand image, it is necessary to further increase customers’ confidence by providing safe, high-quality products that meet customer preferences and demand. If Toyota is unable to effectively maintain and develop its brand image as a result of its inability to provide safe, high-quality products or as a result of the failure to promptly implement safety measures such as recalls when necessary, vehicle unit sales and/or sale prices may decrease, and as a result revenues and profits may not increase as expected or may decrease, adversely affecting its financial condition and results of operations.

Toyota relies on suppliers for the provision of certain supplies including parts, components and raw materials.

Toyota purchases supplies including parts, components and raw materials from a number of external suppliers located around the world. For some supplies, Toyota relies on a single supplier or a limited number of suppliers, whose replacement with another supplier may be difficult. Inability to obtain supplies from a single or limited source supplier may result in difficulty obtaining supplies and may restrict Toyota’s ability to produce vehicles. Furthermore, even if Toyota were to rely on a large number of suppliers, first-tier suppliers with whom Toyota directly transacts may in turn rely on a single second-tier supplier or limited second-tier suppliers. Toyota’s ability to continue to obtain supplies from its suppliers in a timely and cost-effective manner is subject to a number of factors, some of which are not within Toyota’s control. These factors include the ability of Toyota’s suppliers to provide a continued source of supply, and Toyota’s ability to effectively compete and obtain competitive prices from suppliers. A loss of any single or limited source supplier or inability to obtain supplies from suppliers in a timely and cost-effective manner could lead to increased costs or delays or suspensions in Toyota’s production and deliveries, which could have an adverse effect on Toyota’s financial condition and results of operations.

The worldwide financial services industry is highly competitive.

The worldwide financial services industry is highly competitive. Increased competition in automobile financing may lead to decreased margins. A decline in Toyota’s vehicle unit sales, an increase in residual value risk due to lower used vehicle price, an increase in the ratio of credit losses and increased funding costs are factors which may impact Toyota’s financial services operations. If Toyota is unable to adequately respond to the changes and competition in automobile financing, Toyota’s financial services operations may adversely affect its financial condition and results of operations.

Toyota’s operations and vehicles rely on various digital and information technologies.

Toyota depends on various information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, including sensitive data, and to manage or support a variety of business processes and activities, including manufacturing, research and development, supply chain management, sales and accounting. In addition, Toyota’s vehicles may rely on various digital and information technologies, including information service and driving assistance functions. Despite security measures, Toyota’s digital and information technology networks and systems may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers, computer viruses, breaches due to unauthorized use, errors or

 

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malfeasance by employees and others who have or gain access to the networks and systems Toyota depends on, service failures or bankruptcy of third parties such as software development or cloud computing vendors, power shortages and outages, and utility failures or other catastrophic events like natural disasters. Such incidents could materially disrupt critical operations, disclose sensitive data, interfere with information services and driving assistance functions in Toyota’s vehicles, and/or give rise to legal claims or proceedings, liability or regulatory penalties under applicable laws, which could have an adverse effect on Toyota’s brand image and its financial condition and results of operations.

Financial Market and Economic Risks

Toyota’s operations are subject to currency and interest rate fluctuations.

Toyota is sensitive to fluctuations in foreign currency exchange rates and is principally exposed to fluctuations in the value of the Japanese yen, the U.S. dollar and the euro and, to a lesser extent, the Australian dollar, the Russian ruble, the Canadian dollar and the British pound. Toyota’s consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through translation risk, and changes in foreign currency exchange rates may also affect the price of products sold and materials purchased by Toyota in foreign currencies through transaction risk. In particular, strengthening of the Japanese yen against the U.S. dollar can have an adverse effect on Toyota’s operating results.

Toyota believes that its use of certain derivative financial instruments including foreign exchange forward contracts and interest rate swaps and increased localized production of its products have reduced, but not eliminated, the effects of interest rate and foreign currency exchange rate fluctuations. Nonetheless, a negative impact resulting from fluctuations in foreign currency exchange rates and changes in interest rates may adversely affect Toyota’s financial condition and results of operations. For a further discussion of currency and interest rate fluctuations and the use of derivative financial instruments, see “Operating and Financial Review and Prospects — Operating Results — Overview — Currency Fluctuations”, “Quantitative and Qualitative Disclosures About Market Risk”, and notes 20 and 21 to Toyota’s consolidated financial statements.

High prices of raw materials and strong pressure on Toyota’s suppliers could negatively impact Toyota’s profitability.

Increases in prices for raw materials that Toyota and Toyota’s suppliers use in manufacturing their products or parts and components such as steel, precious metals, non-ferrous alloys including aluminum, and plastic parts, may lead to higher production costs for parts and components. This could, in turn, negatively impact Toyota’s future profitability because Toyota may not be able to pass all those costs on to its customers or require its suppliers to absorb such costs.

A downturn in the financial markets could adversely affect Toyota’s ability to raise capital.

Should the world economy suddenly deteriorate, a number of financial institutions and investors will face difficulties in providing capital to the financial markets at levels corresponding to their own financial capacity, and, as a result, there is a risk that companies may not be able to raise capital under terms that they would expect to receive with their creditworthiness. If Toyota is unable to raise the necessary capital under appropriate conditions on a timely basis, Toyota’s financial condition and results of operations may be adversely affected.

Political, Regulatory, Legal and Other Risks

The automotive industry is subject to various governmental regulations.

The worldwide automotive industry is subject to various laws and governmental regulations including those related to vehicle safety and environmental matters such as emission levels, fuel economy, noise and pollution. In particular, automotive manufacturers such as Toyota are required to implement safety measures such as recalls

 

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for vehicles that do not or may not comply with the safety standards of laws and governmental regulations. In addition, Toyota may, in order to reassure its customers of the safety of Toyota’s vehicles, decide to voluntarily implement recalls or other safety measures even if the vehicle complies with the safety standards of relevant laws and governmental regulations. Many governments also impose tariffs and other trade barriers, taxes and levies, or enact price or exchange controls. Toyota has incurred, and expects to incur in the future, significant costs in complying with these regulations. If Toyota launches products that result in safety measures such as recalls, Toyota may incur various costs including significant costs for free repairs. Furthermore, new legislation or changes in existing legislation may also subject Toyota to additional expenses in the future. If Toyota incurs significant costs related to implementing safety measures or meeting laws and governmental regulations, Toyota’s financial condition and results of operations may be adversely affected.

Toyota may become subject to various legal proceedings.

As an automotive manufacturer, Toyota may become subject to legal proceedings in respect of various issues, including product liability and infringement of intellectual property. Toyota may also be subject to legal proceedings brought by its shareholders and governmental proceedings and investigations. Toyota is in fact currently subject to a number of pending legal proceedings and government investigations. A negative outcome in one or more of these pending legal proceedings could adversely affect Toyota’s financial condition and results of operations. For a further discussion of governmental regulations, see “Information on the Company — Business Overview — Governmental Regulation, Environmental and Safety Standards” and for legal proceedings, please see “Information on the Company — Business Overview — Legal Proceedings”.

Toyota may be adversely affected by natural calamities, political and economic instability, fuel shortages or interruptions in social infrastructure, wars, terrorism and labor strikes.

Toyota is subject to various risks associated with conducting business worldwide. These risks include natural calamities; political and economic instability; fuel shortages; interruption in social infrastructure including energy supply, transportation systems, gas, water, or communication systems resulting from natural hazards or technological hazards; wars; terrorism; labor strikes and work stoppages. Should the major markets in which Toyota purchases materials, parts and components and supplies for the manufacture of Toyota products or in which Toyota’s products are produced, distributed or sold be affected by any of these events, it may result in disruptions and delays in the operations of Toyota’s business. Should significant or prolonged disruptions or delays related to Toyota’s business operations occur, it may adversely affect Toyota’s financial condition and results of operations.

ITEM 4. INFORMATION ON THE COMPANY

4.A HISTORY AND DEVELOPMENT OF THE COMPANY

Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan and continues to exist under the Companies Act. Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.). Toyota became a separate company on August 28, 1937. In 1982, the Toyota Motor Company and Toyota Motor Sales merged into one company, the Toyota Motor Corporation of today. As of March 31, 2015, Toyota operated through 541 consolidated subsidiaries (including variable interest entities) and 203 affiliated companies, of which 54 companies were accounted for through the equity method.

See “— Business Overview — Capital Expenditures and Divestitures” for a description of Toyota’s principal capital expenditures and divestitures between April 1, 2012 and March 31, 2015 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota’s principal executive offices are located at 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan. Toyota’s telephone number in Japan is +81-565-28-2121.

 

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4.B BUSINESS OVERVIEW

Toyota primarily conducts business in the automotive industry. Toyota also conducts business in finance and other industries. Toyota sold 8,972 thousand vehicles in fiscal 2015 on a consolidated basis. Toyota had net revenues of ¥27,234.5 billion and net income attributable to Toyota Motor Corporation of ¥2,173.3 billion in fiscal 2015.

Toyota’s business segments are automotive operations, financial services operations and all other operations. The following table sets forth Toyota’s sales to external customers in each of its business segments for each of the past three fiscal years.

 

     Yen in millions  
     Year Ended March 31,  
     2013      2014      2015  

Automotive

     20,378,762         23,733,855         25,006,224   

Financial Services

     1,150,042         1,379,267         1,621,685   

All Other

     535,388         578,789         606,612   

Toyota’s automotive operations include the design, manufacture, assembly and sale of passenger cars, minivans and commercial vehicles such as trucks and related parts and accessories. Toyota’s financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Toyota’s financial services also provide retail installment credit and leasing through the purchase of installment and lease contracts originated by Toyota dealers. Related to Toyota’s automotive operations is its development of intelligent transport systems (“ITS”). Toyota’s all other operations business segment includes the design and manufacture of prefabricated housing, information technology related businesses including a web portal for automobile information called GAZOO.com, and sales promotions for KDDI’s communication-related products (predominantly the au brand).

Toyota sells its vehicles in approximately 170 countries and regions. Toyota’s primary markets for its automobiles are Japan, North America, Europe and Asia. The following table sets forth Toyota’s sales to external customers in each of its geographical markets for each of the past three fiscal years.

 

     Yen in millions  
     Year Ended March 31,  
     2013      2014      2015  

Japan

     7,910,456         8,532,875         8,338,881   

North America

     6,167,821         7,938,615         9,430,450   

Europe

     2,003,113         2,614,070         2,690,803   

Asia

     4,058,629         4,475,382         4,531,178   

Other*

     1,924,173         2,130,969         2,243,209   

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

During fiscal 2015, 24.0% of Toyota’s automobile unit sales on a consolidated basis were in Japan, 30.3% were in North America, 9.6% were in Europe and 16.6% were in Asia. The remaining 19.5% of consolidated unit sales were in other markets.

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 89 million units in 2014.

Automobile sales are affected by a number of factors including:

 

   

social, political and economic conditions;

 

   

introduction of new vehicles and technologies; and

 

   

costs incurred by customers to purchase and operate automobiles.

 

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These factors can cause consumer demand to vary substantially from year to year in different geographic markets and in individual categories of automobiles.

In fiscal 2015, the global economy experienced gradual expansion in developed countries with the United States as a driving force, while growth in emerging markets slowed down due to the relative weakening currencies of emerging markets reflecting in part the end of U.S. monetary quantitative easing contributing to the strength of the U.S. dollar, as well as due to the decline in prices of natural resources in resource-producing countries contributing to the weakness of the local currency of such countries.

The automotive industry was also impacted by this trend. In 2014, with respect to developed countries, markets in the United States expanded and the downturn bottomed out in Europe. In addition, in Japan, due to the consumption tax increase in April 2014, market demand slowed down. In emerging markets, the expansion of the Chinese market continued despite signs of weakness in the economy, but markets in other emerging countries slowed down.

However, in the medium- to long-term, Toyota expects the automotive market to grow driven principally by the growth in emerging markets. Global competition is expected to be severe, as competition in compact and low-price vehicles intensifies, and technological development and development of new products become more frequent with a heightened global awareness of the environment and more stringent fuel economy standards.

In 2014, China, North America, Europe and Asia were the world’s largest automotive markets. The share of each market across the globe, which Toyota estimates based on the available automobile sales data in each country and region information, was 27% for China, 22% for North America (20% excluding Mexico and Puerto Rico), 21% for Europe and 10% for Asia. In China, new vehicle sales increased to approximately 24.0 million units. In North America, new vehicle sales increased to approximately 19.6 million units. In Europe, new vehicle sales increased to approximately 18.4 million units. In Asia (including India but excluding Japan and China), new vehicle unit sales decreased slightly from the previous year to approximately 8.8 million units.

The worldwide automotive industry is affected significantly by government regulations aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of manufacturing vehicles. Many governments also mandate local procurement of parts and components and impose tariffs and other trade barriers and price or exchange controls as a means of creating jobs, protecting domestic producers or influencing their balance of payments. Changes in regulatory requirements and other government-imposed restrictions can limit an automaker’s operations. These regulations can also make it difficult to repatriate profits to an automaker’s home country.

The development of the worldwide automotive market includes the continuing globalization of automotive operations. Manufacturers seek to achieve globalization by localizing the design and manufacture of automobiles and their parts and components in the markets in which they are sold. By expanding production capabilities beyond their home markets, automotive manufacturers are able to reduce their exposure to fluctuations in foreign exchange rates as well as to trade restrictions and tariffs.

Recently, there have been many global business alliances and investments entered into between manufacturers in the global automotive industry. There are various reasons behind these transactions including the need to respond to the excessive global capacity in the production of automobiles, the need to reduce costs and improve efficiency by increasing the number of automobiles produced using common vehicle platforms and by sharing research and development expenses for environmental and other technology, the desire to expand a company’s global presence through increased size and the desire to expand into particular segments or geographic markets.

Toyota believes that its research and development initiatives, particularly the development of environmentally friendly new vehicle technologies, vehicle safety and information technology, provide it with a strategic advantage.

 

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Toyota’s ability to compete in the global automotive industry will depend in part on Toyota’s successful implementation of its business strategy. This is subject to a number of factors, some of which are not in Toyota’s control. These factors are discussed in “Operating and Financial Review and Prospects” and elsewhere in this annual report.

Toyota Global Vision

In March 2011, Toyota unveiled its “Toyota Global Vision” corporate outline for the future, which serves not only to give direction to Toyota employees around the world, but also to convey such direction to customers and to the public at large. Toyota will work to achieve sustained growth through the realization of the following ideals which are parts of the Vision:

“The safest and most responsible ways of moving people”

 

   

Safety is Toyota’s highest priority, and Toyota will continue to provide world-class safety.

 

   

Toyota will also continue to contribute to environmental quality and to human happiness by using leading environmental technology and by deploying that technology in a growing line of vehicle models. At the same time, Toyota will work through the provision of products, sales and services that exceed customer expectation to offer a rewarding experience for customers.

“Enriching lives around the world”

 

   

Toyota has been consistently true to its founding spirit of serving society through conscientious manufacturing, and it will continue working in that spirit to contribute to enhance the quality of life wherever it has operations.

 

   

Toyota will strive to continue contributing to economic vitality wherever it has operations by generating stable employment and by participating in mutually beneficial business relationships with dealers and suppliers. It will also strive to continue to actively engage in initiatives for human resources development and the promotion of cultural activities of its host communities.

“Lead the way to the future of mobility”

 

   

Toyota will lead the industry in technological development that will spawn next-generation mobility. For example, it will explore possibilities in personal mobility and in the convergence of information technology for automobiles and “smart grids” for optimizing energy generation and consumption. Toyota will strive to offer products and services that match the needs in each market.

 

   

Toyota will strive to advance environmental technology and develop low-carbon technologies and technologies for maximizing safety through interaction with the transport infrastructure to lay a foundation for sustainable and amenable future mobility.

“Our commitment to quality, constant innovation”

 

   

Toyota is committed to providing quality vehicles that are highly reliable and driven with a sense of safety and reliability.

 

   

Toyota will constantly reinvent itself and continue to engage in cutting-edge technology development. Toyota will work towards offering vehicles around the world that address the needs of today and of tomorrow at affordable prices.

“Continued awareness for the Earth and environment”

 

   

Toyota will continue to work towards minimizing environmental impact in its manufacturing and other operations, and products.

 

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With an emphasis on environmental awareness, Toyota will in its operations work towards energy conservation, reduction in carbon dioxide emission, efficient use of resources such as recycling, and human resource development and production methods that allow for coexistence with nature.

“Exceed expectations and be rewarded with a smile”

 

   

Everyone at Toyota will continuously maintain a sense of gratitude to customers and will strive to earn smiles with products and services that are stimulating and inspiring and exceed customer expectations.

“There is always a better way”

 

   

All Toyota employees will share the recognition that there is always a better way and share a commitment to continuous improvement, which are fundamental to The Toyota Way.

“Meet challenging goals by engaging the talent and passion of people”

 

   

Toyota will nurture a corporate culture where teamwork and individual creativity thrive and where people will approach their work with pride and passion.

 

   

Toyota will honor the spirit of diversity in recruiting, training and promoting capable individuals around the world. Human resources development at Toyota will continue to promote the transfer of the company’s monozukuri spirit of conscientious manufacturing and related skills and know-how from one generation to the next.

As for Toyota’s future business environment, in the world economy, the U.S. is expected to recover steadily. Also the European economy is picking up gradually chiefly in the eurozone, while the economies of several countries are likely to slow down, such as in Russia which is weighed down by declines in crude oil prices. Emerging countries also show downside risk. The Japanese economy is expected to recover gradually through improvements in employment and income conditions, although attention needs to be paid to such factors as uncertainty in overseas economies, which performance will affect the Japanese economy.

The automotive market is expected to expand gradually, led by the U.S. However, amid adaptation of eco-car promotion policies in various countries and increased efforts toward the development of safety technologies, as well as continuing advances in information and communication technology, fierce competition exists on a global scale.

In this severe business environment, Toyota intends to steadily progress toward the realization of the Toyota Global Vision through sustainable growth based on the following policies:

First, Toyota intends to reinforce its core competitiveness in order to grow as steadily as a tree adding annual growth rings. It plans to work on quality improvement and human resource development in order to manufacture vehicles that bring smiles to customers. In addition, it plans to thoroughly improve productivity in each of its business operations through measures such as effective use of management resources and the strengthening of its IT infrastructure.

Second, Toyota intends to take on bold challenges toward the creation of new value in order to progress into the future. It plans to work toward the future of mobility through pioneering technologies, products and businesses.

In order to implement the above, Toyota intends to improve its management structure to speed up decision-making, enhance the supervision of business execution, strengthen collaboration with Toyota group companies and leverage the value of diversity.

Based on these initiatives, Toyota will contribute to “enriching lives of communities” by providing “ever-better cars.” This is expected to encourage more customers to purchase Toyota cars and thereby lead to the

 

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establishment of a stable business base. By perpetuating this cycle, it will aim to realize sustainable growth and enhance corporate value. In addition, through full observance of corporate ethics such as compliance with applicable laws and regulations, Toyota will fulfill its social responsibilities.

Automotive Operations

Toyota’s revenues from its automotive operations were ¥25,062.1 billion in fiscal 2015, ¥23,781.4 billion in fiscal 2014 and ¥20,419.1 billion in fiscal 2013.

Toyota produces and sells passenger cars, minivans and commercial vehicles such as trucks. Toyota Motor Corporation’s subsidiary, Daihatsu Motor Co., Ltd. (“Daihatsu”), produces and sells mini-vehicles and compact cars. Hino Motors, Ltd. (“Hino”), also a subsidiary of Toyota Motor Corporation, produces and sells commercial vehicles such as trucks and buses. Toyota also manufactures automotive parts, components and accessories for its own use and for sale to others.

On March 4, 2015, Toyota Motor Corporation, Toyota Motor Sales & Marketing Corporation (“TMSM”), a wholly-owned subsidiary of Toyota Motor Corporation, and Toyota Marketing Japan Corporation (“TMJ”), a wholly-owned subsidiary of TMSM, announced that TMSM will merge with and into Toyota Motor Corporation and TMJ’s motor sports business will be transferred to Toyota Motor Corporation.

Vehicle Models

Toyota’s vehicles (produced by Toyota, Daihatsu and Hino) can be classified into three categories: hybrid vehicles, conventional engine vehicles, and fuel cell vehicles, which in December 2014 became available commercially for the first time in the world, in the Japanese market. Toyota’s product line-up includes subcompact and compact cars, mini-vehicles, mid-size, luxury, sports and specialty cars, recreational and sport-utility vehicles, pickup trucks, minivans, trucks and buses.

Hybrid Vehicles

The world’s first mass-produced hybrid car was Toyota’s Prius. It runs on an efficient combination of a gasoline engine and motor. This system allows the Prius to travel more efficiently than conventional engine vehicles of comparable size and performance. The hybrid design of the Prius also results in the output of 75% less emission than the maximum amount allowed by Japanese environmental regulations. Toyota views the Prius as the cornerstone of its emphasis on designing and producing eco-friendly automobiles.

In the last three years, Toyota has strengthened its hybrid lineup by introducing the Prius plug-in and the fully remodeled GS450h in January 2012, the Yaris HV in May 2012, the ES300h in July 2012, the Auris HV in November 2012, the Avalon HV and the fully remodeled Crown HV in December 2012, the fully remodeled IS300h in May 2013, the fully remodeled Corolla Axio HV/Corolla Fielder HV in August 2013, the fully remodeled Harrier HV in December 2013, the fully remodeled Voxy HV/Noah HV in January 2014, the NX300h in July 2014, the RC300h and the Esquire HV in September 2014 and the fully remodeled Alphard and Vellfire in January 2015. In the hybrid vehicles area, where strong growth is anticipated, Toyota aims to continue its efforts to offer a diverse line-up of hybrid vehicles, enhance engine power while improving fuel economy and otherwise work towards increasing the sales of hybrid vehicles.

Fuel Cell Vehicles

Toyota began limited sales of a fuel cell vehicle in Japan and the United States in December 2002. In June 2005, Toyota’s new fuel cell passenger vehicle became the first in Japan to acquire vehicle type certification under the Road Vehicles Act, as amended, on March 31, 2005, by Japan’s Ministry of Land, Infrastructure, Transport and Tourism. Leases for fuel cell vehicles began in July 2005. By 2007, Toyota was able to make

 

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improvements to start-up and cruising distance at temperatures below freezing, which were technological challenges. Toyota has made advances by solving technological issues such as the above and worked towards the practical use of such solutions, culminating in the general sale of the world’s first mass produced fuel cell vehicle MIRAI in Japan beginning in December 2014.

