Section 1. Global Financial Crisis
Item 1. Rapid Growth
Upon entering the 21st century, demand in Japan for new cars started to peak. In contrast, demand in the U.S. market remained at historically high levels in the range of 16 million to 17 million vehicles annually from 1999 to 2006, while modernization in emerging countries such as China and India entered a stage of full-fledged development. The timing of the start of operations at overseas production sites where TMC had been laying foundations since the mid-1990s coincided with these market developments, and TMC's overseas production grew at an unprecedented pace.
In the Global Vision 2010 adopted in 2002, Toyota began to see that it was headed toward a global market share of approximately 15% in the 2010s and accelerated overseas production initiatives even further. As a result, new vehicle plants in France, China, the Czech Republic, the United States, and other countries began operations between 2001 and 2006.
At the end of 2007, TMC had 53 overseas production affiliates (including engine and other component plants) in 27 countries and regions, an increase of 50% in just 10 years. Global consolidated production volume including Hino Motors, Ltd. and Daihatsu Motor Co., Ltd. increased from 5.94 million units in 2000 to 9.50 million units in 2007. This represented an increase of 3.56 million units over seven years, with continuous annual average growth of approximately 500,000 units. TMC's production was growing at a rapid pace, particularly overseas, and two to three new plants, each with an annual production capacity of 200,000 units, were coming online each year.
As TMC put into practice its policy of expanding production where demand is, its unconsolidated overseas production reached approximately 4.31 million units in 2007, exceeding domestic production of approximately 4.23 million units for the first time.
In conjunction with the increases in global production and sales, TMC reported (in accordance with accounting principles generally accepted in the United States) higher revenues and earnings for each fiscal year from fiscal year 2000 (ended March 2001) to fiscal year 2007 (ended March 2008). For fiscal year 2001 (ended March 2002), operating income reached 1.936 trillion yen, surpassing 1 trillion yen for the first time, and, for fiscal year 2003 (ended March 2004), TMC became the first Japanese company to reach 1 trillion yen in net income. For fiscal year 2005 (ended March 2006), net revenues surpassed the 20 trillion yen mark to reach 21.369 trillion yen, and for fiscal year 2006 (ended March 2007), operating income reached the 2 trillion yen level. As such, the rapid pace of grow in financial results mirrored the rapid pace of growth in production and sales.
Even as the company's performance continued its upward climb, the external environment was slowly changing. Starting in mid-2004, rising demand caused by rapid growth in emerging markets pushed up prices for energy and materials, including crude oil, specialty steels, plastics and precious metals such as platinum. Procurement costs rose not only in the automobile industry, but in all manufacturing industries, putting pressure on earnings. TMC, which enjoyed continuous good results, also experienced stagnating earnings even as sales volumes increased because of an increase of compact cars and other small vehicles in the model mix.
As for TMC's consolidated financial results, cost improvements, including those achieved through the Construction of Cost Competitiveness 21 (CCC21) cost-cutting program, enabled the company to reduce annual costs in fiscal years 2002 and 2003 (ended March 2003 and March 2004, respectively), during which material costs were relatively stable, to the 300 billion yen level. However, in fiscal year 2006 (ended March 2007), when consolidated operating income surpassed 2 trillion yen, the impact of a greater-than 200 billion yen increase in material costs limited cost-improvement savings to only 100 billion yen.