It is no secret that Toyota Motors (NYSE:TM) sees the next wave of growth coming from developing markets in Southeast Asia and South America. Low rates of car ownership combined with rising disposable incomes bode well for the auto market demand in these countries in the long term. Toyota’s image as a no-frills, low-maintenance and good value for money product company resonates well with the demands of customers in the emerging economies.
Earlier this month, it opened its fourth auto plant in Indonesia at an investment of $340 million. The facility, which will take Toyota’s annual capacity to 180,000, is part of the automaker’s plans to make Indonesia an export hub. The plant will be initially used to manufacture Etios Valco, the model that was recently launched in the country.
With a greater focus on building cars suited to the needs of customers in developing markets, Toyota hopes to generate 50% of its total vehicle sales from developing markets by 2015, up from 45% in 2011. Overall, Toyota plans to introduce eight new subcompact cars by 2015 designed specifically for emerging markets, and Etios is one of these cars.
Car sales surged 25% to 1.12 million units last year in Indonesia. In fact, the country is expected to overtake Thailand as the biggest automotive market in Southeast Asia.
Car ownership is a symbol of affluence in Indonesia. According to a study by the Boston Consulting Group, cars are mostly bought by people with a disposable income of over $7,500 a month. This segment currently represents 6.6% of the country’s population of 240 million implying around 15.8 million potential car buyers. This higher income segment is expected to grow to 16.5% by 2020 implying nearly 40 million potential car buyers. There are an estimated 45 car owners per 1,000 people or 4.5% of the country implying around 10.8 million cars on the road currently. If we assume the same ratio of car buyers is close to 70% of those that can afford them, this potential market is around 27.2 million cars on the road over the next 8 years and translates to around 16-17 million additional cars sold.
Toyota is already the market leader in Indonesia with 37% share, and these investments highlight how much the automaker is determined to maintain or even extend its current position. If Toyota continues to maintain the current market share, it could end up selling more than 6.3 million (i.e. 37% of 17 million) vehicles in the next eight years. If we assume the average of $15,000 per car, this could translate to close to $95 billion in revenues spread out over the next eight years.
Where Else Is Toyota Investing?
Besides Indonesia, Toyota is also spending significantly in India, Thailand and Brazil. In February this year, Toyota opened a new plant in India which saw the automaker’s capacity in the country rising 50% to 310,000 units. The plant, which cost Toyota $100 million, will be used primarily to manufacture the Etios and Innova models.
Similarly, in Thailand, Toyota is looking to boost its production in the country to 1.2 million units annually within the next five years as the country aims to become one of the top 10 auto producing nations. The production gains could represent investment of nearly $700 million by Toyota.
In Brazil, Toyota opened its third plant last year and another one is due to begin production 2015 onward. The fourth plant, which will have an annual capacity of 200,000 units, will come at an investment of $500 million.
We currently have a $105 price estimate for Toyota’s stock, which is in line with the current market price.
Disclosure: No positions.