Conventional Engine Vehicles

Subcompact and Compact

Toyota’s subcompact and compact cars include the four-door Corolla sedan, which is one of Toyota’s bestselling models. The Yaris, marketed as the Vitz in Japan, is a subcompact car designed to perform better and offer greater comfort than other compact cars available in the market with low emissions that are particularly attractive to European consumers. In Europe, Toyota introduced the fully remodeled Aygo in June 2014. In Japan, Toyota introduced the remodeled Corolla Axio/Fielder in May 2012, the remodeled Porte and its variant, the Spade, in July 2012 and the remodeled Auris in August 2012. In India, Asia, China and other markets, Toyota introduced the Etios and Vios. In addition, Toyota introduced the AGYA, which is designed and manufactured by Daihatsu.

Mini-Vehicles

Mini-vehicles are manufactured and sold by Daihatsu. Daihatsu manufactures mini-vehicles, passenger vehicles, commercial vehicles and auto parts. Mini-vehicles are passenger cars, vans or trucks with engine displacements of 660 cubic centimeters or less. Daihatsu sold approximately 629 thousand mini-vehicles and 197 thousand automobiles on a consolidated basis during fiscal 2015. Daihatsu’s largest market is Japan, which accounted for approximately 80% of Daihatsu’s unit sales during fiscal 2015. From 2011, Toyota began to sell some mini-vehicles manufactured by Daihatsu under the Toyota brand.

Mid-Size

Toyota’s mid-size models include the Camry, which has been the bestselling passenger car in the United States for seventeen of the past eighteen calendar years (from 1997 to present) and also for the last thirteen consecutive years. The Camry was fully remodeled in August 2011. Camry sales in the United States for 2014 were approximately 428 thousand units (including Camry hybrids). In addition, Toyota’s other mid-size models include the REIZ for the Chinese market, the Avensis, which was remodeled in November 2008 for the European market, and the Mark X, which was remodeled in October 2009 for the Japanese market.

Luxury & Large

In North America, Europe, Japan and other regions, Toyota’s luxury lineup consists primarily of vehicles sold under the Lexus brand name. Lexus passenger car models include the LS, the GS, the ES, the IS, the HS, the CT and the RC. Lexus models also include the LX, the GX, the RX and the NX sold as luxury sport-utility vehicles. Toyota commenced sales of its luxury automobiles in Japan under the Lexus brand in August 2005. As of March 31, 2015, the Lexus brand lineup in Japan includes the LS, the GS, the HS, the IS, the CT, the RX, the NX and the RC. The Toyota brand’s full-size luxury car, the Avalon, was remodeled in October 2012, and the Crown was remodeled in December 2012. Toyota also sells the Century limousine in Japan.

Sports and Specialty

In the United States Toyota sells the Scion tC, a sports model targeted at young drivers. In December 2010, Toyota introduced the LFA model under the Lexus brand as the high-performance sports model, and in April 2012, Toyota introduced the 86 (called Scion FR-S in the U.S.), a compact sports car with a front-mounted engine and rear-wheel drive. In October 2014, Toyota introduced the RC coupe that leads the image of Lexus, which engages drivers on a sentimental level.

 

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Recreational and Sport-Utility Vehicles and Pickup Trucks

Toyota sells a variety of sport-utility vehicles and pickup trucks. Toyota’s sport-utility vehicles available in North America include the Sequoia, the 4Runner, the RAV4, the Highlander, the FJ Cruiser and the Land Cruiser, and pickup trucks available are the Tacoma and Tundra. The Tacoma, the Tundra, the Highlander and the Sequoia are manufactured in the United States. Toyota also offers four types of sport-utility vehicles under the Lexus brand, including the LX, the GX, the RX, and the NX. Toyota also manufactures the RX and RAV4 models in Canada. Toyota’s pickup truck, the Hilux, has been the bestselling model of all Toyota cars sold in Thailand. In North America, the fully remodeled RAV4 was introduced in December 2012 and the fully remodeled Highlander was introduced in December 2013. In July 2014, Toyota introduced the new NX model under the Lexus brand, and in May 2015, Toyota introduced the fully remodeled Hilux in Thailand.

Minivans and Cabwagons

Toyota offers several basic models for the global minivan market. Its largest minivans in Japan, the Alphard and the Vellfire, were remodeled in January 2015. In addition, the Corolla Verso was remodeled in December 2008 in Europe, and the Wish was remodeled in April 2009, the Noah/Voxy was remodeled in January 2014 and the new model Esquire was introduced in October 2014 in Japan. Toyota’s other minivan models include, in Japan, the Estima, the Sienta and the Isis, and, in North America, the Sienna.

Trucks and Buses

Toyota’s product lineup includes trucks (including vans) up to a gross vehicle weight of five tons and micro-buses that are sold in Japan and in overseas markets. Trucks and buses are also manufactured and sold by Hino, a subsidiary of Toyota. Hino’s product lineup includes large trucks with a gross vehicle weight of over eleven tons, medium trucks with a gross vehicle weight of between five and eleven tons and small trucks with a gross vehicle weight of up to five tons. Hino’s bus lineup includes medium to large buses used primarily as tour buses and public buses, small buses and micro-buses.

Product Development

New cars introduced in Japan during fiscal 2015 and thereafter include the RC, the NX, the Esquire and the MIRAI. Remodeled cars in Japan during fiscal 2015 and thereafter include the Alphard, the Vellfire and the PIXIS TRUCK. New vehicles developed during fiscal 2015 and thereafter and introduced outside of Japan include the RC and the NX. Remodeled cars outside of Japan during fiscal 2015 and thereafter include the Aygo, the Alphard, the Vellfire and the Hilux.

In addition, the IMV product lineup based on the IMV project to optimize global manufacturing and supply systems is a lineup of strategic multipurpose vehicles produced from a single platform to meet market demand. The IMV product lineup includes, as of March 31, 2015, the Hilux, Fortuner, and Innova, one or all of which are available in all regions except for Japan.

 

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Markets, Sales and Competition

Toyota’s primary markets are Japan, North America, Europe and Asia. The following table sets forth Toyota’s consolidated vehicle unit sales by geographic market for the periods shown. The vehicle unit sales below reflect vehicle sales made by Toyota to unconsolidated entities (recognized as sales under Toyota’s revenue recognition policy), including sales to unconsolidated distributors and dealers. Vehicles sold by Daihatsu and Hino are included in the vehicle unit sales figures set forth below.

 

    Year Ended March 31,  
    2011     2012     2013     2014     2015  
    Units     %     Units     %     Units     %     Units     %     Units     %  

Market

                   

Japan

    1,913,117        26.2     2,070,799        28.2     2,278,796        25.7     2,365,410        26.0     2,153,694        24.0

North America

    2,031,249        27.8        1,872,423        25.5        2,468,804        27.8        2,529,398        27.7        2,715,173        30.3   

Europe

    795,534        10.9        797,993        10.8        799,085        9.0        844,003        9.3        859,038        9.6   

Asia

    1,255,016        17.2        1,326,829        18.0        1,683,578        19.0        1,608,355        17.6        1,488,922        16.6   

Other*

    1,313,123        17.9        1,283,885        17.5        1,640,401        18.5        1,768,867        19.4        1,755,037        19.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    7,308,039        100.0     7,351,929        100.0     8,870,664        100.0     9,116,033        100.0     8,971,864        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East, etc.

The following table sets forth Toyota’s vehicle unit sales and market share in Japan, North America, Europe and Asia on a retail basis for the periods shown. Each market’s total sales and Toyota’s sales represent new vehicle registrations in the relevant year (except for the Asia market where vehicle registration does not necessarily apply). All information on Japan excludes mini-vehicles. The sales information contained below excludes unit sales by Daihatsu and Hino, each a consolidated subsidiary of Toyota. Vehicle unit sales in Asia do not include sales in China.

 

     (Thousands of Units)  
     Fiscal Year Ended March 31,  
     2011     2012     2013     2014     2015  

Japan:

          

Total market sales (excluding mini-vehicles)

     2,975        3,067        3,242        3,433        3,126   

Toyota sales (retail basis, excluding mini-vehicles)

     1,407        1,396        1,570        1,605        1,439   

Toyota market share

     47.3     45.5     48.4     46.7     46.0
     (Thousands of Units)  
     Calendar Year Ended December 31,  
     2010     2011     2012     2013     2014  

North America:

          

Total market sales

     14,058        15,417        17,153        18,514        19,597   

Toyota sales (retail basis)

     2,008        1,880        2,360        2,520        2,670   

Toyota market share

     14.3     12.2     13.8     13.6     13.6

Europe:

          

Total market sales

     18,368        19,074        18,171        18,009        18,397   

Toyota sales (retail basis)

     808        820        838        848        888   

Toyota market share

     4.4     4.3     4.6     4.7     4.8

Asia (excluding China):

          

Total market sales

     7,430        7,861        8,986        8,899        8,785   

Toyota sales (retail basis)

     1,039        1,103        1,487        1,427        1,324   

Toyota market share

     14.0     14.0     16.5     16.0     15.1

 

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Japan

Japan is one of the leading countries with respect to technological advancements and improvements and will continue to demonstrate such strength. Toyota strives to earn customer satisfaction by introducing products distinctive of Japan’s manufacturing ability such as value-added products including Lexus models, hybrid vehicles, vehicles with 3-seat rows and mini-vehicles. Toyota’s consolidated vehicle sales in Japan in fiscal 2015 was 2,154 thousand units, a decrease of 211 thousand units in comparison with the previous year. Toyota endeavors to secure and maintain its large share of and position atop the Japanese market. Toyota held a domestic market share (excluding mini-vehicles) on a retail basis of 48.4% in fiscal 2013, 46.7% in fiscal 2014 and 46.0% in fiscal 2015.

Although Toyota’s principle is to conduct production in regions where it enjoys true competitiveness, it considers Japan to be the source of its good manufacturing practices. Toyota supports its operations worldwide through measures such as the development of new technologies and products, low-volume vehicles to complement local production, production of global vehicle models which straddle multiple regions and supporting overseas factories. Toyota will also launch the implementation of the new platform and the new unit for the Toyota New Global Architecture (“TNGA”) globally, with Japan at the core. In Japan, Toyota is implementing flexible production based on market needs, in order to support its large share of domestic sales.

In January 2011, Central Motor Co., Ltd., Toyota’s subsidiary, began production at its Tohoku plant, implementing innovative production technology that realizes cost reductions. The Tohoku plant produces compact vehicles such as the Yaris sedan and the Corolla Axio. In addition, Kanto Auto Works, Ltd. became a wholly-owned subsidiary of Toyota in January 2012. In July 2012, Toyota integrated Central Motor Co., Ltd., Kanto Auto Works, Ltd. and Toyota Motor Tohoku Corporation to establish Toyota Motor East Japan, Inc. as a new company. This integration is intended to enable Toyota Motor East Japan, Inc. to design, develop, and produce globally competitive compact cars, manufacture auto parts and support Toyota’s overseas operations. Toyota has established three domestic production bases, each of which are in the Tokai, Kyushu and Tohoku regions.

In January 2012, Toyota Auto Body Co., Ltd. became a wholly-owned subsidiary of Toyota. Toyota Auto Body Co., Ltd. is primarily responsible for integrating the planning, development and production of minivans, commercial vehicles, SUVs, etc.

Since Toyota formed an alliance with Fuji Heavy Industries, Ltd. (“FHI”) in 2005, Toyota and FHI have utilized each other’s resources in development and production. In April 2008, in order to create synergy and to further strengthen competitiveness, Toyota, Daihatsu and FHI agreed on the following three points: (1) Toyota and FHI will jointly develop a compact rear-wheel-drive sports car that will be marketed by both Toyota and FHI, (2) Toyota will provide FHI with a compact car on an original equipment manufacturing basis (“OEM”) and (3) Daihatsu will supply FHI with mini-vehicles and an FHI version of the Daihatsu Coo compact car on an OEM basis. In order to promote a smooth cooperation, FHI transferred 61 million FHI shares owned by FHI to Toyota in July 2008. As a result of this transfer, Toyota owns 16.5% of FHI issued shares. While Toyota vehicles have been manufactured at FHI’s North American production center, Subaru of Indiana Automotive, Inc., since 2007, Toyota and FHI have decided to cease such production in the fall of 2016, and the collaboration between Toyota and FHI will shift going forward to collaboration focusing on products and technology.

In Japan, there are five major domestic manufacturers, five specialized domestic manufacturers and a growing volume of imports from major United States and European manufacturers. The prolonged economic slump in the Japanese economy and the recent increases in environmental awareness have also shifted consumer preference towards more affordable automobiles such as compact and subcompact vehicles and towards utility vehicles such as mini-vans. For more than 40 years, Toyota has maintained its position as the largest automobile manufacturer in Japan. Every year since fiscal 1999, Toyota, excluding Daihatsu and Hino, has achieved a market share (excluding mini-vehicles) of over 40%, reflecting in part the success of the introduction of new models for subcompact and compact cars, mini-vans and sedans. In August 2005, Toyota launched the Lexus

 

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brand in Japan and achieved a record top market share of 25.6% in the luxury market in 2011. Toyota aims to further distinguish the Lexus brand by continuing to attract new and affluent customers including customers that typically had purchased imported vehicles.

North America

The North American region is one of Toyota’s most significant markets. While the automotive market struggled in the aftermath of the financial crisis beginning in 2008, Toyota has since reorganized its production structure and made improvements to its product lineup. In addition, Toyota is actively working to promote increased local operations independence in North America, in accordance with the Toyota Global Vision, announced in 2011.

In the North American region, of which the U.S. is the center, Toyota has a wide product lineup (excluding large trucks and buses), and sold 2,715 thousand vehicles on a consolidated basis in fiscal 2015. This represents approximately 30% of Toyota’s total unit sales on a consolidated basis. The U.S., in particular, is the largest market in the North American region, accounting for 89% of the retail sales of Toyota in such region. Sales figures for fiscal 2015 were 107.3% of those in the previous fiscal year.

Toyota commenced sales of the first-generation Prius hybrid model in North America in 2000. The Prius became Toyota’s bestselling model behind the Corolla and Camry, having gained particular support among customers concerned with the environment. Toyota introduced the first hybrid model under the Lexus brand, the RX400h, and the Highlander hybrid in 2005. Further, Toyota continued expanding its hybrid models with the introduction of models such as the HS250h in 2009, the CT200h and the Prius V in 2011, the Prius C, the ESh and the Avalon HV in 2012 and the NXh in 2014.

Since the introduction of the LS and ES models under the premium brand model, Lexus, in the United States in 1989, Toyota has expanded its Lexus sales with models including the GS, IS and RX. In 2012, Toyota introduced the all-new GS and ES models, and unit sales reached 244 thousand units. Toyota is seeking to steadily increase sales every year and achieved sales of 274 thousand units through the introduction of the new IS model in 2013 and 311 thousand units through the introduction of the new NX and RC models in 2014.

Toyota is continuing to revise its vehicle models and North American production capacities in response to changes in market conditions. Starting 2011, Toyota, instead of importing from Japan, began production of the Corolla at its Mississippi plant. In 2013, the production capacity at the Woodstock plant in Canada increased from 150 to 200 thousand units per year, and the production capacity at the Indiana plant also increased. Toyota commenced production of the RX450h hybrid model at its Cambridge plant in Canada in 2014. Through the business alliance with Mazda Motor Corporation, the production of Toyota brand light vehicles for sale mainly in North America is scheduled to begin at Mazda’s plant in Mexico in July 2015. In addition, Toyota has decided to commence production of the Lexus ES350 at its Kentucky plant for sale in the North America market starting in the fall.

In terms of auto parts, Toyota increased production capacity of engine plants in Kentucky and Alabama in 2013 and 2014, respectively, to meet rising demand, and also increased production capacity of auto parts at its automatic transmission plant in West Virginia in 2014.

In order to further strengthen competitiveness in North America, Toyota will continue the realignment of North American manufacturing operations going forward. As part of this effort, a new plant will be built in Mexico in 2019 and production of the Corolla will be shifted from the plant in Canada to the new plant in Mexico. Compact cars will also be produced at the new plant as well as at the plant in Mississippi. Toyota will consider focusing its production of mid-sized vehicles in the plant in Canada, along with the plants in Indiana and Kentucky, by commencing production of mid-sized vehicles instead of the Corolla in Canada starting in 2019.

 

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As for Toyota’s vehicle development in North America, the Toyota Technical Center spearheads the design, planning, and evaluation of vehicles and parts as to their ability to meet customer needs. Toyota will continue to promote self-reliance towards producing even better cars in the future.

In April 2014, Toyota decided to relocate its North American headquarters for manufacturing, sales and marketing, financial services and other functions to the city of Plano in northern Dallas, Texas. By unifying its North American operations, Toyota plans to promote collaboration and efficiencies across functions, position itself to deliver “ever-better cars” to customers and work towards realizing sustainable growth in the North America market. The relocation is expected to take place following the completion of the construction of the new headquarters in late 2016 or early 2017.

Europe

While competition continues to intensify, Toyota has expanded its lineup of hybrid models to further strengthen its sales operations, and has entered into supply agreements with BMW and PSA for diesel engines and light commercial vehicles, respectively. As a result, Toyota launched the BMW engine-equipped Verso in early 2014 and plans to expand to other models in the future. Toyota also began sales of light commercial vehicles supplied by PSA from mid-2013. In addition, Toyota is actively promoting production and sales measures that meet local demand by strengthening its value chain including used car dealerships, after-sales services and finance and insurance services.

In 2014, while the market recovered steadily in the eurozone, the market in Eastern European countries, mainly in Russia, slowed down due to factors such as the situation in Ukrainian and decline in crude oil prices.

Sales in 2014 in Europe exceeded the previous year’s figures due to increased sales in major markets resulting from the introduction of new models and increased sales of hybrid models. Going forward, Toyota will strive to maintain sales with the expansion of its product lineup while being responsive to market risks. Toyota’s consolidated vehicle sales in Europe in fiscal 2015 was 859 thousand units, an increase of 1.8% from fiscal 2014.

Toyota has in the past increased European production in response to sales growth, establishing Toyota Motor Manufacturing (UK) Ltd. (“TMUK”) in 1992, Toyota Motor Manufacturing Turkey Inc. (“TMMT”) in 1994 and Toyota Motor Manufacturing France S.A.S. (“TMMF”) in 2001. Further, in 2005, Toyota Peugeot Citroën Automobile Czech was formed as a result of a joint venture with PSA Peugeot Citroën as vehicle supply factories to Europe. At the time of the economic crisis in Europe, Toyota promptly reduced personnel and made adjustments to its plant operations. In addition, in 2010, TMUK limited its production to one production line at its Burnaston plant. At the same time, Toyota conducted measures such as changing from a two-shift to a one-shift production operation at TMMT and change from a three-shift to a two-shift production operation at Toyota Motor Manufacturing Poland SP.zo.o. To increase the utilization rate of these factories, Toyota began to transfer the production of the Corolla from South Africa to TMMT and commenced exporting the TMMF Yaris to North America in 2013.

Toyota opened the Toyota Motor Manufacturing Russia (TMMR) plant in 2007 as a base for its manufacturing operations in the Russian market, where future growth is expected. A two-shift production operation started in September 2012 and production capacity was increased from 20,000 units to 50,000 units per year. In addition, Toyota decided in September 2013 to manufacture a second model, namely the RAV4. Moreover, OOO “Toyota Motor” (sales) and TMMR were merged into one company at the end of 2013 to strengthen the business base and promote coordination of manufacturing and sales operations. In addition, Toyota commenced contract assembly of SUVs by Sollers Bussan in Vladivostok in February 2013. Toyota commenced complete knock down, or CKD, production of SUVs in Kazakhstan beginning in the spring of 2014.

Toyota’s principal European markets are Germany, France, the United Kingdom, Italy, Spain and Russia. Toyota’s principal competitors in Europe are Volkswagen, Renault, Ford, Opel and Peugeot, as well as Korean manufacturers Hyundai and Kia.

 

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Asia

Toyota’s consolidated vehicle sales in Asia (including China) in fiscal 2015 was 1,489 thousand units, a decrease of 7.4% from fiscal 2014.

In light of the importance of the Asian market that is further expected to grow in the long term, Toyota aims to build an operational framework that is efficient and self-reliant as well as a predominant position in the automotive market in Asia. Toyota has responded to increasing competition in Asia by making strategic investments in the market and developing relationships with local suppliers. Toyota believes that its existing local presence in the market provides it with an advantage over new entrants to the market and expects to be able to promptly respond to demand for vehicles in the region.

In this region, Toyota has been further strengthening its business foundations by improving its product line-up, expanding local procurement and increasing production capacities.

As an example of enhancing the product line-up, Toyota began producing IMVs (the Hilux, Fortuner and Innova) in Thailand, Indonesia, India, the Philippines and Malaysia in 2005 and in Vietnam in 2006. Furthermore, with increased production capacity, the Thailand plant now produces IMVs for export outside of Asia, including to Australia and to the Middle East, contributing greatly to the expansion of Toyota’s automotive business.

As part of Toyota’s efforts to expand business, Toyota Motor Thailand Co., Ltd. commenced production of the Camry hybrid in 2009 and Prius in 2011. Toyota also started operation of its second Gateway plant in 2013, expanding production capacity by 80 thousand units in Thailand to 810 thousand units. In April 2015, Toyota implemented a full model change for IMV models manufactured at its plant in Thailand.

In India, Toyota constructed a second plant with an annual production capacity of 70 thousand units and commenced production and sales of the Etios compact model designed specifically for the Indian market in 2010. Furthermore, Toyota increased production capacity in India during 2012 and 2013 to 210 thousand units. Moreover, Toyota began exporting the gasoline-fueled model of the Etios to South Africa from India in 2012.

