In recent days we have been discussing with clients concerns about the latest in a series of false certifications of safety and emissions test data by Toyota Group member companies, in the context of our 13+ year investment in Toyota Industries Corporation (TIC) (TSE 6201).
As an investment, TIC has been a paradox. We invested in TIC because of its extraordinarily compelling valuation, combined with its global leading businesses. TIC’s market cap has been less than the value of its financial assets. In effect, investors have received “for free” the stub value of TIC’s growing, world-class operating businesses, which is an anomaly in global capital markets, especially considering TIC’s strengths. Globally, TIC ranks as the number one manufacturer of forklifts and automobile air conditioner compressors and the number three provider of logistics solutions. The paradox is that TIC’s stock returns have been strong despite the company’s poor corporate governance, which has been like a lead weight holding back this star athlete. Implications of governance shortcomings at TIC and the broader Toyota Group have been highly visible recently.
At the end of January, TIC released an investigation report, by the special investigating committee composed of outside experts, which documented that TIC personnel repeatedly altered and manipulated data to certify that TIC-manufactured engines met emissions standards. This followed earlier reports of the same kind of misconduct by Toyota Group members Hino Motors and Daihatsu.
As we see it, fraudulent certifications are just one symptom of a larger problem of broken corporate governance and culture at TIC and Toyota Group as a whole. In this letter, we share our thoughts on the nature of the underlying problems and concrete steps we believe TIC should urgently take.