In Indonesia, Toyota introduced the Etios and commenced operation of a second plant in Karawang in 2013 in order to meet the diverse customer needs and the expanding market. In 2014, Toyota increased the initial production capacity of 70 thousand units per year to 120 thousand units per year with the introduction of the Vios and the Yaris, and also began exporting the Vios to the Middle East. Toyota also began construction of a passenger vehicle engine plant to commence production at the beginning of 2016. In Malaysia, Toyota began production of the Camry hybrid in March 2015. In addition, in 2012 Toyota began production and sales of the Camry hybrid in Taiwan to accommodate the spread of environmentally-friendly vehicles. Moreover, in light of the free trade agreement between the U.S. and Korea, Toyota began sales of the U.S.-produced Camry in Korea in January 2012.

Toyota’s principal Asian markets are Thailand, Indonesia, India, Malaysia and Taiwan.

China

Toyota has been conducting its operations in China through joint ventures, and its success in producing products that meet local demands and in establishing its sales and service network has significantly contributed to Toyota’s profits. Based on the firm business foundation that it has established, Toyota is conducting its operations with the aim of promoting further growth and increasing profitability through further development of its sales and service network and expansion of its product lineup.

In China, Toyota has been conducting joint ventures with two major partners. First, with respect to the joint venture with China FAW Group Corporation since Toyota first launched the Vios through the joint venture in

 

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2002, Toyota has been producing and selling the Land Cruiser Prado, the Land Cruiser, the Corolla, the Crown, the REIZ, the Coaster, the RAV4 and the Prius in China. With regard to production capacity, in 2007, Toyota commenced production at the new Tianjin Teda plant, which has an annual production capacity of 200 thousand units, and in 2012, commenced production at a new factory in Changchun, China, which has an annual production capacity of 100 thousand units. Toyota also increased annual production capacity of the plant in Sichuan from 30 thousand units to 50 thousand units in the spring of 2015 to increase production of the Prado.

GAC Toyota Motor Co., Ltd., a joint venture between Toyota and Guangzhou Automobile Group Co., Ltd., commenced sales of the Camry in 2006, followed by production and sales of the Yaris, the Highlander, the E’z and the Levin. In 2006, it commenced production at the first plant on a single shift basis with an annual production capacity of 100 thousand units and expanded its annual production capacity to 200 thousand units on a double shift basis. In addition, a second plant commenced production in 2009 and Toyota plans to complete construction of a third plant in 2017. In terms of auto parts, in 2014, Toyota opened a plant in Changshu in Jiangsu, China for the production of the CVT as the first CVT plant outside of Japan. Toyota also plans to open a plant to produce hybrid vehicle batteries in October 2015.

Total vehicle sales in the Chinese market increased 8% from 22.19 million in 2013 to 24.00 million in 2014. In this market, Toyota’s sales in 2014 were 1.03 million vehicles, up 13% from the previous year. In the passenger vehicle market (17.80 million units), Toyota had a market share of 6%. In 2014, favorable conditions in the less-than-1.6 liter market continued, and the SUV market expanded as a result of customers’ value diversification. As for Toyota’s distribution network, Toyota has been expanding the distribution network for locally produced vehicles in cooperation with Chinese joint venture partners under Tianjin FAW Toyota Motor Co., Ltd. and Guanqi Toyota Motor Co., Ltd., and for imported vehicles, Toyota has also been expanding primarily the Lexus brand sales network. Toyota plans to further increase sales by expanding the number of dealers and the product lineup for both locally produced and imported vehicles, particularly inland. In addition, as the market in China develops, Toyota plans to promote the so-called “Value Chain” businesses such as used cars, services, financing and insurance.

South and Central America, Oceania, Africa and the Middle East

Toyota’s consolidated vehicle sales in South and Central America, Oceania, Africa and the Middle East (collectively, the “Four Regions”) in fiscal 2015 remained around the same at 1,755 thousand units, a decrease of 0.8% from fiscal 2014. The core models in this region are global models such as the Corolla, IMV (the Hilux) and Camry. In order to increase production of IMVs, Toyota expanded the annual production capacity of its Argentina factory from 70 thousand units to 90 thousand units in 2011. Toyota is seeking to further increase its annual production capacity to 140 thousand units per year during 2015 and 2016. In order to expand business in Brazil, Toyota constructed a new factory in Sorocaba with an annual production capacity of 70 thousand units, and in 2012, began production and sales of the compact vehicles. Starting from 2016, Toyota plans to increase production capacity to 110 thousand units per year. Further, Toyota began local production of the Fortuner in Egypt in 2012. Moreover, in terms of auto parts, Toyota plans to commence production at a plant in Brazil for passenger vehicle engines in 2016.

Toyota decided to end production of vehicles and engines at Toyota Motor Corporation Australia Ltd. by the end of 2017.

In these regions, which are expected to become increasingly important to Toyota’s business strategy, Toyota aims to develop new products which meet the specific demands of each region, increase production and further promote sales.

Toyota’s principal markets in the Four Regions are Brazil in South and Central America, Australia in Oceania, South Africa in Africa and Saudi Arabia in the Middle East.

 

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Production

Toyota and its affiliated companies produce automobiles and related parts and components through more than 50 overseas manufacturing companies in 28 countries and regions besides Japan. Toyota’s major manufacturing facilities include plants in Japan, the United States, Canada, the United Kingdom, France, Turkey, Thailand, China, Taiwan, India, Indonesia, South Africa, Australia, Argentina and Brazil. Daihatsu brand vehicles are produced at 4 factories in Japan and 4 manufacturing companies in 3 other countries, including Indonesia and Malaysia. Hino brand vehicles are produced at 2 factories in Japan and 10 manufacturing companies in 10 countries, including Indonesia and Thailand. For a listing of Toyota’s principal production facilities, see “Information on the Company — Property, Plants and Equipment”.

In promoting a sustainable growth strategy, establishing a system capable of providing optimal supply of products in the global market is integral to Toyota’s strategy.

In line with its basic policy of manufacturing where there is demand and where Toyota is truly competitive, Toyota will make efficient use of and maximize capacity utilization at its existing plants to respond to the expanding market and will continue to focus on making efficient capital investments as necessary. Furthermore, Toyota will continue to place top priority on safety and quality in strengthening true competitiveness with the aim of achieving sustainable growth.

In 2014, 76.5% of Toyota vehicles sold in overseas markets were manufactured in overseas plants by Toyota and its unconsolidated affiliated companies. In 2014, approximately 74.4% of Toyota vehicles sold in North America were produced in North America. Of the vehicles sold in Europe in 2014, approximately 73.7% were produced in Europe. In fiscal 2015, Toyota produced on a consolidated basis 4,125 thousand vehicles in Japan and 4,805 thousand vehicles overseas compared to 4,345 thousand vehicles in Japan and 4,687 thousand vehicles overseas in fiscal 2014.

The following table shows the worldwide vehicle unit production by Toyota for the periods shown. These production figures do not include vehicles produced by Toyota’s unconsolidated affiliated companies. The sales unit information elsewhere in this annual report includes sales of vehicles produced by these affiliated companies. Vehicles produced by Daihatsu and Hino are included in the vehicle production figures set forth below.

 

     Year Ended March 31,  
     2011      2012      2013      2014      2015  

Units Produced

     7,169,721         7,435,781         8,698,454         9,032,165         8,929,887   

Toyota closely monitors its actual units of sale, market share and units of production data and uses this information to allocate resources to existing manufacturing facilities and to plan for future expansions.

See “— Capital Expenditures and Divestitures” for a description of Toyota’s recent investments in completed plant constructions and for a description of Toyota’s current investments in ongoing plant constructions.

The Toyota Production System

Toyota pioneered the internationally recognized production system known as the “Toyota Production System”. The Toyota Production System is based on Toyota’s own concepts of efficient production of only necessary and quality products and efficient cost reduction, and has the following two principal elements:

 

   

Just-in-Time”, and

 

   

Jidoka”.

 

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Just-in-Time is an approach in which necessary parts and components are manufactured and delivered in just the right quantity in a timely manner just as they are needed. This allows Toyota to maintain low levels of inventory while maintaining operating efficiency.

Jidoka is a production concept which involves immediate stop of work when problems arise in the production line in order to stop the production of defective items from being passed on to subsequent stages of the process, and therefore making quality assurance an inherent part of the production process. To achieve this, Toyota’s equipment is designed to detect and highlight abnormalities and to stop whenever abnormalities occur. Toyota also authorizes its machine operators and other members of its production team to stop production whenever they note anything suspicious. This helps Toyota to build quality into the production process by avoiding defects and preventing the waste that would result from producing a series of defective items.

Toyota believes that the Toyota Production System allows it to achieve mass-production efficiencies even in high-mix, low-volume production. This belief gives Toyota the flexibility to respond to changing consumer demand without significantly increasing production costs. While the Toyota Production System remains the basis of Toyota’s automobile production, the system has been expanded for use in Toyota’s parts production, logistics and customer service activities as well.

Through the Toyota Production System, issues are identified and analyzed at the actual site, the entire production process is made visible and production efficiency as well as product quality are improved through the application of measures to address the sources of problems. As one method to implement these measures, Toyota utilizes sophisticated information technologies to improve each step of its vehicle development process, from product planning to commencement of mass-production. These technologies are intended to enhance flexibility, simplification, quality, cost competitiveness and speed. Specifically, detailed virtual assembly and other simulations of manufacturing processes are conducted on computers for a new vehicle or new production equipment/systems before a prototype is made. An actual prototype is made only after defects and related issues have been identified and resolved by computer simulation, thereby minimizing the time required for rebuilding prototypes and significantly shortening the time required before starting mass production. Moreover, this system is used to prepare virtual factories and other visual aids in order to facilitate training and communication at overseas plants and enable the efficient transfer of necessary technology and skills.

In order to strengthen manufacturing and promote localization of overseas production, Toyota established the Global Production Center (“GPC”) in July 2003 as a development and training center for global human resources. The GPC is intended to introduce local managers to the Toyota methodology, allowing them to train their subordinates while managing locally. GPC develops simple, easy-to-understand and efficient training systems for the development of explicit knowledge. One characteristic of the GPC is that managers and supervisors, new hires and experienced workers can all receive common skill-training. GPC’s training system involves a pre-training phase where trainees learn basic skills and discover the skills that they must acquire through image training. This is followed by various steps, from basic skill training and elemental task training to standard task training, which ensures a step-by-step training. The fruits of this training method are reduced training time, higher levels of achievement and the efficiency of training. Since January 2006, Toyota has opened regional GPCs in North America, Europe and Asia. In each region, Toyota commenced courses where trainees from each department are trained by local trainers to become trainers themselves.

In April 2015, the GPC was reorganized into TPS Promotion Center in order to promote TPS (Toyota Production System) and activities centering on improving production engineering and manufacturing methods at each manufacturing process by sharing global best standards in cooperation across different plants in order to foster highly skilled workers and improve logistics in order to comprehensively improve manufacturing abilities. Through these activities, Toyota has been making efforts to resolve issues relating to the entire supply chain.

 

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Toyota is working company-wide towards the production of “ever-better cars.” The production engineering and manufacturing divisions are developing Toyota’s own innovative production systems, equipment and processing technologies and deploying them in production lines in order to produce vehicles that create excitement, joy and fun for customers through truly competitive manufacturing methods.

Distribution

Toyota’s automotive sales distribution network is the largest in Japan. As of March 31, 2015, this network consisted of 280 dealers employing approximately 33 thousand sales personnel and operating approximately 4.7 thousand sales and service outlets. Toyota owns 15 of these dealers and the remainder is independent.

Toyota believes that this extensive sales network has been an important factor in its success in the Japanese market. A large number of the cars sold in Japan are purchased from salespersons who visit customers in their homes or offices. In recent years, however, the traditional method of sales through home visits is being replaced by showroom sales and the percentage of automobile purchases through showrooms has been gradually increasing. Toyota expects this trend to continue, and accordingly, is working to improve its sales activities such as customer reception and meticulous service at showrooms to increase customer satisfaction.

Sales of Toyota vehicles in Japan are conducted through four sales channels — “Toyota,” “Toyopet,” “Corolla” and “Netz.” In addition, Toyota introduced the Lexus brand to the Japanese market in August 2005, and currently distributes the Lexus brand vehicles through a network of 166 sales outlets in order to enhance its competitiveness in the domestic luxury automobile market. The following table provides information for each channel as of March 31, 2015.

 

     Dealers       

Channel

   Toyota
Owned
     Independent      Total     

Market Focus

Toyota

     4             45              49         Luxury channel for Toyota brand vehicles

Toyopet

     4             48              52         Leading channel for the medium market

Corolla

     4            70              74         Volume retail channel centering on compact models

Netz

     3            102              105         Sales channel targeting customers with new values for the 21st century

Brand

     Sales
Outlets
    

Market Focus

Lexus

  

     166       Premium brand

Outside Japan, Toyota vehicles are sold through approximately 170 distributors in approximately 190 countries and regions. Through these distributors, Toyota maintains networks of dealers. The chart below shows the number of Toyota distributors as of March 31, 2015 by country and region:

 

Country/Region

   Number of Countries      Number of Distributors  

North America

     3         5   

Europe

     56         30   

China

     1         4   

Asia (excluding China)

     17         12   

Oceania

     17         15   

Middle East

     17         16   

Africa

     54         45   

Central and South America

     30         40   

 

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Improving Efficiency

Toyota is working on the following to create a corporate structure allowing for efficient development, production and sales that can respond flexibly to changes in the external environment:

 

   

working with suppliers as one team to dramatically increase the efficiency of development;

 

   

creating a production structure that can better withstand fluctuations in demand and currency exchange rates; and

 

   

strengthening sales capabilities in line with local conditions.

Toyota also plans to improve profitability and enhance operating efficiency by continuing to pursue aggressive cost reduction programs, including:

 

   

improving product development and production efficiencies through the re-integration and improvement of vehicle platforms and power trains as well as through the development of electronic platforms which organize electronic devices of vehicles as a package and standardize electronic structure and infrastructure;

 

   

implementing Ryohin-Renka Cost Innovation (“RR-CI”) activity, which aims for the elimination of waste in all processes from design to production while ensuring the reliability and safety of each part;

 

   

applying advanced information technologies to improve efficiency throughout the product development and production processes;

 

   

promoting global reinforcement of the supply base under an open and fair purchasing policy;

 

   

streamlining production systems; and

 

   

improving the efficiency of domestic and international distribution.

Toyota is further improving production efficiency by installing more versatile equipment and systems, modifying vehicle body designs to allow for a greater variety of models on each production line and sharing more parts among vehicles, not simply among different models but also among different platforms.

In April 2012, Toyota announced a new development framework, the TNGA, which reconciles sweeping advances in product appeal with cost reductions. The new framework sets forth an architecture that incorporates not only the three fundamental vehicle functions of moving, turning and stopping, but also ergonomics such as driving position as well as freedom of design. Toyota plans to efficiently develop cars with high basic-performance attributes by developing parts and modules based on this architecture. The TNGA provides for handling multiple models simultaneously in grouped development projects that will increase the sharing of parts and core vehicle components. This sharing, carried out in cooperation with suppliers, will result in lowered costs, thereby allowing developmental manpower and funds to be reinvested in R&D to meet consumer preferences and R&D to meet regional needs, resulting in further product improvement.

By April 2013, Toyota established systems to rapidly promote the TNGA. Toyota is promoting company-wide activities to reevaluate the way it does business from the ground up in order to continue producing high-quality, profitable and attractive cars.

Enhancing Vehicle Functionality and Realizing a Smart Mobility Society

Toyota is striving to realize a smart mobility society in which people feel at ease and excited about being in cars and in everyday life by connecting vehicles, people and communities in order to meet the needs of rapidly changing societies, including the falling birth rate and aging populations in developed nations and an increasingly diverse range of energy sources, among others. In particular, Toyota aims to contribute to an affluent lifestyle that offers peace of mind by enhancing vehicle functionality that will increase the attractiveness of vehicles and

 

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the excitement of driving, enhancing transport systems that make being in cars more comfortable and more environmentally friendly, and realizing Smart Communities that aim for optimization of local energy use and establishment of a low-carbon emission transportation system.

Enhancing Vehicle Functionality — Information Service Functions

To Toyota, enhancing vehicle functionality means advancing information service functions that integrate vehicles with telecommunication systems, and driving assistance functions that use communication technologies and sensor technologies to create vehicles with intelligent features. Information service functions can improve convenience and enrich the driving experience through information communication technologies that add new functions that are connected to the basic vehicle functions of “running, turning and stopping.” Examples include the following:

 

   

Toyota is advancing enhancement of car navigation systems, such as car parking maps that display detailed information inside car parks, as well as the VICS system (Vehicle Information and Communication System) that provides real-time road traffic information such as congestion, accidents, traffic restrictions and parking. Car navigation systems play an increasingly important role in providing drivers with various types of information on safety, smooth traveling, comfort and convenience.

 

   

T-Connect/G-BOOK is the latest information network service that merges the latest network technologies and car multimedia a step ahead of the arrival of the ubiquitous network society. T-Connect/G-BOOK provides various types of information useful for driving, as well as safety and security services that detect unusual conditions in the vehicle, thereby supporting a lifestyle with one’s vehicles anytime and anywhere through a network. In 2005, Toyota started G-BOOK ALPHA and G-Link for Lexus, each with additional various features including traffic congestion forecast service. In 2007, Toyota launched G-BOOK mX, which in addition to the well-received conventional safety and security services of G-BOOK, introduced even more useful car navigation services such as “Map-on-Demand” — the world’s first technology for automatically updating map data — and “Probe Communication Traffic Information” that provides drivers with highly precise information on traffic congestion. In 2014, Toyota launched T-Connect, which in addition to conventional telematics services, provides new services and functions through the distribution of applications to on-board device, as well as destination and other information searches through the adoption of a voice recognition system.

 

   

HELPNET is an emergency dial system that, in the event of a traffic accident or medical emergency, transmits information required for emergency rescue, such as present-location data and vehicle details, either automatically or with the touch of a button. It immediately contacts police and fire departments through the HELPNET Operation Center. This system is integrated into T-Connect/G-BOOK and G-Link to improve the quality of services. HELPNET shortens the time taken to report following an emergency situation, which contributes to decreasing the number of traffic accident fatalities and reducing the level of impact, while at the same time aiming to prevent secondary disasters and ease traffic congestion.

In addition to the above, Toyota also operates a Japanese-language web portal for automobile information, GAZOO.com. The name “GAZOO” originates from the Japanese word gazo, meaning images. GAZOO was established as an Internet membership service linking Toyota, its national dealer network and GAZOO members, and has provided information on new and used Toyota vehicles and related services, as well as online shopping services. GAZOO currently provides information on not only Toyota vehicles but also other automakers, as well as offering a rich blog feature as a social networking portal site on automobiles. In addition, GAZOO features GAZOO Racing and Gazoo mura, through which Toyota aims to expand the fan base of car enthusiasts by promoting activities such as user-participatory motor sports, where customers can experience in real life the enjoyment that cars offer, to further complement its contents line-up. Toyota utilized its GAZOO technology to further expand its automobile information service by launching the G-BOOK telematics service in Japan in fall 2002 and G-Link, which is a service exclusive to Lexus, in August 2005. Toyota also offers a theft detection system, vehicle tracking service and operator support service as standard services to enhance services aiming to

 

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provide safety, security and comfort for T-Connect/G-BOOK and G-Link users in their lifestyle using vehicles. With G-BOOK mX announced in April 2007, Toyota started offering services that allow drivers to use more convenient navigation systems such as “Map-on-Demand” — the world’s first technology for automatically updating map data. In addition, Toyota has further strengthened its linkage between GAZOO and G-BOOK and has, for example, allowed map information searched on a blog on GAZOO.com to be used on G-BOOK, further maturing as a comprehensive telematics service. In Japan, Toyota is seeking to promote the use of the T-Connect/G-BOOK by equipping all Lexus models and certain Crown models with the T-Connect/G-BOOK as a standard feature. Toyota has also licensed its T-Connect/G-BOOK technology to certain other competitors in Japan. Toyota is applying the technology and experience which it has accumulated in Japan to regions outside Japan; G-BOOK services were introduced in China in March 2009, and unique telematics services in the United States were launched in August 2009. In addition, Toyota began offering telematics services for smartphones in December 2010 in Japan, and began to offer the same service in Thailand in March 2012 and the Middle East from January 2014 (UAE, Qatar and Lebanon in January 2014, Saudi Arabia in August 2014, Bahrain in October 2014 and Kuwait in January 2015).

In addition, in March 2004, Toyota launched its CRM (Customer Relationship Management) system called e-CRB (evolutionary Customer Relationship Building) in Thailand. e-CRB builds on a technology cultivated through the development of Gazoo and G-BOOK and offers its customers a variety of services such as providing information on new vehicles, accepting requests for brochures and estimates and notifying customers when it is time for maintenance by keeping track of the vehicle’s maintenance history and mileage. In addition, e-CRB offers an advanced operation system that can be utilized comprehensively at dealers including new and used cars and services. Toyota is promoting e-CRB in countries such as China, Thailand, Australia, India and Brazil where steady progress has been made as the service-in ratio has increased. In 2013, Toyota introduced the next-generation e-CRB that adopts tablet terminals (portable information processing terminals) in China. These tablet terminals are supporting the improvement of customer satisfaction at points of sale and in after-sale service.

Toyota also introduced a system called Sales Logistics Integrated Management (“SLIM”) in Guangzhou, China and India. By utilizing real sales information and linking with production and distribution, Toyota is able to realize the Just-in-Time production system of producing and delivering only the number of vehicles that have been sold. SLIM has been recognized to significantly increase the freshness of inventory and improve cash flow.

In September 2010, Toyota announced its smart-grid initiatives, which are intended to demonstrate efficient energy use toward the realization of a low-carbon and energy-saving society. By utilizing technology cultivated through the Internet and telematics services mentioned above, Toyota developed the Toyota Smart Center (“TSC”) that optimally controls electricity and links EV (electric vehicles) and PHV (plug-in hybrid vehicles) with homes, and conducted a demonstration project in Rokkasho Village in Aomori aimed at reducing overall CO2 emissions and users’ electricity costs. In addition, in order to develop a global platform of the TSC, Toyota announced a partnership with Microsoft Corp. in April 2011 and a partnership with Salesforce.com in May 2011. Toyota plans to utilize the cloud technology of these two companies in its Internet and telematics services to build a framework for TSC’s global implementation. In January 2012, Toyota began eConnect and “TOYOTA friend” services for PHV. In May 2013, Toyota utilized the latest version of Microsoft’s SharePoint to comprehensively redesign GAZOO, the automobile information portal site. Toyota aims to offer new services, achieve better vehicle quality and enhance product attractiveness as well as contribute further to society by utilizing the vehicle information, road conditions and other parameters collected via telematics services and stored at the TSC. With regard to contribution to society, Toyota began offering the Big Data Traffic Information Service in June 2013, through which traffic information, statistics and other related information are provided to local governments, universities and businesses to support traffic flow improvement and assist disaster prevention measures. Toyota plans to continue to work with new information technologies and the IT industry to establish a framework for TSC’s global implementation and to realize a mobility society of the future.

 

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Enhancing Vehicle Functionality — Driving Assistance Functions

Toyota’s driving assistance functions offer functions that assist drivers with an aim to lessen the burden of driving, enhance safety and provide to everyone the pleasure of driving. Toyota has commercialized enhancements to various functions that assist the driver in sensing external information, avoiding danger and making appropriate maneuvers. Examples of driving assistance functions include the following:

 

   

VDIM (Vehicle Dynamics Integrated Management) is a system that constantly monitors the driver’s operations and the vehicle’s situation and centrally manages the engine, steering mechanisms and brakes. By stabilizing the vehicle before the driver loses control of the vehicle, VDIM achieves a high level of ‘active safety’ and improves driving performance, consisting namely of running, turning and stopping.

 

   

“Pre-collision System” is a system that perceives possibilities of a crash with obstacles, cars in front or crossing pedestrians through a sensor installed in a vehicle. If a collision seems likely, it proceeds to activate warnings as well as brake assistance, which aids the driver’s operation of the brake, or the automatic braking system, which aids in avoiding the collision altogether or mitigates any damage.

 

   

“Radar Cruise Control (with all-speed tracking function)” allows the vehicle to keep a constant distance between itself and the preceding vehicle within a speed range from zero to a preset speed, automatically slowing down and stopping if necessary to avoid collision. When the car in front speeds up, it allows the driver to accelerate.

 

   

“Lane Departure Alert” is a system that uses a camera to detect white or yellow lane markers while driving. The system warns the driver with a buzzer and displays if it detects possible deviation in order to assist in avoiding a collision accident resulting from deviation. In addition, “Lane Keeping Assist System,” a system that assists the driver’s operation of the steering wheel with electric power steering in order to help keep the vehicle traveling between lane markers, has also been developed.

 

   

“Automatic High Beam” detects the headlights of oncoming vehicles or taillights of vehicles running in front and adjusts the headlight range, automatically switching to low beam or high beam, in order to avoid dazzling the visions of the drivers with bright lights, as well as to secure the drivers’ forward visions at night.

 

   

“Blind Spot Monitor” is a system which aims to reduce accidents by alerting the driver to other vehicles in the driver’s blind spot diagonally behind the driver’s seat with sound and visual display in the side mirrors while changing lanes.

From these driving assistance functions, in 2015 Toyota developed the Toyota Safety Sense, a collision avoidance support package that includes the Pre-collision System, the Lane Departure Alert and the Automatic High Beam. By the end of 2017, Toyota plans to install this package on nearly all models sold in Japan, the United States and Europe at an affordable price aimed at widespread adaption.

Enhancing Transport Systems

Enhancing transport systems requires taking a general approach that addresses various factors across a wide scope that are pertinent not only to vehicles but also roads, people and public transport systems in order to ensure smooth and efficient movement of people and vehicles and to build a safe transportation environment. In addition to VICS and ETC (Electronic Toll Collection System), which are already standard in Japan, the “Vehicle-Infrastructure Cooperative Systems that Support Safety Driving,” which combines cutting edge IT and vehicle technology, is in development and has begun to be partially implemented.

 

   

The “ITS Spot Service” commenced in 2009 and corresponding products are available for purchase. Mainly for use on highways, this service provides drivers with information related to road traffic and safe driving that is transmitted from road infrastructures to car navigation systems through video and voice.

 

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In the summer of 2011, Toyota introduced products corresponding to the driving safety support system (“DSSS”) which the National Police Agency has started operating. Mainly for use on normal roads, this system supports safe driving, including by preventing the driver from overlooking red lights, by transmitting traffic control information (such as traffic lights and signs) and other local information from road infrastructures to automobiles.

 

   

Systems aimed at further reducing accidents, improving fuel efficiency and reducing CO2 emissions are in development. Through direct and continuous exchange of information between vehicles and the road, other vehicles and pedestrians, these systems aim to mitigate side collisions and accidents involving pedestrians, which have been difficult to mitigate to date. This also includes systems such as C-ACC (Co-operative Adaptive Cruise Control) which supports fuel efficient driving and smooth acceleration and deceleration when following behind another vehicle.

Toyota is committed to developing new ITS products. Toyota believes that intelligent transport systems will become an integral part of its overall automotive operations and enhance the competitiveness of its vehicles. As familiarity with and demand for ITS products grow, Toyota expects an increasing number of ITS products to become commercially available and achieve greater acceptance each year.

Smart Communities

In April 2010, Toyota City was selected as a “Model Region for Next-Generation Energy Systems” by the Ministry of Economy, Trade and Industry. Toyota has since joined the “Toyota City Low-Carbon Society Verification Council” (established in August 2010), and carried out experiments relating to the “Optimization of Local Energy Use in Households and Destinations (commercial and public facilities)” and “Establishment of a System for Low-Carbon Emission Transportation.” In addition, starting in October 2014, Toyota launched an experimental ultra-compact electric vehicle sharing program in Grenoble, France, together with the city of Grenoble and local companies, and in Tokyo from April 2015.

In February 2013, Toyota, together with Toyota affiliated companies, established the “F-Grid Ohira, Miyagi Limited Liability Partnership,” a smart community business which operates the “F-Grid” in the Sendai Hokubu Industrial Park in the village of Ohira, Miyagi. The Partnership began supplying electricity and heat to partners in the industrial park in April 2013. This business aims to contribute to “creating a safe and secure community with the community and the industrial park working as one,” “revitalizing local industry” and “revitalizing the community.” Toyota believes that the elemental technologies developed through these experiments and businesses will help in the creation of new systems for society that meet differing social environments and municipal needs, not just in Japan but around the world, in both developed and emerging countries, and will play a role in the creation of energy and transportation infrastructure to help spread next-generation eco-cars.

Financial Services

Toyota’s financial services include loan programs and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value-added service. In July 2000, Toyota established a wholly-owned subsidiary, Toyota Financial Services Corporation (“TFSC”), to oversee the management of Toyota’s finance companies worldwide, through which Toyota aims to strengthen the overall competitiveness of its financial business, improve risk management and streamline decision-making processes. Toyota has expanded its network of financial services, in accordance with its strategy of developing auto-related financing businesses in significant markets. Accordingly, Toyota currently operates financial services companies in 35 countries and regions, which support its automotive operations globally.

Toyota’s revenues from its financial services operations were ¥1,661.1 billion in fiscal 2015, ¥1,421.0 billion in fiscal 2014 and ¥1,170.6 billion in fiscal 2013. In fiscal 2014, amid a gradual recovery in markets including the United States, Europe and Japan, Toyota collaborated with dealers in various countries and regions, and the balance of loan receivables increased steadily. In fiscal 2015, with recovery in markets particularly in the United States and as a result of the continued collaboration with dealers in various countries and regions and efforts to expand

 

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products and services that meet customer needs, Toyota’s share of financing provided for new car sales of Toyota and Lexus vehicles in regions where TFSC operates remained at a high level of 36% and the balance of loan receivables, mainly in the United States and Thailand, continued to increase steadily. Meanwhile, Toyota is making efforts to provide both its customers and dealers with stable financial services by diversifying its funding mechanisms with ABCP (Asset Backed Commercial Paper) and ABS (Asset Backed Securities), in addition to mid- to long-term financings, primarily in commercial paper issuances, corporate bonds and bank borrowings. Toyota continued to perform detailed credit appraisals and serve customers by monitoring bad debt and loan payment extensions, and the percentage of credit losses remained low, at 0.31% and 0.28% in fiscal years 2015 and 2014, respectively. Toyota continues to work towards improving its risk management measures in connection with credit and residual value risks.

Toyota Motor Credit Corporation is Toyota’s principal financial services subsidiary in the United States. Toyota also provides financial services in 34 other countries and regions through various financial services subsidiaries, including:

 

   

Toyota Finance Corporation in Japan;

 

   

Toyota Credit Canada Inc. in Canada;

 

   

Toyota Finance Australia Ltd. in Australia;

 

   

Toyota Kreditbank GmbH in Germany;

 

   

Toyota Financial Services (UK) PLC in the United Kingdom;

 

   

Toyota Leasing (Thailand) Co., Ltd. in Thailand; and

 

   

Toyota Motor Finance (China) Co., Ltd. in China.

Toyota Motor Credit Corporation provides a wide range of financial services, including retail financing, retail leasing, wholesale financing and insurance. Toyota Finance Corporation also provides a range of financial services, including retail financing, retail leasing and credit cards. Toyota’s other finance subsidiaries provide services including retail financing, retail leasing and wholesale financing.

In May 2011, Toyota established Toyota Financial Services India Limited, a financial services company, in India. Toyota Financial Services India Limited began its operations in June 2012 and has since expanded its business to major cities such as Bangalore, Delhi and Mumbai. In January 2013, Toyota established a new leasing company, Toyota Motor Leasing (China) Co., Ltd., in China, which began its operations in April 2013. In addition, in April 2013, Toyota established Toyota Financial Services Kazakhstan MFO LLP, a financial services company, in Kazakhstan, which began its operations in January 2014.

Net finance receivables for all of Toyota’s dealer and customer financing operations were ¥15,472.3 billion as of March 31, 2015, representing an increase of approximately 12.7% as compared to the previous year. The majority of Toyota’s financial services are provided in North America. As of March 31, 2015, 59.3% of Toyota’s finance receivables were derived from financing operations in North America, 12.8% from Asia, 9.5% from Europe, 7.9% from Japan and 10.5% from other areas.

Approximately 50% of Toyota’s unit sales in the United States during fiscal 2015 included a finance or lease arrangement with Toyota. Because the majority of Toyota’s financial services operations are related to the sale of Toyota vehicles, a decrease in vehicle unit sales may lead to a contraction of Toyota’s financial services operations.

The worldwide financial services market is highly competitive. Toyota’s competitors in retail financing and retail leasing include commercial banks, credit unions and other finance companies. Commercial banks and other automobile finance subsidiary companies serving their parent automobile companies are competitors of Toyota’s wholesale financing activities. Competitors in Toyota’s insurance operations are primarily national and regional insurance companies.

 

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For information on Toyota’s finance receivables and operating leases, please see “Operating and Financial Review and Prospects — Operating Results — Financial Services Operations.”

Retail Financing

Toyota’s finance subsidiaries acquire new and used vehicle installment contracts primarily from Toyota dealers. Installment contracts acquired must first meet specified credit standards. Thereafter, the finance company retains responsibility for installment payment collections and administration. Toyota’s finance subsidiaries acquire security interests in the vehicles financed and can generally repossess vehicles if customers fail to meet their contractual obligations. Almost all retail financings are non-recourse, which relieves the dealers from financial responsibility in the event of repossession. In most cases, Toyota’s finance subsidiaries require their retail financing customers to carry automobile insurance on financed vehicles covering the interests of both the finance company and the customer.

Toyota has historically sponsored, and continues to sponsor, special lease and retail programs by subsidizing below market lease and retail contract rates.

Retail Leasing

In the area of retail leasing, Toyota’s finance subsidiaries acquire new vehicle lease contracts originated primarily through Toyota dealers. Lease contracts acquired must first meet specified credit standards after which the finance company assumes ownership of the leased vehicle. The finance company is generally permitted to take possession of the vehicle upon a default by the lessee. Toyota’s finance subsidiaries are responsible for contract collection and administration during the lease period. The residual value is normally estimated at the time the vehicle is first leased. Vehicles returned to the finance subsidiaries at the end of their leases are sold by auction. For example, in the United States, vehicles are sold through a network of auction sites as well as through the Internet. In most cases, Toyota’s finance subsidiaries require lessees to carry automobile insurance on leased vehicles covering the interests of both the finance company and the lessee.

Wholesale Financing

Toyota’s finance subsidiaries also provide wholesale financing primarily to qualified Toyota vehicle dealers to finance inventories of new Toyota vehicles and used vehicles of Toyota and others. The finance companies acquire security interests in vehicles financed at wholesale. In cases where additional security interests would be required, the finance companies take dealership assets or personal assets, or both, as additional security. If a dealer defaults, the finance companies have the right to liquidate any assets acquired and seek legal remedies.

Toyota’s finance subsidiaries also make term loans to dealers for business acquisitions, facilities refurbishment, real estate purchases and working capital requirements. These loans are typically secured with liens on real estate, other dealership assets and/or personal assets of the dealers.

Insurance

Toyota provides insurance services in the United States through Toyota Motor Credit Corporation’s wholly-owned subsidiary, Toyota Motor Insurance Services, Inc. (“TMIS”) and its wholly-owned insurance company subsidiaries. Their principal activities include marketing, underwriting and claims administration. TMIS also provides coverage related to vehicle service agreements and contractual liability agreements through Toyota dealers to customers. In addition, TMIS also provides coverage and related administrative services to affiliated companies of Toyota Motor Credit Corporation. Toyota dealers in Japan and in other countries and regions also engage in vehicle insurance sales.

 

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Other Financial Services

Toyota Finance Corporation launched its credit card business in April 2001 and began issuing Lexus credit cards in 2005 when the Lexus brand was introduced in Japan. As of March 31, 2015, Toyota Finance Corporation has 13.5 million card holders (including Lexus credit card holders).

All Other Operations

In addition to its automotive operations and financial services operations, Toyota is involved in a number of other non-automotive business activities. Net sales for these activities totaled ¥1,255.7 billion in fiscal 2015, ¥1,151.2 billion in fiscal 2014 and ¥1,066.4 billion in fiscal 2013. Sales to external customers of all other operations in fiscal 2015 represented 2.2% of Toyota’s net revenues for fiscal 2015. Substantially all of Toyota’s revenues from other operations were derived in Japan.

Housing

Toyota established its subsidiary Toyota Housing Corporation in April 2003 and has transferred to it product planning and sales operations related to the manufacture and sale of housing. Furthermore, in order to quickly and accurately grasp clients’ needs and to plan, develop and sell products on a timely basis, in April 2008, Toyota transferred the product development operation to Toyota Housing Corporation. In October 2010, Toyota spun-off its housing operations (project planning, technology development and manufacturing) through a statutory demerger and integrated them into Toyota Housing Corporation. Toyota believes that in the vastly changing housing market environment, the integration of the development, manufacture and sales functions will expedite decision making and lead to flexible business operations that will enable Toyota to better respond to the needs of even more customers. In March 2005, Toyota, together with institutional investors, agreed to jointly invest in Misawa Home Holdings, Inc. (“Misawa”; renamed Misawa Homes Co., Ltd.) pursuant to its request for assistance in its rehabilitation. In April 2010, determining that a stronger collaboration with Misawa would be desirable in order to achieve further growth in the difficult operating environment of the housing industry, Toyota Housing Corporation agreed to purchase Misawa shares from an institutional investor. In addition, Toyota transferred ownership of Misawa to Toyota Housing Corporation in October 2010. Through these activities, Toyota has strengthened the housing business of both companies.

Information Technology

See “— Enhancing Vehicle Functionality and Intelligent Transport Systems” for a description of Toyota’s information technology.

Governmental Regulation, Environmental and Safety Standards

Toyota is subject to laws in various jurisdictions regulating the levels of pollutants generated by its plants. In addition, Toyota is subject to regulations relating to the emission levels, fuel economy, noise and safety of its products. Toyota has incurred significant costs in complying with these laws and regulations and expects to incur significant compliance costs in the future. Toyota’s management views leadership in environmental protection as an important competitive factor in the marketplace.

Vehicle Emissions

Japanese Standards

The Air Pollution Control Law of Japan and the Road Vehicle Law and the Law Concerning Special Measures for Total Emission Reduction of Nitrogen Oxides from Automobiles in Specified Areas regulate vehicle emissions in Japan. In addition, both the Noise Regulation Law and the Road Vehicles Law provide for noise reduction standards on automobiles in Japan. Toyota’s vehicles manufactured for sale in Japan comply with all Japanese exhaust emission and noise level standards.

 

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U.S. Federal Standards

The federal Clean Air Act directs the Environmental Protection Agency (“EPA”) to establish and enforce air quality standards, including emission control standards on passenger cars, light trucks and heavy-duty vehicles. The EPA decided in February 2000 to adopt more stringent vehicle emission and fuel economy standards applicable to passenger cars and light trucks produced in model years 2004 and beyond. In the standards adopted for model years 2004 and beyond, manufacturers must guarantee that their vehicles meet the requirements for ten years or 120 thousand miles, whichever occurs first. Manufacturers are not permitted to sell vehicles in the United States that do not meet the standards. In April 2007, EPA regulations that further restrict emissions from passenger cars and light trucks operating at cold temperatures became effective. The new emission standards set by these regulations were phased in between 2010 and 2013. Similar standards that further restrict emissions from heavy-duty vehicles operating at cold temperatures have been phased in from 2012 to 2015. In March 2014, the EPA finalized new vehicle emission and fuel standards for passenger vehicles and light-duty trucks for model years 2017 and onwards. Under the new standards, emission standards for volatile organic compounds and nitrogen oxides are to be strengthened in phases from 2017 to 2025, bringing the emission standards in line with emission standards in California, resulting in the unification of the differing California and federal emission standards. In addition, the particulate matter standards and fuel vapor emission standards will also be strengthened to be brought in line with California’s emission standards. This is expected to lead to reductions in the burden on development, such as a reduction in the number of tests required for certification and standardization of emission reduction systems.

Furthermore, in April 2007 the U.S. Supreme Court ruled that the EPA has the authority to regulate automobile emissions of greenhouse gases. In response to this ruling, on April 1, 2010 the EPA and the federal National Highway Traffic Safety Administration (“NHTSA”) issued a joint final rule to reduce the emission of greenhouse gases from passenger cars, light-duty trucks and medium-duty passenger vehicles for model years 2012 through 2016. These vehicles are required to meet an estimated combined average emissions level of 250 grams of carbon dioxide per mile, equivalent to 35.5 miles per gallon if the requirements were met through fuel economy standards. The NHTSA also set Corporate Average Fuel Economy (“CAFE”) standards for passenger cars and light trucks that will require manufacturers of those vehicles to meet an estimated combined average fuel economy level of 34.1 miles per gallon in model year 2016. In addition, on August 28, 2012, the EPA and the NHTSA jointly issued the final rule to further reduce greenhouse gas emissions and improve fuel economy for passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2017 through 2025. In the final rule, these vehicles are required to meet an estimated combined average emission level of 163 grams of carbon dioxide per mile in model year 2025, equivalent to 54.5 miles per gallon if these requirements were met through improvements in fuel economy standards. The NHTSA also issued CAFE standards for passenger vehicles and light trucks that would require manufacturers to meet an estimated combined average fuel economy level of 49.6 miles per gallon in model year 2025. According to the final rule, these standards are to be reevaluated by 2018.

In addition, in August 2014, the EPA proposed to limit, due to related greenhouse gas emissions, the use of various hydroflourocarbons (HFCs) and HFC-containing refrigerant blends used in motor vehicle air conditioning systems for new vehicles, among other applications. Toyota purchases air conditioning systems from third parties for use in its vehicles. The proposed rule would list HFC-134a, the most dominant refrigerant used in light-duty vehicles worldwide, as unacceptable for use in motor vehicle air conditioning systems in new light-duty vehicles beginning in model year 2021. The proposed rule also lists additional refrigerant blends as unacceptable for use in new light-duty vehicles beginning in model year 2017. Feasible alternatives to these refrigerants that the proposed rule, if finalized, would prohibit may be costly or present other risks, such as flammability or other safety concerns. The potential impacts of this proposed rule to Toyota are unclear at this time.

As discussed above, the EPA has been granted the authority to set fuel standards in connection with the regulation of automobile emissions. In October 2010, the EPA approved the sale and use of fuel with a 15% ethanol blend (“E15”) for model years 2007 and later passenger vehicles and light-duty trucks. The use of E15 is

 

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not permitted for engines used in lawnmowers, small generators, motorbikes, boats and other vehicles and equipment. Subsequently, in February 2011, the EPA approved the use of E15 for model years 2001 and later vehicles. The Alliance of Automobile Manufacturers (“The Alliance”), of which Toyota Motor North America is a member, has stated that current vehicles are only guaranteed to function on fuel up to 10% ethanol and the EPA’s permission is invalid. The Alliance created the Engine Products Group together with the Global Automakers, the National Marine Manufacturers Association and the Outdoor Power Equipment Institute, and in December 2010 the Engine Products Group brought suit against the EPA. The lawsuit was dismissed in January 2013 on the grounds that the Engine Products Group lacked standing and in March 2013, the Engine Products Group appealed the decision to the Supreme Court of the United States. The appeal was dismissed on the same grounds in July 2013, and the EPA approval became effective. The use of E15 is only permitted for certain 2001 model year or newer vehicles, such as light-duty passenger vehicles and small trucks, and E15 is prohibited for use in other 2000 model year or older vehicles and general purpose engines. As a result, the EPA promulgated regulations in July 2011, effective August 2011, requiring businesses that sell E15 to put a warning label regarding E15 on gasoline fuel dispensers. The Engine Products Group brought suit against the EPA in federal appeals court in 2013 challenging such regulations, but the lawsuit was dismissed in October 2014 on the ground that the Engine Products Group lacked standing.

California Standards

Under the federal Clean Air Act, the State of California is permitted to establish its own vehicle emission control standards if it receives a waiver from the EPA. As a result, the California Air Resources Board (“CARB”) established the Low Emission Vehicle Program and set emission standards for certain regulated pollutants that were phased in beginning in the 2004 model year. Under these standards, most light trucks and passenger cars are required to meet the same emission standards, which were stricter than the federal standards. As part of the original Low Emission Vehicle Program, the CARB also required that a specified percentage of a manufacturer’s passenger cars and light trucks sold in California for all model years 1998 and after be “zero-emission vehicles” (vehicles producing no emissions of regulated pollutants). The CARB subsequently eliminated the zero-emission vehicles mandate for model years before 2005, and decided to adopt a zero-emission vehicles requirement for model years 2005 and beyond. This zero-emission vehicles requirement also permitted certain advanced technology vehicles such as PHV (Plug-in Hybrid Vehicles), hybrid cars and alternative fuel vehicles that meet “partial zero-emission vehicles requirements” to be granted partial qualification as EV (Electronic Vehicles) or FCV (Fuel Cell Vehicle). Toyota’s battery-powered RAV4 EV compact sport-utility vehicle and the Toyota FCHV qualify as zero-emission vehicles. The current Prius plug-in hybrid, Prius and the Camry Hybrid qualify as partial zero-emission vehicles under the zero-emission vehicles requirement adopted by the CARB. Toyota intends to continue to develop additional advanced technologies and alternative fuel technologies that will allow other vehicles using such technologies to qualify as zero-emission vehicles or partial-zero-emission vehicles.

In July 2002, the California legislature passed legislation that required the CARB to develop and adopt, by the end of 2004, regulations that achieved the maximum feasible reduction in greenhouse gas emissions from vehicles. In September 2004, the CARB adopted regulations that required a 20 to 30 percent reduction of greenhouse gas emissions from passenger vehicles, light trucks and other noncommercial vehicles to be phased in between the 2009 and 2016 model years.

In December 2007, the EPA denied California’s request for a waiver under the Clean Air Act that would have allowed the state to enforce these regulations to control greenhouse gas emissions from motor vehicles. However, the EPA reconsidered its decision pursuant to a direction issued by the U.S. President in January 2009, and in July 2009 decided to allow the state to enforce such regulations.

In February 2010, the CARB enacted regulations that deem automobile manufacturers that produced vehicles in model years 2012 through 2016 that are in compliance with the greenhouse gas emissions regulations of the EPA to be in compliance with California’s greenhouse gas emissions regulations. Toyota is currently developing plans to comply with the EPA regulations.

 

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In January 2012, the CARB approved a new emission control program for model years 2017 to 2025 called Advanced Clean Cars. The program covers greenhouse gas standards for cars and light trucks, reductions of smog-forming emissions, zero-emission vehicles regulations and clean fuels outlet regulations. The CARB is in the process of developing and implementing specific rules for the program.

Other States’ Standards

The states of New York, Massachusetts, Connecticut, Maine, Maryland, New Jersey, New Mexico, Oregon, Rhode Island, Vermont and Colorado have either adopted, or plan to adopt, regulations substantially similar to California’s zero-emission vehicles requirement. With regard to greenhouse gas emissions regulations, in addition to these states, Pennsylvania and Washington have also adopted California’s regulations.

Canadian Standards

Canada has established vehicle emission standards equivalent to the federal standards in the United States, including the heightened requirements that became applicable to passenger cars and light trucks in model years 2004 and beyond. In addition, in response to the strengthening of the federal greenhouse gas emission standards in the United States applicable to model years 2017 to 2025, Canada finalized equivalent standards in October 2014. Furthermore, certain Canadian provinces are currently considering enacting their own regulations on vehicle emissions of greenhouse gases. Canada has also proposed more stringent fuel legislation, which is based on fuel legislation in the United States, that reduces refineries’ annual average sulfur concentration of gasoline to 10 ppm from 2017 with a new addition of credit system to secure compliance.

European Standards

The European Union adopted a directive that establishes increasingly stringent emission standards for passenger vehicles and light commercial vehicles in October 1998. Under this directive, the standards adopted beginning with year 2000 require manufacturers to recall any vehicles which fail to meet the standards for five years or 80 thousand kilometers, whichever occurs first. Toyota introduced vehicles complying with this directive in 1999. Under standards adopted in 2005, manufacturers are obligated to meet the more stringent standards for five years or total vehicle miles of 100 thousand kilometers, whichever occurs first. In 2007, the European Parliament adopted more stringent emission standards for passenger vehicles and light commercial vehicles. The effective dates for phasing in these stricter standards for passenger cars were September 2009 for Euro 5 and September 2014 for Euro 6. For light commercial vehicles, the effective dates are September 2010 for Euro 5 and September 2015 for Euro 6. Euro 5 provides for lower emission levels for gasoline and diesel powered vehicles and also extends the manufacturers’ responsibility for emission performance to total vehicle miles of 160 thousand kilometers. The primary focus of Euro 6 is to limit further emissions of diesel powered vehicles and bring them down to a level equivalent to gasoline powered vehicles. In addition, Euro 6 will be implemented in two stages, and beginning with the second stage (September 2017 for passenger vehicles and September 2018 for commercial vehicles), the EU is considering implementing the Real Driving Emission (RDE) regulations, which regulate emissions under real driving conditions, and the Worldwide harmonized Light vehicles Test Procedure (WLTP).

Chinese Standards

Emissions regulations are being implemented throughout China pursuant to the Chinese National Standards (GB) of the Ministry of Environmental Protection of the People’s Republic of China, and the manufacture and sale of models not meeting these regulations are prohibited.

For passenger vehicles, pursuant to GB18352.3-2005, Level 3 Emissions Regulations (corresponding to Euro 3 standards) apply to new models after July 2007 and Level 4 Emissions Regulations (corresponding to Euro 4 standards) apply to new models after July 2010. New models after July 2008 are also required to be

 

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equipped with on-board diagnostics. With respect to passenger vehicles, pursuant to GB18352.5-2013, Level 5 Emissions Regulations (corresponding to Euro 5 standards) are to be implemented throughout China for all models that are sold and registered after January 2018.

For diesel-powered commercial vehicles, pursuant to GB17691-2005, new Level 3 Emissions Regulations apply to models after January 2007. Although Level 4 Emissions Regulations were to apply to new models after January 2010, and Level 5 Emissions Regulations were to apply to new models after January 2012, because the infrastructure to supply sufficient diesel fuel meeting the Level 4 quality standards had yet to be put in place, the implementation of the Level 4 Emissions Regulations for all models was postponed to July 2013. In connection with such delay, the implementation of the Level 5 Emissions Regulations has been postponed. For gasoline-powered commercial vehicles, pursuant to GB14762-2008, Level 3 Emissions Regulations apply to new models after July 2009 and Level 4 Emissions Regulations apply to new models after July 2012. After the first day the regulation is implemented to a new model, all new models released during the following one-year period also become subject to the regulation. In addition, in some areas such as Beijing, Shanghai, Guangzhou and the Pearl River Delta region, the above mentioned regulations were implemented several years earlier by regional environmental preservation authorities with the authorization of the Chinese State Council. Cities with serious air pollution are increasingly exhibiting tendencies to similarly implement Level 5 Emissions Regulations in advance of the rest of China.

China will also start implementing stricter diesel and gasoline fuel standards a year earlier than scheduled to reduce vehicle emissions, pursuant to GB19147-2013 and GB17930-2013. The new Level 5 standards (equivalent to Euro 5 standards) will be implemented in 11 provinces in eastern China in January 2016, and are now planned to be implemented nationwide in January 2017, as opposed to the previously announced January 2018 implementation date.

Compliance with new and more stringent emissions and fuel standards will present significant technological challenges to automobile manufacturers and will likely require significant expenditures. Examples of these challenges include the development of advanced technologies, such as high performance batteries and catalytic converters, as well as the development of alternative fuel technologies. Manufacturers that are unable to develop commercially viable technologies within the time frames set by the new standards will lose their market share and will be forced to decrease the number of types of vehicles and engines in their principal markets.

Standards of Other Countries

Countries other than Japan, the United States, Europe and China are also proactively introducing emissions regulations. Countries in Eastern Europe and Asia, as well as Australia, Mexico, Taiwan and Hong Kong, have considered or implemented emissions regulations.

Vehicle Fuel Economy

Japanese Standards

The Law Concerning the Rational Use of Energy requires automobile manufacturers to improve their vehicles to meet specified fuel economy standards. Fuel economy standards are established according to the types of vehicles specified below, and are required to be met by either fiscal 2011 (April 2010-March 2011), fiscal 2016 (April 2015-March 2016), fiscal 2021 (April 2020-March 2021) or fiscal 2023 (April 2022-March 2023).

Among qualifying passenger vehicles are:

 

   

Vehicles which are designated in Article 75, Paragraph 1 of the Road Vehicles Law as type-designated vehicles (“type-designated vehicles”) with 10 seats or less using gasoline, gas oil or LPG;

 

   

Type-designated vehicles with 11 seats or more that are 3.5 tons or less in vehicle weight using gasoline or gas oil; and

 

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Type-designated vehicles with 11 seats or more that are over 3.5 tons in vehicle weight using gas oil, or designated carbon monoxide emission control vehicles (“designated carbon monoxide emission control vehicles”) which are designated in Article 75-2 Paragraph 1 of the Road Vehicles Law.

Among qualifying cargo vehicles are:

 

   

Type-designated vehicles that are 3.5 tons or less in vehicle weight using gasoline, gas oil or LPG; and

 

   

Type-designated vehicles that are over 3.5 tons in vehicle weight using gas oil or LPG, or designated carbon monoxide emission control vehicles.

Toyota is in compliance with the fuel economy standards that currently apply and is promoting the improvement of its vehicles in order to achieve compliance with the standards that will apply beginning in fiscal 2016.

Japan is a signatory to the Framework Convention on Climate Change and has agreed to take measures to reduce its greenhouse gas emissions. Improved vehicle fuel economy is contributing to the reduction in carbon dioxide emissions.

U.S. Standards

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with CAFE standards. Under this law, limits are imposed on the amount of regulated pollutants that may be emitted by new motor vehicles in the United States. A manufacturer is subject to substantial civil penalties if, in any model year, its vehicles do not meet the CAFE standards. Manufacturers that exceed the CAFE standards earn credits determined by the difference between the average fuel economy performance of their vehicles and the CAFE standards. Credits earned for the five model years preceding the current model year, and credits projected to be earned for the next three model years, can be used to meet CAFE standards in a current model year.

In April 2006, the NHTSA established CAFE standards applicable to light trucks for model year 2008 and beyond. These CAFE standards aimed at shifting the framework from one that used to be advantageous only to compact car manufacturers to one that is fair to full line manufacturers. The requirements were changed so that the CAFE standards are now determined by a sales rate based on vehicle size (measured by the area of the wheel and wheel base) for each manufacturer.

In addition to the CAFE standards, there are multiple standards in the United States, including the EPA’s emissions regulations and the California standard. Automobile manufacturers had called for uniform standards, as they would need to comply with standards that varied by state if all standards became effective. On April 1, 2010, the EPA and the NHTSA issued a joint final rule to reduce the emission of greenhouse gases from passenger cars, light-duty trucks and medium-duty passenger vehicles for model years 2012 through 2016. These vehicles are required to meet an estimated combined average emissions level of 250 grams of carbon dioxide per mile, equivalent to 35.5 miles per gallon if the requirements were met through fuel economy standards. The NHTSA also set CAFE standards for passenger cars and light trucks that will require manufacturers of those vehicles to meet an estimated combined average fuel economy level of 34.1 miles per gallon in model year 2016. Furthermore, the EPA and the NHTSA joint final rule allows the two agencies and California standards to act in a unified way, and creates a regulatory framework that makes compliance less burdensome for the manufacturers. In addition, in December 2011, the EPA and the NHTSA issued a joint proposed rule to further reduce greenhouse gas emissions and improve fuel economy for passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2017 through 2025. In the rule, which was finalized in August 2012, these vehicles are required to meet an estimated combined average emission level of 163 grams of carbon dioxide per mile in model year 2025, equivalent to 54.5 miles per gallon if these requirements are met through improvements in fuel economy standards. At the same time, the NHTSA also issued CAFE standards for

 

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passenger vehicles and light trucks that would require manufacturers to meet an estimated combined average fuel economy level of 49.6 miles per gallon in model year 2025. The standards of fuel economy are stringent, and Toyota strives to meet the fuel economy standards by further developing fuel-efficient technology, alternative fuel technology and other advanced technology.

In addition, the Energy Tax Act of 1978 imposes a “gas guzzler” tax on automobiles with a fuel economy rating below specified levels.

European Standards

The European Union has signed the Kyoto Protocol and agreed to reduce carbon dioxide emissions by 8% during the years 2008 to 2012, as measured from the 1990 base year. In early 1999, the European Commission and the European Automotive Manufacturers Association (“ACEA”) reached a voluntary agreement which establishes an average emissions target of 140 grams of carbon dioxide per kilometer for new cars sold in the EU in 2008 (the voluntary agreement applied to the 15 states who were members of the EU at that time). The Japan Automobile Manufacturers Association and the Korean Automobile Manufacturers Association have also reached a voluntary agreement, similar to that entered into by the European Commission, with the year 2009 as a target year.

In December 2008, the European Parliament approved a new regulation that establishes an average emission standard of 130 grams of carbon dioxide per kilometer by 2012 for passenger vehicles sold in member states, made effective in June 2009. The regulation has been phased in gradually, initially requiring 65% of new cars to comply with the new standards in 2012 and increasing to 100% of new cars in 2015. As a result of the new regulations, different targets will apply to each manufacturer, based on their respective fleets of vehicles and weight. Penalties will apply to those manufacturers who fail to meet their targets from 2012, in amounts corresponding to the degree of shortfall. Manufacturers failing to meet their targets between 2012 and 2018 will incur penalties of between €5 and €95 per each gram of carbon dioxide per kilometer shortfall for each non-compliant vehicle, and such penalties will rise to €95 in 2019 and beyond. Furthermore, in June 2011, a new carbon dioxide emission standard applicable to light commercial vehicles entered into force establishing an average emissions target of 175 grams of carbon dioxide per kilometer. This regulation has the same basic regulatory framework as passenger vehicles, raising the compliance rate from 70% in 2014 to 100% in 2017.

Furthermore, in February 2014, the European Parliament and Council adopted a regulation to reduce the average carbon dioxide emissions target for light commercial vehicles to 147 grams per kilometer beginning in 2020. In March 2014, the European Parliament and Council adopted a regulation to reduce the average carbon dioxide emissions target for passenger vehicles to 95 grams per kilometer beginning in 2021. The relevant legislation requests the European Commission to conduct a review by 2015 and, if appropriate, propose new targets for the period beyond 2020, including possibly setting a 2025 target.

An increasing number of EU member states are introducing vehicle tax laws based on carbon dioxide emission levels pursuant to the directive issued by the European Commission in 2005. This trend is expected to continue in accordance with the recent increases in environmental awareness.

Chinese Standards

Fuel consumption regulations are being implemented pursuant to the Chinese National Standards (“GB”), and the manufacture and sale of vehicle models not meeting these regulations are prohibited. For passenger vehicles, pursuant to GB19578-2004, Level 1 Fuel Consumption Regulations apply to new models after July 2005 and Level 2 Fuel Consumption Regulations apply to new models after January 2008. For small commercial vehicles, pursuant to GB20997-2007, Level 2 Fuel Consumption Regulations apply to new models after February 2008, Level 1 Fuel Consumption Regulations apply to all vehicles as of January 2009 and Level 2 Fuel Consumption Regulations apply to all models as of January 2011. These regulations determine the

 

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consumption standards that apply depending on the mass of the applicable vehicle and set forth a method for determining whether each model has met the regulation. With respect to passenger vehicles, GB27999-2011 has been issued to further strengthen fuel consumption regulations from 2012 and beyond. In these Level 3 Fuel Consumption Regulations for passenger vehicles, the regulation framework was substantially revised, such as a change from regulations requiring each model to meet consumption standards to regulations requiring automobile manufacturers to meet standards of average consumption across models. Furthermore, in order to achieve the national target for average fuel efficiency for 2020, the following more stringent fuel consumption regulations have been enacted for passenger cars. First, GB19578-2014, which has been enacted to strengthen regulations for each model, will be applied to new models after January 2016. Second, GB27999-2014, which has been enacted to strengthen corporate average regulations, will apply the Level 4 Fuel Consumption Regulations from 2016.

Standards of Other Countries

As momentum gathers to increase energy security and prevent global warming, other countries in addition to Japan, the United States, Europe and China are moving to introduce fuel consumption regulations, and Korea, Mexico, Brazil, Taiwan, India, Saudi Arabia and Canada have already decided to introduce fuel consumption regulations. Vietnam and some other countries are also actively considering the introduction of new fuel consumption regulations using the regulations of Japan, Europe and the United States as a base, and may implement them by approximately 2017. Toyota predicts that this trend will spread to other countries, and in the future many nations will consider new regulations related to fuel consumption and carbon dioxide.

Vehicle Safety

Japanese Standards

In Japan, efforts have been made since 1998 to bring Japanese standards in line with the regulations of the United Nations Economic Commission for Europe (“UN”).

With respect to standards that were previously brought in line with the UN regulations, the Japanese standards regarding Lane Departure Warning systems (“LDWS”) will additionally require that buses and medium or heavy trucks be equipped with such systems. LDWS will apply gradually to new models beginning in November 2017 and to existing models still in production beginning in November 2019.

With respect to standards that were newly brought in line with the UN regulations, standards for interior fittings (internal projections) will apply to new models beginning in January 2018 and to existing models still in production beginning in January 2020. Standards for glass windows will apply to new models beginning in July 2017 and to existing models still in production beginning in July 2019. Standards for temporary-use spare units and tire pressure monitoring systems will apply to vehicles to be manufactured on or after February 2018. Standards for steering systems will apply gradually to new models beginning in July 2016 and to existing models still in production beginning in July 2018.

With respect to standards that are scheduled to be newly brought in line with the UN regulations, standards for fire prevention will apply to new models beginning in September 2018. Standards for protection of passengers from pole side impact will apply to new models beginning in June 2020. Standards for illumination of rear registration plates will apply to vehicles to be manufactured on or after June 2020. Standards for filament light bulbs will apply to vehicles to be manufactured on or after June 2020. Standards for gas-discharge light sources will apply to vehicles to be manufactured on or after June 2020. Standards for LED will apply to vehicles to be manufactured on or after June 2020.

Furthermore, in Japan, considerations regarding the standardization of brake override systems, the strengthening of anti-spinal injury measures and anti-drunk driving measures are currently under consideration.

 

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U.S. Standards

The U.S. National Traffic and Motor Vehicle Safety Act of 1966, or Safety Act, requires vehicles and equipment sold in the United States to meet various safety standards issued by the NHTSA. The Safety Act also authorizes the NHTSA to investigate complaints relating to vehicle safety and to order manufacturers to recall and repair vehicles found to have safety-related defects. The cost of these recalls can be substantial depending on the nature of the repair and the number of vehicles affected.

The Transportation Recall Enhancement, Accountability and Documentation Act was enacted in the United States on November 1, 2000. This Act required the NHTSA to regulate the dynamic rollover standards and to upgrade federal motor vehicle safety standards relating to tires. It also required the NHTSA to enhance its authority to gather information potentially relating to motor vehicle defects. This Act substantially increases the maximum civil penalties for violation of regulatory requirements and specifies possible criminal penalties for violations of the federal Fraud and False Statements Act. In 2003, the NHTSA expanded its New Car Assessment Program (“NCAP”) to implement consumer information programs for vehicle rollover resistance and child restraints and, beginning in 2003, adopted extensive early warning defect reporting requirements. Regulations regarding tire-pressure monitoring systems were strengthened in 2005.

Legislation on a transportation budget plan promoting a safe and efficient vehicle safety program for drivers, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) was passed in August 2005. The legislation requires the NHTSA to propose and issue safety standards to reduce rollover accidents, to complete the creation of standards for the reduction of vehicle passengers released from cars at the time of rollover accidents, to upgrade door lock standards, to complete the upgrade of roof crash standards, to decide on the side impact protection standards for passengers in all seat locations, to review seat belt wearing technology and complete a study that includes a proposal for improving the rate of seat belt usage, to establish standards to display NCAP ratings on new car labels and to complete the upgrade of the standard for power windows that will require pulling up switches. Some actions have already been taken and completed in response to the above requirements.

In February 2008, legislation to prevent non-traffic related injuries to young children caused by vehicles, the “Cameron Gulbransen Kids Transportation Safety Act,” was passed. Pursuant to this legislation, the NHTSA finalized standards requiring vehicles to be equipped with rearview camera systems in order to ensure rearward visibility to prevent children from being struck by backing vehicles and mandating the use of brake shift interlock systems.

In January 2011, legislation to improve the safety of the visually impaired and other pedestrians, the “Pedestrian Safety Enhancement Act of 2010,” was passed. The legislation requires the NHTSA to draft and finalize standards for warning sounds of electric and hybrid vehicles. The NHTSA formally proposed minimum sound standards in January 2013, and the standards are currently in the regulatory review process.

In response to the unintended acceleration issue in 2010, the NHTSA has started to examine and implement measures to strengthen safety standards, such as mandating brake override systems, mandating Event Data Recorders, or EDR, and standardizing push-start switches.

In August 2014, the NHTSA initiated rulemaking that would propose to create a new safety standard to require new passenger and light truck vehicles to have dedicated short-range communication (DSRC) units that enable Vehicle-to-Vehicle (V2V) communication.

In January 2015, the NHTSA proposed to amend safety standards regarding child restraint anchorage systems to improve the ease of use, and in March 2015, the NHTSA proposed to amend a safety standard regarding seat belt assembly anchorages to specify an alternative test procedure.

 

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European Standards

In Europe, following the White Paper “European Transport Policy for 2010: Time to Decide” adopted in 2001, which targets halving the number of deaths caused by road accidents by 2010, various groups in different fields have conducted research and analyses.

The European Commission and the ACEA have established CARS 21, a High Level Group that aims to strengthen the competitiveness of the European automotive industry, and examined the recommendations with the legal framework of a decade later in mind. The CARS 21 final report issued at the end of 2005 contains recommendations relating to the simplification of legislation and road safety, among other issues, and indicates a Ten Year Roadmap, and in February 2007, the European Commission issued a communication regarding the CARS 21 final report, in which concrete action plans for future legislation were announced, and much legislation has already proceeded.

In 2009, based on the CARS 21 final report released in February 2007, the European Commission enacted a new regulation and established a simplified framework, repealing more than 50 existing European Commission directives regarding vehicle safety other than pedestrian protection, and replacing them with a single regulation aimed at incorporating the UN regulations. The new regulation also requires the adoption of advanced safety systems. The EU Regulation directly incorporating the UN Regulations commenced in 2012 and requires advanced safety systems, including requiring new type vehicles to have electronic stability control systems from 2011, to introduce regulations relating to low rolling resistance tires in 2013, to require tire pressure monitoring systems starting in 2012 and to require heavy vehicles to have advanced emergency braking systems and lane departure warning systems from 2013. All of the technical requirements for these advanced safety systems were discussed in the United Nations (the technical requirements for advanced emergency braking in medium-duty passenger vehicles are under consideration by the United Nations). Further, application of UN regulation came into force from November 2012 for new vehicle types and from 2014 for all new vehicles sold in the EU market. The new mandatory measures include electric car safety requirements and gear shift indicators.

In October 2010, CARS 21 was resumed in order to proceed with the realization of the “2020 Strategy” (CARS 2020) by the European Commission that aims for high-level, sustainable and comprehensive growth, and the CARS 21 final report was issued in June 2012. The final report addresses issues facing the widespread adoption of electric vehicles, including charging infrastructure in the EU, establishing battery requirements, adopting seat belt reminder devices for all seats, connection of alcohol interlock devices to vehicles, adopting speed management devices, establishing safety requirements for micro urban mobility, strengthening safety regulation to protect the vulnerable from collisions and the possibility of regulation in connection with preventative safety technology. In November 2012, “CARS 2020: Action Plan for a competitive and sustainable automotive industry in Europe” was issued based on the final report. The action plan is built on four core concepts, and within these concepts it discusses enhancement of road safety, improving the market conditions within the EU and the implementation of smart regulations. Each item is given a target date and is to be monitored going forward. A stakeholder hearing on the implementation of the CARS 2020 action plan took place in February 2014 in Brussels in preparation for the Commission’s final report, which the Commission published in October 2014. The report indicates the direction for future short and medium term actions.

On the widespread adoption of emergency call systems (“eCall”), the European Commission concluded that a legislative approach is effective as a result of the impact assessment by the Commission in 2011. Accordingly, eCall is expected to become mandatory from the end of March 2018 for light-duty passenger vehicles and light-duty commercial vehicles using the framework of “Whole Vehicle Type Approval.” Amended rules relating to WVTA are scheduled to take effect. Regulations setting forth the technical standards of eCall have been proposed, with further revisions possible. Rulemaking regarding eCall has also been proposed by the United Nations, and is also currently being considered. In addition, in the event the installation of eCall becomes mandatory in the EU, it will be necessary at the same time to build infrastructure such as communication bases in the different member states of the EU, and rulemaking regarding eCall is expected to also cover the creation of such infrastructure.

 

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The possibility of regulation in connection with ITS and other advanced driver assist systems for 2020 and beyond is also under consideration. In addition, the adoption of Advanced Emergency Breaking systems and lane departure warning systems on light vehicles, Advanced Emergency Breaking systems which detect pedestrians, and the adoption of blind spot monitors, reverse system which detect pedestrians, reverse cameras, Evert Data Recorders on trucks and alcohol interlock devices are also expected to be considered. In March 2015, the European Commission published a final report on the benefit and feasibility of a range of new safety technologies.

From April 2009, the applicable scope for Whole Vehicle Type Approval (“WVTA”) was extended to cover all vehicle categories. Furthermore, an amendment was issued in 2011 which clarifies the categories (especially those for passenger and light-duty commercial vehicles). Through this amendment, the criteria for light-duty commercial vehicles was clarified, and there is a possibility that vehicles currently classified as light-duty commercial vehicles become classified as passenger vehicles. In addition, revisions to EU regulations related to vehicle mass and dimensions were issued in 2012. These revisions clarified the mass, criteria and definitions which comprise the base specifications for vehicles. In 2015, WVTA is scheduled to be amended for further enhancement and improvement together with the revision of overall requirements based on a comprehensive review of the requirements for vehicle structures, including the strengthening of the market surveillance requirements and general product safety requirements, as well as revisions to the vehicle type definitions.

United Nations Regulations

The 1958 Agreement (“Agreement Concerning the Adoption of Uniform Technical Prescriptions for Wheeled Vehicles, Equipment and Parts which can be Fitted and/or be Used on Wheeled Vehicles and the Conditions for Reciprocal Recognition of Approvals Granted on the Basis of These Prescriptions”) was originally based on the European regulations, but the UN Regulations are developing as an established international law, and Japan, Thailand, Malaysia and Egypt as well as other countries outside the EU have become members after the amendment in 1995, and many other countries are expected to join in the future. The countries bound by the 1958 Agreement have incorporated the UN Regulations into their own domestic policies (The EU and Japan have directly included the UN Regulations into their domestic legislations). While automotive parts and vehicle systems are regulated by the UN regulations, there are currently no regulations with respect to International Whole Vehicle Type Approval (IWVTA) such as those in Europe. Japan proposed legislation establishing WVTA under the United Nations in 2016, and the matter is being deliberated by the United Nations. If IWVTA is established, integration of global approval administrative regulations of each country and simplification of vehicle construction regulations are expected but IWVTA, if finalized, would only be partially applicable at the time of its establishment in 2016 and deliberation toward the full application would continue after establishment.

An amendment to the 1958 Agreement is being considered with an aim towards implementation in March 2016. Such amendment will increase the flexibility of the regulations, enabling approvals to be granted for the old series of regulations according to the needs of the signatory countries to the 1958 Agreement. The percentage of required votes for voting in connection with proposed UN regulations will also be considered, and if the percentage of required votes is increased from the current two-thirds, the 1958 Agreement is expected to become fairer. Such amendment is expected to make the 1958 Agreement more attractive to countries that are not currently party to the 1958 Agreement, and aims to increase the number of signatory countries.

The 1998 Agreement (“Agreement Concerning the Establishing of Global Technical Regulations for Wheeled Vehicles, Equipment and Parts which can be Fitted and/or be Used on Wheeled Vehicles”) is a U.S.-led agreement that aims to harmonize technical regulations, and defines each regulation as a Global Technical Regulation (“GTR”). At present, there are 16 GTRs in total. Currently, numerous provisions are under discussion in order to include more regulations. The countries bound by the 1998 agreement are required to incorporate the GTRs into their domestic laws. The parties to the 1998 agreement include the United States, Canada, China and India, which are not parties to the 1958 agreement, so GTRs will also influence those countries.

 

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Chinese Standards

Vehicle safety regulations in China were drafted with reference to the UN regulations and cover almost the same matters as the UN regulations. However, these regulations also include unique provisions which take into account the distinctive characteristics of the Chinese market environment and the rules differ from the latest UN regulations. As for future safety regulations, standards related to airbag technologies and standards related to batteries, motors and the charging of electric vehicles are currently being planned.

Standards of Other Countries

Vehicle safety regulations in Canada are basically similar to those in the United States. In regions outside of North America, adoption and conformity with the UN regulations is widespread, including in those countries without automotive manufacturing industries. The list of signatories to the 1958 agreement of the United Nations continues to grow, and now includes Korea, Thailand and Malaysia in Asia, as well as Russia, South Africa, Egypt and Morocco. In addition, ASEAN, pursuant to its economic community mission, has decided to adopt the UN regulations as its regional agreement. Latin America, India and countries in the Middle East that are not signatories to the 1958 agreement of the United Nations are also moving forward to conform their respective regulations to the UN regulations or to adopt new regulations consistent with the UN regulations.

Environmental Matters

Japanese Standards

Toyota’s automotive operations in Japan are subject to substantial environmental regulation under laws such as the Air Pollution Law, the Water Pollution Control Law, the Noise Regulation Law and the Vibration Control Law. Under these laws, if a business entity establishes or alters any facility that is regulated by these laws, the business entity is required to give prior notice to regulators, and if a business entity discharges, uses or stores substances that are environmental burdens or causes noise or vibration from such facility, the business entity is also required to comply with the applicable standards. Toyota is also subject to local regulations, which in some cases impose more stringent obligations than the Japanese central government requirements. Toyota has complied with these regulations. Under the Waste Disposal and Public Cleaning Law, producers of industrial waste must dispose of industrial waste in the manner prescribed in the Waste Disposal and Public Cleaning Law. Toyota has also complied with the Waste Disposal and Public Cleaning Law.

The Soil Contamination Countermeasures Law of Japan requires that land owners conduct contamination testing and submit a report at the time they cease to use hazardous substances, such as in connection with the sale of a former factory, or if there is a possibility of health hazards due to land contamination. If it is found that land contamination exceeds a certain level, the relevant prefectural authority designates the area considered to be contaminated and orders the land owner to take necessary measures. Toyota is suitably managing its land in accordance with the same law. In addition, under the Law on Recycling of End-of-Life Vehicles, vehicle manufacturers are required to take back and recycle specified materials (automotive shredder residues, air bags and fluorocarbons) of end-of-life vehicles and the provisions concerning such obligations of vehicle manufacturers became effective in January 2005. Toyota has coordinated with relevant parties to establish a vehicle take-back and recycle system throughout Japan. As a result, in fiscal 2015, Toyota achieved a recycling/recovery rate of 97% for automobile shredder residue (the legal requirement being 50%) and 94% for air bags (the legal requirement being 85%) and reached the targets set forth in this law.

U.S. Standards

Toyota’s assembly, manufacturing and other operations in the United States are subject to a wide range of environmental regulation under the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Pollution Prevention Act and the Toxic Substances Control Act. Toyota is also subject to a variety of state legislation that parallels, and in some cases imposes more stringent obligations than, federal

 

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requirements. These federal and state regulations impose severe restrictions on air- and water-borne discharges of pollution from Toyota facilities, the handling of hazardous materials at Toyota facilities and the disposal of wastes from Toyota operations. Toyota is subject to many similar requirements in its operations in Europe, Canada and other countries.

Pursuant to the Clean Air Act, the EPA has promulgated National Ambient Air Quality Standards (“NAAQS”) for six “criteria” pollutants, including for ozone and particulate matter. The Clean Air Act requires that the EPA review and possibly revise these NAAQS every five years. On December 14, 2012, the EPA made the annual health-based particulate matter NAAQS more stringent, and the EPA is scheduled to complete its review and possible revision of the ozone NAAQS in 2015. The revised annual health-based particulate matter NAAQS, as well as any future NAAQS revisions, could lead to additional pollution control requirements on the industry, including on Toyota’s manufacturing operations.

Toyota expects growing pressure in the next several years to further reduce emissions from motor vehicles and manufacturing facilities.

European Standards

In October 2000, the European Union brought into effect a directive that requires member states to promulgate regulations implementing the following:

 

   

automotive manufacturers shall bear all or a significant part of the costs for taking back end-of-life vehicles sold after July 1, 2002 and dismantling and recycling those vehicles. Beginning January 1, 2007, this requirement became applicable to vehicles sold before July 1, 2002 as well;

 

   

automotive manufacturers may not use certain hazardous materials in vehicles sold after July 1, 2003;

 

   

certified vehicle models sold after December 15, 2008 shall be re-usable and/or recyclable to a minimum of 85% by weight per vehicle and shall be re-usable and/or re-use as material or energy to a minimum of 95% by weight per vehicle; and

 

   

end-of-life vehicles must meet actual re-use and/or recycling of 80% and re-use and/or recovery of 85%, respectively, of vehicle weight by 2006, rising respectively to 85% and 95% by 2015.

Laws to implement this directive came into effect in each of the EU member states. Currently, there are uncertainties surrounding the implementation of the applicable regulations in different EU member states, particularly regarding automotive manufacturer responsibilities and resultant expenses that may be incurred.

In addition, under this directive, the member states must take measures to ensure that car manufacturers, distributors and other auto-related economic operators establish adequate used vehicle collection and treatment facilities and to ensure that hazardous materials and recyclable parts are removed from vehicles prior to shredding. This directive impacts Toyota’s vehicles sold in the EU. Toyota accommodated, in offering its products, any measures the EU member states chose to implement in order to comply with this directive.

The EU has also issued directives and made proposals relating to the following subjects on environmental matters:

 

   

emission standards that include a framework permitting member states to introduce fiscal incentives to promote early compliance; and

 

   

reform of rules governing automotive distribution and service. The block exemption on distribution has been amended so that dealers may engage in cross-border sales actively within the EU and open additional facilities for sales and services. Additionally, dealers may no longer be required by manufacturers to operate both sales and service facilities side by side.

 

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In December 2011, the European Commission proposed to reduce noise produced by cars, vans, buses, coaches and light and heavy trucks. As proposed, noise limit values would ultimately be lowered by four A-weighted decibels for vehicles other than trucks, and three A-weighted decibels for trucks. Compliance would be achieved in three steps over a 10 to 12 year period. In May 2014, a regulation adopting the proposal was published in final form in the EU Official Journal.

Toyota believes that its operations are materially in compliance with environmental regulatory requirements concerning its facilities and products in each of the markets in which it operates. Toyota continuously monitors these requirements and takes necessary operational measures to ensure that it remains in material compliance with all of these requirements.

Toyota believes that environmental regulatory requirements have not had a material adverse effect on its operations. However, compliance with environmental regulations and standards has increased costs and is expected to lead to higher costs in the future. Therefore, Toyota recognizes that effective environmental cost management will become increasingly important. Moreover, innovation and leadership in the area of environmental protection are becoming increasingly important to remain competitive in the market. As a result, Toyota has proceeded with the development and production of environmentally friendly technologies, such as hybrid vehicles, fuel cell vehicles and high fuel efficiency, low emission engines.

In addressing environmental issues, based on an assessment of the environmental impact of its products through their life cycles, Toyota, as a manufacturer, strives to take all possible measures in each life stage of a product, from development through production, sales, disposal and recycling, and continues to work toward technological innovations to make efficient use of resources and to reduce the burden on the environment.

Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Securities Exchange Act of 1934, as amended. Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Pursuant to Section 13(r), Toyota is disclosing the following information.

During the fiscal year ended March 31, 2015:

 

   

Toyota Tourist International, Inc., a majority-owned subsidiary of Toyota, obtained three visas from the Iranian embassy in Japan in connection with certain travel arrangements.

 

   

Tokyo Toyota Motor Co., Ltd., a wholly-owned indirect subsidiary of Toyota, performed maintenance services for Toyota vehicles owned by the Iranian embassy in Japan.

Altogether, the above activities contributed an insignificant amount in gross revenues and net profit to Toyota. Toyota believes that none of the above transactions subject it or its affiliates to U.S. sanctions. Toyota Tourist International intends to cease conducting the activities described above. Tokyo Toyota Motor may, if requested by the Iranian embassy in Japan, continue to perform maintenance services relating to vehicles owned by such embassy, in accordance with applicable laws and regulations, in order to honor Toyota’s commitment to the safety and reliability of its vehicles.

Research and Development

The overriding goals of Toyota’s technology and product development activities are to minimize the negative aspects of cars, such as traffic accidents and impact on the environment, and maximize the positive aspects, such as driving pleasure, comfort and convenience. By achieving these sometimes conflicting goals to a

 

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high degree, Toyota seeks to open the door to the automobile society of the future. To ensure efficient progress in research and development activities, Toyota coordinates and integrates all research and development phases, from basic research and advanced research to forward-looking technology and product development. With respect to long-term basic research in areas such as energy, the environment, information technology, telecommunications and materials, projects are regularly reviewed and evaluated in consultation with outside experts to achieve research and development cost control. With respect to forward-looking, leading-edge technology and product development, Toyota establishes cost-performance benchmarks on a project-by-project basis to ensure efficient development investment.

The chart below provides an overview of Toyota’s R&D at each phase.

 

Phase

  

Description

Basic research   

Phase to discover development theme

 

Research on basic vehicle-related technology

Forward-looking and leading-edge technology development   

Phase requiring technological breakthroughs such as components and systems

 

Development of leading-edge components and systems that are more advanced than those of competitors

Product development   

Phase mainly for development of new models

 

Development of all-new models and existing-model upgrades

Toyota is promoting research and development into the early commercialization of next generation environmentally-friendly, energy-efficient and safe-vehicle technology and is making efforts to produce vehicles that are friendly to people and the environment by focusing on the following areas:

 

   

further improvements in hybrid technologies, including in functions and cost, and contributions to the environment through advancements;

 

   

improvement in gasoline engine fuel economy technology as well as improvement in technology in connection with more stringent emission standards;

 

   

promoting improvements in functions and fuel economy of clean diesel engines;

 

   

development of electric vehicles, fuel cell vehicles and other alternative fuel vehicles; and

 

   

development of technology designed to promote driving and vehicle safety.

For a detailed discussion of the company’s research and development infrastructure, see “Operating and Financial Review and Prospects — Research and Development, Patents and Licenses”.

Components and Parts, Raw Materials and Sources of Supply

Toyota purchases parts, components, raw materials, equipment and other supplies from multiple competing suppliers located around the world. Toyota works closely with its suppliers to pursue the most optimal purchasing possible. Toyota believes that this policy encourages technological innovation, cost reduction and other measures to strengthen its vehicle competitiveness. No single supplier accounted for more than 5% of Toyota’s consolidated purchases of raw materials and parts during fiscal 2015, except for Denso Corporation, an affiliated company of Toyota, which supplied approximately 10% of Toyota’s purchases during fiscal 2015. Toyota plans to continue purchases based on the same principle and does not anticipate any difficulty in obtaining stable supplies in the foreseeable future.

Because Toyota had more than 50 overseas operations in 28 countries and regions as of December 31, 2014, procurement of parts and components is being carried out not only locally in the country of the production site but also from third countries, and the distribution network has become increasingly more complex. In order to

 

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realize timely and efficient distribution at the same time as keeping total costs at a minimum, Toyota is promoting efforts to optimize each stage of the supply-chain. To this end, Toyota has developed a standardized system of global distribution and is supporting the operation of the system at each production base. The use of the global distribution system aims at implementing parts procurement that meets changes in vehicle production in a timely manner. These varying efforts, combined together, have led to maximized customer satisfaction, as well as to building a good working relationship with Toyota’s suppliers.

Toyota aims to share information and collaborate among the procurement divisions in each of the regions throughout the world in order to procure parts and materials from the most competitive suppliers among Toyota factories located in various areas worldwide. At the same time, Toyota carries out streamlining efforts undertaken together with suppliers in each country in order to achieve sustainable growth. In particular, Toyota has been working on a cost reduction measure referred to as RR-CI activities. RR-CI activities aim to improve competitive power through thorough localization, sharing parts and components and manufacturing reforms together with producing products matching customers’ needs in each region and vehicle category. Toyota is advancing RR-CI activities in conjunction with the TNGA. Urgent VA (value analysis) Activities began in fiscal 2008 and developed into All-Toyota VA Activities at the beginning of fiscal 2010 as part of Toyota’s ongoing unified cost reduction effort with suppliers for the various types of vehicles already on sale. In addition, Toyota has been working on the TNGA to achieve sweeping advances in basic performance and product appeal of parts and units as well as seeking cost reductions by sharing more parts and implementing manufacturing reforms.

In fiscal 2015, market prices of raw materials such as steel generally remained at the same level or slightly decreased in comparison to the prior fiscal year due in part to the depreciation of the yen despite downward pressure due to decreased demand in China. The direction of prices is still unforeseeable. Toyota is continually promoting cost reduction efforts, such as reducing the amount of raw materials it uses.

Toyota’s ability to continue to obtain supplies in an efficient manner is subject to a number of factors, some of which are not in Toyota’s control. These factors include the ability of its suppliers to provide a continued source of supplies and the effect on Toyota of competition by other users in obtaining the supplies.

Intellectual Property

Toyota holds numerous Japanese and foreign patents, trademarks, design patents and some utility model registrations. It also has a number of applications pending for Japanese and foreign patents. While Toyota considers all of its intellectual property to be important, it does not consider any one or group of patents, trademarks, design patents or utility model registrations to be so important that their expiration or termination would materially affect Toyota’s business.

 

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Capital Expenditures and Divestitures

Set forth below is a chart of Toyota’s principal capital expenditures between April 1, 2012 and March 31, 2015, the approximate total costs of such activity, as well as the location and method of financing of such activity, presented on a “by subsidiary” basis and as reported in Toyota’s annual Japanese securities report filed with the director of the Kanto Local Finance Bureau.

 

Description of Activity

   Total Cost
(Yen in billions)
     Location    Primary
Method of
Financing

Japan

        

Investment primarily in technology and products by
Toyota Motor Corporation  

  

 

 

 

692.9

 

  

  

 

Japan

  

 

Internal funds,

financing

from issuance
of bonds, etc.

Investment primarily in technology and products by
Hino Motors, Ltd.  

     93.4       Japan    Internal funds

Investment primarily in technology and products by
Daihatsu Motor Co., Ltd.  

     88.7       Japan    Internal funds

Investment primarily in technology and products by
Toyota Auto Body Co., Ltd.  

     70.3       Japan    Internal funds

Investment primarily in technology and products by
Primeearth EV Energy Co., Ltd.  

     56.9       Japan    Borrowings

Outside of Japan

        

Investment primarily to promote localization by
Toyota Motor Thailand Co., Ltd.  

     133.8       Thailand    Internal funds

Investment primarily to promote localization by
Toyota Motor Manufacturing Canada Inc.  

     113.8       Canada    Internal funds

Investment primarily to promote localization by
P.T. Toyota Motor Manufacturing Indonesia  

     94.5       Indonesia    Internal funds

Investment primarily to promote localization by
Toyota Motor Manufacturing, Kentucky, Inc.  

     93.8       United States    Internal funds

Investment primarily to promote localization by
Toyota Argentina S.A.  

     67.4       Argentina    Internal funds

Investment primarily to promote localization by
Toyota do Brasil Ltda.  

     66.5       Brazil    Internal funds

Investment primarily to promote localization by
Toyota Motor Europe NV/SA  

     65.1       Belgium    Internal funds

Investment primarily to promote localization by
Toyota Motor Manufacturing, Indiana, Inc.  

     63.6       United States    Internal funds

Investment primarily to promote localization by
Siam Toyota Manufacturing Co., Ltd.  

     54.8       Thailand    Internal funds

Investment primarily in leased automobiles by
Toyota Motor Credit Corporation  

  

 

 

 

4,415.7

 

  

  

 

United States

  

 

Internal funds,

financing
from issuance
of bonds, etc.

 

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Set forth below is information with respect to Toyota’s material plans to construct, expand or improve its facilities between April 2015 and March 2016, presented on a “by subsidiary” basis and as reported in Toyota’s annual Japanese securities report filed with the director of the Kanto Local Finance Bureau.

 

Description of Activity

   Total Cost
(Yen in billions)
    

Location

  

Primary
Method of

Financing

Japan

        

Investment primarily in manufacturing facilities by
Toyota Motor Corporation

  

 

 

 

300.0

 

  

  

 

Japan

  

 

Internal funds

Investment primarily in manufacturing facilities by
Hino Motors, Ltd.

    

 

59.0

 

  

 

  

Japan

 

  

Internal funds and borrowings

Outside of Japan

        

Investment primarily in manufacturing facilities by
Toyota Motor Thailand Co., Ltd.

     61.6       Thailand    Internal funds

Investment primarily in manufacturing facilities by
Toyota Motor Manufacturing, Kentucky, Inc.

     52.5       United States    Internal funds

Investment primarily in manufacturing facilities by
P.T. Toyota Motor Manufacturing Indonesia

    

 

51.9

 

  

 

  

Indonesia

 

  

Internal funds and borrowings

Investment primarily in manufacturing facilities by
Toyota Motor Manufacturing Canada Inc.

     42.9       Canada    Internal funds

Set forth below is additional information with respect to Toyota’s material plans to construct, expand or improve its facilities.

Toyota plans to increase production capacity at its Argentina factory from 90 thousand units to 140 thousand units annually during 2015 and 2016, and at its Sorocaba Plant in Brazil from 70 thousand units to 110 thousand units annually in 2016. Toyota also plans to build a new plant in Mexico in 2019, and to complete construction of a third plant in Guangzhou in China in 2017.

To enhance production capacity of auto parts, Toyota plans to construct a plant for hybrid vehicle battery production in China in October 2015 and a plant for passenger vehicle engine production in Indonesia and Brazil in 2016.

Toyota does not collect information on the amount of expenditures already paid for each plant under construction because Toyota believes that it is difficult and it would require unreasonable effort or expense to identify and categorize each expenditure item with reasonable accuracy as past and future expenditures. Toyota’s construction projects consist of numerous expenditures, each of which is continually being adjusted and incurred in variable and constantly changing amounts as part of the overall work-in-progress.

Seasonality

Toyota does not consider its seasonality material in the sense of significantly higher sales during any certain period of the year as compared to other periods of the year.

Legal Proceedings

From time-to-time, Toyota issues vehicle recalls and takes other safety measures including safety campaigns relating to its vehicles. In 2009 and 2010, Toyota issued safety campaigns related to the risk of floor mat

 

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entrapment of accelerator pedals and vehicle recalls related to slow-to-return or sticky accelerator pedals. Following some of these recalls and other safety measures, a large number of putative class actions and individual lawsuits were brought against Toyota, alleging that certain Toyota, Lexus and Scion vehicles contained defects that led to unintended acceleration. The class actions and individual lawsuits related to economic loss were resolved by a settlement which was approved by the United States District Court for the Central District of California in July 2013, and the settlement of those claims is final.

There were also several government investigations related to unintended acceleration. The last of these to be resolved was the investigation initiated by the U.S. Attorney for the Southern District of New York in February 2010. In March 2014, Toyota announced that it entered into a deferred prosecution agreement (“DPA”) with the U.S. Attorney’s Office to resolve its investigation. The DPA provided for a $1.2 billion payment to the U.S. government, and Toyota recorded a $1.2 billion charge against earnings in fiscal 2014. Pursuant to the DPA, an independent monitor was appointed to review and assess policies and procedures relating to Toyota’s safety communications process, its process for sharing vehicle accident information internally and its process for preparing and sharing certain technical reports.

In 2010, there was a recall related to the software program that controls the antilock braking system in certain models including the Prius, which led to putative class action lawsuits on behalf of owners of recalled vehicles and owners of vehicles which were not recalled. These cases were consolidated into two actions, one in the United States District Court for the Central District of California and one in the Los Angeles County Superior Court. In January 2013, the United States District Court for the Central District of California denied the plaintiff’s motion for class certification and granted summary judgment in Toyota’s favor resolving the claims related to the recalled vehicles, and in July 2013, the United States District Court for the Central District of California denied the plaintiff’s motion for class certification and granted summary judgment in Toyota’s favor regarding the claims related to the non-recalled vehicles. Proceedings involving the recalled vehicles in both courts have concluded. The ruling of the United States District Court for the Central District of California related to the non-recalled vehicles has been appealed.

Product liability personal injury claims related to the floor mat entrapment of accelerator pedals and slow-to-return or sticky accelerator pedal cases are pending in several consolidated cases in federal and state courts, as well as in individual cases in various other states. The judges in the consolidated federal action and the consolidated California state action have approved an Intensive Settlement Process (“ISP”) for such claims in those actions. Under the ISP, all individual claims within the consolidated actions are stayed pending completion of a process to assess whether they can be resolved on terms acceptable to the parties. Cases not resolved after completion of the ISP will then proceed to discovery and toward trial. Toyota has offered the ISP process to plaintiffs in other consolidated actions and in individual cases, as well.

Toyota has been named as a defendant in 27 economic loss class action lawsuits, which have been consolidated for pretrial purposes in the United States District Court for the Southern District of Florida, arising out of allegations that Takata airbags installed in Toyota vehicles are defective. These lawsuits are at a very early stage.

Toyota also has various other legal actions, other governmental proceedings and other claims pending against it, including other product liability claims in the United States.

Beyond the amounts accrued with respect to all aforementioned matters, Toyota is unable to estimate a range of reasonably possible loss, if any, for the pending legal matters because (i) many of the proceedings are in evidence gathering stages, (ii) significant factual issues need to be resolved, (iii) the legal theory or nature of the claims is unclear, (iv) the outcome of future motions or appeals is unknown and/or (v) the outcomes of other matters of these types vary widely and do not appear sufficiently similar to offer meaningful guidance. Based upon information currently available to Toyota, however, Toyota believes that its losses from these matters, if any, beyond the amounts accrued, would not have a material adverse effect on Toyota’s financial position, results of operations or its cash flows.

 

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4.C ORGANIZATIONAL STRUCTURE

As of March 31, 2015, Toyota Motor Corporation had 261 Japanese subsidiaries and 280 overseas subsidiaries. The following table sets forth for each of Toyota Motor Corporation’s principal subsidiaries, the country of incorporation and the percentage ownership interest and the voting interest held by Toyota Motor Corporation.

 

Name of Subsidiary

      Country of
Incorporation
  Percentage
Ownership
Interest
    Percentage
Voting
Interest
 

Toyota Financial Services Corporation  

    Japan     100.00        100.00   

Hino Motors, Ltd.  

    Japan     50.21        50.36   

Toyota Motor Kyushu, Inc.  

    Japan     100.00        100.00   

Daihatsu Motor Co., Ltd.  

    Japan     51.33        51.50   

Toyota Finance Corporation  

    Japan     100.00        100.00   

Toyota Auto Body Co., Ltd.  

    Japan     100.00        100.00   

Toyota Motor East Japan, Inc.  

    Japan     100.00        100.00   

Toyota Motor Engineering & Manufacturing North America, Inc.  

    United States     100.00        100.00   

Toyota Motor Manufacturing, Kentucky, Inc.  

    United States     100.00        100.00   

Toyota Motor North America, Inc.  

    United States     100.00        100.00   

Toyota Motor Credit Corporation  

    United States     100.00        100.00   

Toyota Motor Manufacturing, Indiana, Inc.  

    United States     100.00        100.00   

Toyota Motor Manufacturing, Texas, Inc.  

    United States     100.00        100.00   

Toyota Motor Sales, U.S.A., Inc.  

    United States     100.00        100.00   

Toyota Motor Manufacturing, Mississippi, Inc.  

    United states     100.00        100.00   

Toyota Motor Manufacturing Canada Inc.  

    Canada     100.00        100.00   

Toyota Credit Canada Inc.  

    Canada     100.00        100.00   

Toyota Canada Inc.  

    Canada     51.00        51.00   

Toyota Motor Europe NV/SA  

    Belgium     100.00        100.00   

Toyota Motor Manufacturing France S.A.S.  

    France     100.00        100.00   

Toyota Kreditbank GmbH  

    Germany     100.00        100.00   

Toyota Motor Finance (Netherlands) B.V.  

    Netherlands     100.00        100.00   

Toyota Motor Manufacturing (UK) Ltd.  

    United Kingdom     100.00        100.00   

Toyota Financial Services (UK) PLC  

    United Kingdom     100.00        100.00   

Toyota (GB) PLC  

    United Kingdom     100.00        100.00   

OOO “TOYOTA MOTOR”  

    Russia     100.00        100.00   

Toyota Motor (China) Investment Co., Ltd.  

    China     100.00        100.00   

Toyota Motor Finance (China) Co., Ltd.  

    China     100.00        100.00   

P.T. Toyota Motor Manufacturing Indonesia  

    Indonesia     95.00        95.00   

Toyota Motor Asia Pacific Pte Ltd.  

    Singapore     100.00        100.00   

Kuozui Motors, Ltd.  

    Taiwan     70.00        70.00   

Toyota Leasing (Thailand) Co., Ltd.  

    Thailand     86.84        86.84   

Toyota Motor Thailand Co., Ltd.  

    Thailand     86.43        86.43   

Toyota Motor Asia Pacific Engineering and Manufacturing Co., Ltd.  

    Thailand     100.00        100.00   

Toyota Motor Corporation Australia Ltd.  

    Australia     100.00        100.00   

Toyota Finance Australia Ltd.  

    Australia     100.00        100.00   

Toyota Argentina S.A.  

    Argentina     100.00        100.00   

Toyota do Brasil Ltda.  

    Brazil     100.00        100.00   

Toyota South Africa Motors (Pty) Ltd.  

    South Africa     100.00        100.00   

 

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4.D PROPERTY, PLANTS AND EQUIPMENT

As of March 31, 2015, Toyota and its affiliated companies produced automobiles and related components through more than 50 overseas manufacturing organizations in 28 countries and regions besides Japan. The facilities are located principally in Japan, the United States, Canada, the United Kingdom, France, Turkey, Thailand, China, Taiwan, India, Indonesia, South Africa, Australia, Argentina and Brazil.

In addition to its manufacturing facilities, Toyota’s properties include sales offices and other sales facilities in major cities, repair service facilities and research and development facilities.

The following table sets forth information, as of March 31, 2015, with respect to Toyota’s principal facilities and organizations, all of which are owned by Toyota Motor Corporation or its subsidiaries. However, small portions, all under approximately 20%, of some facilities are on leased premises.

 

Facility or Subsidiary Name

 

Location

  Land Area
(thousand
square
meters)
    Number of
Employees
    Principal
Products or
Functions

Japan (Toyota Motor Corporation)

       

Tahara Plant

  Tahara City, Aichi Pref.     4,029         7,075         Automobiles

Higashi-Fuji Technical Center

  Susono City, Shizuoka Pref.     2,041         3,026         Research and
Development

Toyota Head Office and Technical Center

  Toyota City, Aichi Pref.     1,930         23,023        

Research and
Development

Motomachi Plant

  Toyota City, Aichi Pref.     1,594         7,249         Automobiles

Takaoka Plant

  Toyota City, Aichi Pref.     1,312         3,551         Automobiles

Tsutsumi Plant

  Toyota City, Aichi Pref.     937         4,615         Automobiles

Kamigo Plant

  Toyota City, Aichi Pref.     868         2,955         Automobile parts

Kinu-ura Plant

  Hekinan City, Aichi Pref.     836         3,042         Automobile parts

Honsha Plant

  Toyota City, Aichi Pref.     551         1,804         Automobile parts

Nagoya Office

  Nagoya City, Aichi Pref.     3         2,210         Office

Japan (Subsidiaries)

       

Daihatsu Motor Co., Ltd.

  Ikeda City, Osaka, etc.     8,409         11,446         Automobiles

Hino Motors, Ltd.

  Hino City, Tokyo, etc.     6,009         11,844         Automobiles

Toyota Auto Body Co., Ltd.

  Kariya City, Aichi Pref., etc.     2,254         11,338         Automobiles

Toyota Motor East Japan, Inc.

  Kurokawa-gun, Miyagi Pref., etc.     2,613         7,170         Automobiles

Toyota Motor Kyushu, Inc.

  Miyawaka City, Fukuoka Pref., etc.     1,940         7,411         Automobiles

Outside Japan (Subsidiaries)

       

Toyota Motor Manufacturing Canada, Inc.

  Ontario, Canada     4,756         6,683         Automobiles

Toyota Motor Thailand Co., Ltd.

  Samutprakan, Thailand     4,414         9,933         Automobiles

Toyota Motor Sales, U.S.A., Inc.

  California, U.S.A.     3,755         6,413         Sales facilities

Toyota Motor Manufacturing, Indiana, Inc.

  Indiana, U.S.A.     4,348         4,745         Automobiles

Toyota Motor Manufacturing, Kentucky, Inc.

  Kentucky, U.S.A.     5,161         7,442         Automobiles

 

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Toyota is constantly engaged in upgrading, modernizing and revamping the operations of its manufacturing facilities based on its assessment of market needs and prospects. To respond flexibly to fluctuations in demand in each of its production operations throughout the world, Toyota continually reviews and implements appropriate production measures such as revising takt time and adjusting days of operation. As a result, Toyota believes it would require unreasonable effort to track the exact productive capacity and the extent of utilization of each of its manufacturing facilities with a reasonable degree of accuracy.

As of March 31, 2015, property, plant and equipment having a net book value of approximately ¥192.3 billion was pledged as collateral securing indebtedness incurred by Toyota Motor Corporation’s consolidated subsidiaries. Toyota believes that there does not exist any material environmental issues that may affect the company’s utilization of its assets.

Toyota considers all its principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of its operations.

See “— Business Overview — Capital Expenditures and Divestitures” for a description of Toyota’s material plans to construct, expand or improve facilities.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A OPERATING RESULTS

Financial information discussed in this section is derived from Toyota’s consolidated financial statements that appear elsewhere in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

Overview

The business segments of Toyota include automotive operations, financial services operations and all other operations. Automotive operations are Toyota’s most significant business segment, accounting for 90% of Toyota’s total revenues before the elimination of intersegment revenues for fiscal 2015. Toyota’s primary markets based on vehicle unit sales for fiscal 2015 were: Japan (24%), North America (30%), Europe (10%) and Asia (17%).

Automotive Market Environment

The worldwide automotive market is highly competitive and volatile. The demand for automobiles is affected by a number of factors including social, political and general economic conditions; introduction of new vehicles and technologies; and costs incurred by customers to purchase or operate vehicles. These factors can cause consumer demand to vary substantially in different geographic markets and for different types of automobiles.

During fiscal 2015, although automotive markets have progressed in a steady manner, especially in the U.S., markets in some emerging countries have become stagnant and the Japanese market slowed down due to the consumption tax increase. Efforts toward building a low-carbon society through eco-cars and improvements in safety increased worldwide.

 

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The following table sets forth Toyota’s consolidated vehicle unit sales by geographic market based on location of customers for the past three fiscal years.

 

     Thousands of units  
     Year Ended March 31,  
     2013      2014      2015  

Japan

     2,279         2,365         2,154   

North America

     2,469         2,529         2,715   

Europe

     799         844         859   

Asia

     1,684         1,609         1,489   

Other*

     1,640         1,769         1,755   
  

 

 

    

 

 

    

 

 

 

Overseas total

     6,592         6,751         6,818   
  

 

 

    

 

 

    

 

 

 

Total

     8,871         9,116         8,972   
  

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East, etc.

During fiscal 2014, Toyota’s consolidated vehicle unit sales in Japan increased as compared with prior fiscal year, primarily as a result of the active introduction of new products and the efforts of dealers nationwide. For fiscal 2014, Toyota and Lexus brands’ market share excluding mini-vehicles was 46.7% and market share (including Daihatsu and Hino brands) including mini-vehicles was 42.2%. During fiscal 2015, Toyota’s consolidated vehicle unit sales in Japan decreased as compared with the prior fiscal year under the market downturn in Japan. However, with the efforts of dealers nationwide, for fiscal 2015, Toyota and Lexus brands’ market share excluding mini-vehicles was 46.0%, and market share (including Daihatsu and Hino brands) including mini-vehicles was 41.8%, each remaining at a high level as was in the prior fiscal year. Overseas consolidated vehicle unit sales increased during fiscal 2014 and 2015. During fiscal 2014, total overseas vehicle unit sales increased as a whole, due to increased sales in North America, Europe and other regions. During fiscal 2015, total overseas vehicle unit sales increased as a whole, due to increased sales in North America and Europe.

Toyota’s share of total vehicle unit sales in each market is influenced by the quality, safety, reliability, price, design, performance, economy and utility of Toyota’s vehicles compared with those offered by other manufacturers. The timely introduction of new or redesigned vehicles is also an important factor in satisfying customer needs. Toyota’s ability to satisfy changing customer preferences can affect its revenues and earnings significantly.

The profitability of Toyota’s automotive operations is affected by many factors. These factors include:

 

   

vehicle unit sales volumes,

 

   

the mix of vehicle models and options sold,

 

   

the level of parts and service sales,

 

   

the levels of price discounts and other sales incentives and marketing costs,

 

   

the cost of customer warranty claims and other customer satisfaction actions,

 

   

the cost of research and development and other fixed costs,

 

   

the prices of raw materials,

 

   

the ability to control costs,

 

   

the efficient use of production capacity,

 

   

the adverse effect on production due to the reliance on various suppliers for the provision of supplies,

 

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the adverse effect on market, sales and productions of natural calamities and interruptions of social infrastructure, and

 

   

changes in the value of the Japanese yen and other currencies in which Toyota conducts business.

Changes in laws, regulations, policies and other governmental actions can also materially impact the profitability of Toyota’s automotive operations. These laws, regulations and policies include those attributed to environmental matters, vehicle safety, fuel economy and emissions that can add significantly to the cost of vehicles. The European Union has enforced a directive on end-of-life vehicles. See “Information on the Company — Business Overview — Governmental Regulation, Environmental and Safety Standards” for a more detailed discussion of these laws, regulations and policies.

Many governments also impose local content requirements, impose tariffs and other trade barriers, and enact price or exchange controls that can limit an automaker’s operations and can make the repatriation of profits unpredictable. Changes in these laws, regulations, policies and other governmental actions may affect the production, licensing, distribution or sale of Toyota’s products, cost of products or applicable tax rates. From time-to-time when potential safety problems arise, Toyota issues vehicle recalls and takes other safety measures including safety campaigns relating to its vehicles. In 2009 and 2010, Toyota issued safety campaigns related to the risk of floor mat entrapment of accelerator pedals and vehicle recalls related to slow-to-return or sticky accelerator pedals. In 2010, Toyota announced a recall related to the software program that controls the antilock braking system in certain models including the Prius. The recalls and other safety measures described above have led to a number of claims and lawsuits against Toyota. For a more detailed description of these claims and lawsuits, see “Information on the Company — Business Overview — Legal Proceedings” and note 23 to the consolidated financial statements.

The worldwide automotive industry is in a period of global competition which may continue for the foreseeable future, and in general the competitive environment in which Toyota operates is likely to intensify. Toyota believes it has the resources, strategies and technologies in place to compete effectively in the industry as an independent company for the foreseeable future.

Financial Services Operations

The competition in the worldwide automobile financial services industry is intensifying. As competition increases, margins on financing transactions may decrease and market share may also decline as customers obtain financing for Toyota vehicles from alternative sources.

Toyota’s financial services operations mainly include loans and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value added service. Therefore, Toyota has expanded its network of finance subsidiaries in order to offer financial services in many countries.

Toyota’s competitors for retail financing and retail leasing include commercial banks, credit unions and other finance companies. Meanwhile, commercial banks and other captive automobile finance companies also compete against Toyota’s wholesale financing activities.

Toyota’s total finance receivables increased during fiscal 2015 mainly due to the favorable impact of fluctuations in foreign currency translation rates and an increase in retail receivables. Also, vehicles and equipment on operating leases, net increased during fiscal 2015 mainly due to the favorable impact of fluctuations in foreign currency translation rates and an increase in vehicles on operating leases in financial services subsidiaries in North America.

 

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The following table provides information regarding Toyota’s finance receivables and operating leases in the past two fiscal years.

 

     Yen in millions  
     March 31,  
     2014     2015  

Finance Receivables

    

Retail

     10,523,364        12,015,844   

Finance leases

     1,071,179        1,158,361   

Wholesale and other dealer loans

     2,875,650        3,124,079   
  

 

 

   

 

 

 
     14,470,193        16,298,284   

Deferred origination costs

     161,956        179,905   

Unearned income

     (754,539     (837,124

Allowance for credit losses

    

Retail

     (89,439     (109,316

Finance leases

     (30,585     (29,303

Wholesale and other dealer loans

     (26,358     (30,053
  

 

 

   

 

 

 
     (146,382     (168,672
  

 

 

   

 

 

 

Total finance receivables, net

     13,731,228        15,472,393   

Less – Current portion

     (5,628,934     (6,269,862
  

 

 

   

 

 

 

Noncurrent finance receivables, net

     8,102,294        9,202,531   
  

 

 

   

 

 

 

Operating Leases

    

Vehicles

     3,674,969        5,169,524   

Equipment

     129,029        163,195   

Less – Deferred income and other

     (94,438     (132,733
  

 

 

   

 

 

 
     3,709,560        5,199,986   

Less – Accumulated depreciation

     (808,764     (1,080,936

Less – Allowance for credit losses

     (7,220     (9,366
  

 

 

   

 

 

 

Vehicles and equipment on operating leases, net

     2,893,576        4,109,684   
  

 

 

   

 

 

 

Toyota’s finance receivables are subject to collectability risks. These risks include consumer and dealer insolvencies and insufficient collateral values (less costs to sell) to realize the full carrying values of these receivables. See discussion in “Critical Accounting Estimates — Allowance for Doubtful Accounts and Credit Losses” and note 10 to the consolidated financial statements.

Toyota continues to originate leases to finance new Toyota vehicles. These leasing activities are subject to residual value risk. Residual value losses could be incurred when the lessee of a vehicle does not exercise the option to purchase the vehicle at the end of the lease term. See discussion in “Critical Accounting Estimates — Investment in Operating Leases” and note 2 to the consolidated financial statements.

Toyota enters into interest rate swap agreements and cross currency interest rate swap agreements to convert its fixed-rate debt to variable-rate functional currency debt. A portion of the derivative instruments are entered into to hedge interest rate risk from an economic perspective and are not designated as a hedge of specific assets or liabilities on Toyota’s consolidated balance sheet and accordingly, unrealized gains or losses related to derivatives that are not designated as a hedge are recognized currently in operations. See discussion in “Critical Accounting Estimates — Derivatives and Other Contracts at Fair Value” and “Quantitative and Qualitative Disclosures about Market Risk” and notes 20 and 26 to the consolidated financial statements.

The fluctuations in funding costs can affect the profitability of Toyota’s financial services operations. Funding costs are affected by a number of factors, some of which are not in Toyota’s control. These factors

 

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include general economic conditions, prevailing interest rates and Toyota’s financial strength. Funding costs decreased during fiscal 2014 and 2015, mainly as a result of lower interest rates.

Toyota launched its credit card business in Japan in April 2001. As of March 31, 2014, Toyota had 12.7 million cardholders, an increase of 0.9 million cardholders compared with March 31, 2013. As of March 31, 2015, Toyota had 13.5 million cardholders, an increase of 0.8 million cardholders compared with March 31, 2014. Credit card receivables as of March 31, 2014 increased by ¥42.8 billion from March 31, 2013 to ¥380.9 billion. Credit card receivables as of March 31, 2015 was nearly equal to as of March 31, 2014 to ¥380.9 billion.

Other Business Operations

Toyota’s other business operations consist of housing (including the manufacture and sale of prefabricated homes), information technology related businesses (including information technology and telecommunications, intelligent transport systems and GAZOO) and other businesses.

Toyota does not expect its other business operations to materially contribute to Toyota’s consolidated results of operations.

Currency Fluctuations

Toyota is affected by fluctuations in foreign currency exchange rates. Toyota is exposed to fluctuations in the value of the Japanese yen against the U.S. dollar and the euro and, to a lesser extent, the Australian dollar, the Russian ruble, the Canadian dollar, the British pound, and others. Toyota’s consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.

Translation risk is the risk that Toyota’s consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in those countries in which Toyota does business compared with the Japanese yen. Even though the fluctuations of currency exchange rates to the Japanese yen can be substantial, and, therefore, significantly impact comparisons with prior periods and among the various geographic markets, the translation risk is a reporting consideration and does not reflect Toyota’s underlying results of operations. Toyota does not hedge against translation risk.

Transaction risk is the risk that the currency structure of Toyota’s costs and liabilities will deviate from the currency structure of sales proceeds and assets. Transaction risk relates primarily to sales proceeds from Toyota’s non-domestic operations from vehicles produced in Japan.

Toyota believes that the location of its production facilities in different parts of the world has significantly reduced the level of transaction risk. As part of its globalization strategy, Toyota has continued to localize production by constructing production facilities in the major markets in which it sells its vehicles. In calendar 2013 and 2014, Toyota produced 76.3% and 76.5%, respectively, of its non-domestic sales outside Japan. In North America, 73.7% and 74.4% of vehicles sold in calendar 2013 and 2014, respectively, were produced locally. In Europe, 69.4% and 73.7% of vehicles sold in calendar 2013 and 2014, respectively, were produced locally. Localizing production enables Toyota to locally purchase many of the supplies and resources used in the production process, which allows for a better match of local currency revenues with local currency expenses.

Toyota also enters into foreign currency transactions and other hedging instruments to address a portion of its transaction risk. This has reduced, but not eliminated, the effects of foreign currency exchange rate fluctuations, which in some years can be significant. See notes 20 and 26 to the consolidated financial statements for additional information.

 

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Generally, a weakening of the Japanese yen against other currencies has a positive effect on Toyota’s revenues, operating income and net income attributable to Toyota Motor Corporation. A strengthening of the Japanese yen against other currencies has the opposite effect. In fiscal 2014 and 2015, the Japanese yen was on average and at the end of the fiscal year weaker against the U.S. dollar in comparison to fiscal 2013 and 2014, respectively. In fiscal 2014 and 2015, the Japanese yen was on average weaker against the euro in comparison to fiscal 2013 and 2014, respectively. The Japanese yen was at the end of fiscal 2014 weaker against the euro in comparison to fiscal 2013, but was at the end of fiscal 2015 stronger against the euro in comparison to fiscal 2014. See further discussion in “Quantitative and Qualitative Disclosures about Market Risk — Market Risk Disclosures — Foreign Currency Exchange Rate Risk”.

During fiscal 2014 and 2015, the average exchange rate of the Japanese yen against the U.S. dollar and the euro compared to the prior fiscal year fluctuated as described above. The operating results excluding the impact of currency fluctuations described in “Results of Operations — Fiscal 2015 Compared with Fiscal 2014” and “Results of Operations — Fiscal 2014 Compared with Fiscal 2013” show results of net revenues obtained by applying the Japanese yen’s average exchange rate in the previous fiscal year to the local currency-denominated net revenues for fiscal 2014 and 2015, respectively, as if the value of the Japanese yen had remained constant for the comparable periods. Results excluding the impact of currency fluctuations year-on-year are not on the same basis as Toyota’s consolidated financial statements and do not conform with U.S. GAAP. Furthermore, Toyota does not believe that these measures are a substitute for U.S. GAAP measures. However, Toyota believes that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to investors regarding the operating performance on a local currency basis.

Segmentation

Toyota’s most significant business segment is its automotive operations. Toyota carries out its automotive operations as a global competitor in the worldwide automotive market. Management allocates resources to, and assesses the performance of, its automotive operations as a single business segment on a worldwide basis. Toyota does not manage any subset of its automotive operations, such as domestic or overseas operations or parts, as separate management units.

The management of the automotive operations is organized by function, with a manager having oversight responsibility for each function within the segment. Management assesses financial and non-financial data such as vehicle unit sales, production volume, market share information, vehicle model plans and plant location costs to allocate resources within the automotive operations.

Geographic Breakdown

The following table sets forth Toyota’s net revenues in each geographic market based on the country of location of the parent company or the subsidiaries that transacted the sale with the external customer for the past three fiscal years.

 

     Yen in millions  
     Year ended March 31,  
     2013      2014      2015  

Japan

     7,910,456         8,532,875         8,338,881   

North America

     6,167,821         7,938,615         9,430,450   

Europe

     2,003,113         2,614,070         2,690,803   

Asia

     4,058,629         4,475,382         4,531,178   

Other*

     1,924,173         2,130,969         2,243,209   

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

 

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Results of Operations — Fiscal 2015 Compared with Fiscal 2014

 

     Yen in millions  
     Year ended March 31,     2015 v. 2014 Change  
     2014     2015     Amount     Percentage  

Net revenues:

        

Japan

     14,297,470        14,403,867        106,397        0.7

North America

     8,117,099        9,677,596        1,560,497        19.2   

Europe

     2,724,959        2,848,294        123,335        4.5   

Asia

     4,877,672        4,981,240        103,568        2.1   

Other*

     2,336,641        2,449,238        112,597        4.8   

Intersegment elimination/unallocated amount

     (6,661,930     (7,125,714     (463,784     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     25,691,911        27,234,521        1,542,610        6.0   

Operating income:

        

Japan

     1,510,165        1,571,476        61,311        4.1   

North America

     326,052        584,519        258,467        79.3   

Europe

     58,228        81,118        22,890        39.3   

Asia

     395,737        421,782        26,045        6.6   

Other*

     42,568        111,509        68,941        162.0   

Intersegment elimination/unallocated amount

     (40,638     (19,840     20,798        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     2,292,112        2,750,564        458,452        20.0   

Operating margin

     8.9     10.1     1.2  

Income before income taxes and equity in earnings of affiliated companies

     2,441,080        2,892,828        451,748        18.5   

Net margin from income before income taxes and equity in earnings of affiliated companies

     9.5     10.6     1.1  

Equity in earnings of affiliated companies

     318,376        308,545        (9,831     (3.1

Net income attributable to Toyota Motor Corporation

     1,823,119        2,173,338        350,219        19.2   

Net margin attributable to Toyota Motor Corporation

     7.1     8.0     0.9  

 

* “Other” consists of Central and South America, Oceania, Africa and the Middle East.

Net Revenues

Toyota had net revenues for fiscal 2015 of ¥27,234.5 billion, an increase of ¥1,542.6 billion, or 6.0%, compared with the prior fiscal year. This increase mainly reflected the favorable impact of fluctuations in foreign currency translation rates of ¥962.2 billion and changes in vehicle unit sales and sales mix of ¥360.0 billion. Excluding the impact of changes in the Japanese yen values used for translation purposes of ¥962.2 billion, net revenues would have been ¥26,272.2 billion during fiscal 2015, a 2.3% increase compared with the prior fiscal year. The North America automotive market in calendar year 2014 increased by 5.8% compared with the prior calendar year due to the market in the U.S progressing in a steady manner. However the Japanese automotive market in fiscal 2015 decreased by 8.9% compared with the prior fiscal year due to the market downturn resulting from the consumption tax increase. Under these automotive market conditions, Toyota’s consolidated vehicle unit sales decreased by 1.6% compared with the prior fiscal year to 8,972 thousand vehicles.

 

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The table below shows Toyota’s net revenues from external customers by product category and by business.

 

     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Vehicles

     20,353,340         21,557,684         1,204,344        5.9

Parts and components for overseas production

     431,760         402,864         (28,896     (6.7

Parts and components for after service

     1,843,478         1,921,764         78,286        4.2   

Other

     1,105,277         1,123,912         18,635        1.7   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Automotive

     23,733,855         25,006,224         1,272,369        5.4   

All Other

     578,789         606,612         27,823        4.8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales of products

     24,312,644         25,612,836         1,300,192        5.3   

Financial services

     1,379,267         1,621,685         242,418        17.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     25,691,911         27,234,521         1,542,610        6.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Toyota’s net revenues include net revenues from sales of products, consisting of net revenues from automotive operations and all other operations, which increased by 5.3% during fiscal 2015 compared with the prior fiscal year to ¥25,612.8 billion, and net revenues from financial services operations which increased by 17.6% during fiscal 2015 compared with the prior fiscal year to ¥1,621.6 billion. Excluding the impact of changes in the Japanese yen values used for translation purposes of ¥864.5 billion, net revenues from sales of products would have been ¥24,748.2 billion during fiscal 2015, a 1.8% increase compared with the prior fiscal year. The increase in net revenues from sales of products is mainly due to changes in vehicle unit sales and sales mix. Excluding the impact of changes in the Japanese yen values used for translation purposes of ¥97.7 billion, net revenues from financial services operations would have been ¥1,523.9 billion during fiscal 2015, a 10.5% increase compared with the prior fiscal year.

The following table shows the number of financing contracts by geographic region at the end of fiscal 2015 and 2014, respectively.

 

     Number of financing contracts in thousands  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount      Percentage  

Japan

     1,813         1,873         60         3.3

North America

     4,791         5,046         255         5.3   

Europe

     879         910         31         3.6   

Asia

     1,167         1,382         215         18.4   

Other*

     688         741         53         7.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,338         9,952         614         6.6
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* “Other” consists of Central and South America, Oceania and Africa.

Geographically, net revenues (before the elimination of intersegment revenues) for fiscal 2015 increased by 0.7% in Japan, 19.2% in North America, 4.5% in Europe, 2.1% in Asia, and 4.8% in Other compared with the prior fiscal year. Excluding the impact of changes in the Japanese yen values used for translation purposes of ¥962.2 billion, net revenues in fiscal 2015 would have increased by 0.7% in Japan, 9.5% in North America, 4.4% in Europe and 7.2% in Other compared with the prior fiscal year, and would have decreased by 3.7% in Asia compared with the prior fiscal year.

 

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The following is a discussion of net revenues in each geographic market (before the elimination of intersegment revenues).

Japan

 

                                                                           
     Thousands of units  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Toyota’s consolidated vehicle unit sales*

     4,220         3,938         (282     (6.7 )% 

 

*  including number of exported vehicle unit sales

          
     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Net revenues:

          

Sales of products

     14,179,710         14,283,195         103,485        0.7

Financial services

     117,760         120,672         2,912        2.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     14,297,470         14,403,867            106,397          0.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues in Japan increased due primarily to the effect of changes in exchange rates related to export transactions, despite Toyota’s domestic and exported vehicle unit sales decreasing by 282 thousand vehicles compared with the prior fiscal year. For fiscal 2014 and 2015, exported vehicle unit sales were 1,854 thousand units and 1,784 thousand units, respectively.

North America

 

                                                                           
     Thousands of units  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount      Percentage  

Toyota’s consolidated vehicle unit sales

     2,529         2,715         186         7.3
     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount      Percentage  

Net revenues:

           

Sales of products

     7,234,376         8,601,879         1,367,503         18.9

Financial services

     882,723         1,075,717         192,994         21.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

       8,117,099           9,677,596         1,560,497         19.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues in North America increased due primarily to the favorable effect of fluctuations of currency translation rates to the Japanese yen, and the 186 thousand vehicles increase in vehicle unit sales compared with the prior fiscal year. The vehicle unit sales increased due mainly to the market progressing in a steady manner and strong sales of the Corolla, RAV4 and other car models.

 

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Europe

 

     Thousands of units  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount      Percentage  

Toyota’s consolidated vehicle unit sales

     844         859         15           1.8
     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount      Percentage  

Net revenues:

     

Sales of products

     2,630,408         2,750,164         119,756           4.6

Financial services

     94,551         98,130         3,579           3.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,724,959         2,848,294         123,335           4.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenues in Europe increased due primarily to the 15 thousand vehicles increase in vehicle unit sales compared with the prior fiscal year. The vehicle unit sales increased due mainly to the strong sales in Western Europe, especially in Italy and the United Kingdom.

Asia

 

     Thousands of units  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     1,609         1,489         (120     (7.4 )% 
     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Net revenues:

          

Sales of products

     4,755,114         4,833,952         78,838        1.7

Financial services

     122,558         147,288         24,730        20.2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     4,877,672         4,981,240         103,568        2.1
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues in Asia increased due primarily to the favorable impact of fluctuations in foreign currency translation rates despite the vehicle unit sales decreasing by 120 thousand compared with the prior fiscal year. The decrease in vehicle unit sales was due mainly to decreased sales in Thailand and Indonesia, which in turn was attributable mainly to the shrinking of the market and competitive market conditions.

Other

 

     Thousands of units  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Toyota’s consolidated vehicle unit sales

     1,769         1,755         (14     (0.8 )% 
     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount     Percentage  

Net revenues:

          

Sales of products

     2,162,505         2,255,122         92,617        4.3

Financial services

     174,136         194,115         19,979        11.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     2,336,641         2,449,238         112,597        4.8
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Net revenues in Other increased due primarily to the changes in vehicle sales mix despite vehicle unit sales decreasing by 14 thousand vehicles compared with the prior fiscal year.

Operating Costs and Expenses

 

     Yen in millions  
     Year ended March 31,      2015 v. 2014 Change  
     2014      2015      Amount      Percentage  

Operating costs and expenses

           

Cost of products sold

     19,988,245         20,916,362         928,117         4.6

Cost of financing operations

     812,894         925,314         112,420         13.8   

Selling, general and administrative

     2,598,660         2,642,281         43,621         1.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     23,399,799         24,483,957         1,084,158         4.6
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Yen in millions  
     2015 v. 2014 Change  

Changes in operating costs and expenses:

  

Effect of changes in vehicle unit sales and sales mix

     470,000   

Effect of fluctuation in foreign currency translation rates

     895,500   

Effect of cost reduction efforts

     (280,000

Other

     (1,342
  

 

 

 

Total

     1,084,158   
  

 

 

 

Operating costs and expenses increased by ¥1,084.1 billion, or 4.6%, to ¥24,483.9 billion during fiscal 2015 compared with the prior fiscal year. This increase resulted mainly from the ¥895.5 billion unfavorable impact of fluctuations in foreign currency translation rates and the ¥470.0 billion impact of changes in vehicle unit sales and sales mix, partially offset by the ¥280.0 billion impact of cost reduction efforts and the ¥1.3 billion decrease in other.

The decrease in other was due mainly to the ¥125.0 billion payment to the U.S government based on the agreement with the U.S. Attorney’s Office for the Southern District of New York to resolve its investigation and the ¥83.0 billion costs related to ending the vehicle and engine production in Australia, both being recorded in the prior fiscal year, partially offset by the ¥140.0 billion increase in product quality related expenses and the ¥100.0 billion increase in research and development expenses as compared to the prior fiscal year. See note 23 to the consolidated financial statements for further discussion on the payment to the U.S government based on the agreement with the U.S. Attorney’s Office for the Southern District of New York to resolve its investigation, and see note 27 to the consolidated financial statements for further discussion on the costs related to ending the vehicle and engine production in Australia.

The increase in product quality related expenses was due mainly to the increase in provisions for recalls and other safety measures resulting from increase in actual payments during fiscal 2015 and the weakening of the Japanese yen against other currencies at the end of fiscal 2015 in comparison to the prior fiscal year. See note 13 to the consolidated financial statements for further discussion.

During fiscal 2015 and beyond, Toyota announced recalls and other safety measures including the following:

In April 2014, Toyota announced in Japan and other regions the voluntary safety recall on certain Toyota vehicles in relation to the electrical wiring (spiral cable) assembled in the steering column. In April 2014, Toyota announced in Japan and other regions the voluntary safety recall on certain Toyota vehicles in relation to the slide and lock mechanism of the driver’s seat, the windshield wiper motor and the steering column mounting

 

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bracket beneath the instrument panel. In June, October, November and December 2014 and in May and June 2015, Toyota announced in Japan and other regions the voluntary safety recall on certain Toyota and Lexus vehicles in relation to the driver/front passenger airbag inflator.

The increase in research and development expenses was due mainly to active investments in advanced technology development to support Toyota’s future growth.

Cost Reduction Efforts

During fiscal 2015, continued cost reduction efforts together with suppliers contributed to a reduction of operating costs and expenses by ¥280.0 billion. This was due to ¥220.0 billion in cost reduction efforts concerning design related costs due mainly to ongoing value engineering activities, and ¥60.0 billion in cost reduction efforts at plants and logistics department.

These cost reduction efforts related to ongoing value engineering and value analysis activities, the use of common parts resulting in a reduction of part types and other manufacturing initiatives designed to reduce the costs of vehicle production. The amount of the effect of cost reduction efforts includes the impact of fluctuation in the price of steel, precious metals, non-ferrous alloys including aluminum, plastic parts and other production materials and parts.

Cost of Products Sold

Cost of products sold increased by ¥928.1 billion, or 4.6%, to ¥20,916.3 billion during fiscal 2015 compared with the prior fiscal year. The increase resulted mainly from the ¥691.0 billion unfavorable impact of fluctuations in foreign currency translation rates, the ¥420.0 billion impact of changes in vehicle unit sales and sales mix, and the ¥140.0 billion increase in product quality related expenses, partially offset by the ¥280.0 billion impact of cost reduction efforts and the ¥80.0 billion costs related to ending the vehicle and engine production in Australia recorded in the prior fiscal year.

Cost of Financing Operations

Cost of financing operations increased by ¥112.4 billion, or 13.8%, to ¥925.3 billion during fiscal 2015 compared with the prior fiscal year. The increase resulted mainly from the ¥90.7 billion unfavorable impact of fluctuations in foreign currency translation rates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by ¥43.6 billion, or 1.7%, to ¥2,642.2 billion during fiscal 2015 compared with the prior fiscal year. This increase mainly reflected the ¥113.6 billion unfavorable impact of fluctuations in foreign currency translation rates, partially offset by the ¥125.0 billion payment to the U.S government based on the agreement with the U.S. Attorney’s Office for the Southern District of New York to resolve its investigation recorded in the prior fiscal year.

Operating Income

 

     Yen in millions  
     2015 v. 2014 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     280,000   

Effect of cost reduction efforts

     280,000   

Effect of marketing activities

     (70,000

Effect of increase of miscellaneous costs and others

     (160,000

Other

     128,452   
  

 

 

 

Total

     458,452   
  

 

 

 

 

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Toyota’s operating income increased by ¥458.4 billion, or 20.0%, to ¥2,750.5 billion during fiscal 2015 compared with the prior fiscal year. This increase was due mainly to the ¥280.0 billion favorable impact of changes in foreign currency exchange rates, and ¥280.0 billion impact of cost reduction efforts, partially offset by the ¥70.0 billion impact of marketing activities, and ¥160.0 billion increase in miscellaneous costs and others. The increase in miscellaneous costs and others was due mainly to the ¥140.0 billion increase in product quality related expenses, the ¥100.0 billion increase in research and development expenses, and ¥80.0 billion increase in labor costs, partially offset by the ¥125.0 billion payment to the U.S government based on the agreement with the U.S. Attorney’s Office for the Southern District of New York to resolve its investigation and the ¥83.0 billion costs related to ending the vehicle and engine production in Australia, both being recorded in the prior fiscal year.

Marketing efforts and marketing activities include changes in vehicle unit sales and sales mix, sales expenses and other.

During fiscal 2015, operating income (before elimination of intersegment profits), compared with the prior fiscal year increased by ¥61.3 billion, or 4.1%, in Japan, ¥258.4 billion, or 79.3%, in North America, ¥22.8 billion, or 39.3%, in Europe, ¥26.0 billion, or 6.6%, in Asia, and ¥68.9 billion, or 162.0%, in Other.

The following is a description of operating income in each geographic market.

Japan

 

     Yen in millions  
     2015 v. 2014 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     360,000   

Effect of cost reduction efforts

     195,000   

Effect of marketing activities

     (270,000

Effect of increase of miscellaneous costs and others

     (225,000

Other

     1,311   
  

 

 

 

Total

     61,311   
  

 

 

 

North America

 

     Yen in millions  
     2015 v. 2014 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     (40,000

Effect of cost reduction efforts

     70,000   

Effect of marketing efforts

     105,000   

Other

     123,467   
  

 

 

 

Total

     258,467   
  

 

 

 

 

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Europe

 

     Yen in millions  
     2015 v. 2014 Change  

Changes in operating income and loss:

  

Effect of changes in exchange rates

     (10,000

Effect of cost reduction efforts

     20,000   

Effect of marketing efforts

     10,000   

Other

     2,890   
  

 

 

 

Total

     22,890   
  

 

 

 

Asia