Toyota’s $1 billion investment in Grab is credit positive for both

Last Wednesday, Toyota Motor Corporation (Aa3 stable) announced that it will invest $1 billion in Grab
Holdings Inc., a Singapore-based ride-hailing service provider, to expand their collaboration in Southeast
Asia. The investment is credit positive for Toyota.

The deal will enhance Toyota’s foothold and capability in ride-hailing services, a fast-growing business that
could alter automakers’ traditional business models. Grab will benefit from Toyota’s technological
capability. Toyota’s driving recorder, which collects driving data and stores it in a central platform, will
expand connectivity among Grab’s rental car fleet across Southeast Asia. This data will help the companies
roll out new services for drivers, including automotive insurance, auto leasing and vehicle maintenance.

The collaboration complements Toyota’s existing alliances with global ride-hailing providers, including Uber
Technologies Inc. and JapanTaxi Co.,Ltd., an app-based provider in Japan. Grab strengthened its leading
position in Southeast Asia after acquiring Uber’s assets in the region in March 2018.

Led by young users, ride-hailing services have gained popularity in Southeast Asia. We expect Toyota to
benefit from its growing presence in this business because new car sales in the region could fall amid
changing consumer preferences and increasing acceptance of the app-enabled sharing economy. We
estimate that Toyota has more than a 25% market share and a leading position in Southeast Asia, making it
an important market for Toyota.

For Toyota, the $1 billion investment is small relative to its annual cash flow from operations for the
automotive business, which we expect will exceed ¥2.5 trillion (about $23 billion) for fiscal 2018, which
ends in March 2019. We also expect the auto segment’s cash to exceed ¥2.4 trillion (about $22 billion) for
the period, limiting the investment’s effect on Toyota’s key credit metrics.

Toyota’s larger size relative to some of its global competitors gives it capacity to invest in new businesses
and research and development, including connectivity, auto-drive, mobility as a service and electrification.
However, returns on investments in new areas are uncertain amid disruptive technological changes.

We expect Toyota to focus on its cost efficiency to accommodate the new investments. Improving cost
efficiency is important as Toyota struggles to improve its automotive segment’s margin. We expect this
margin, measured by adjusted EBITA, to remain around 8% for the year to March 2019, similar to the
previous two years but lower than 10.9% for the year to March 2016. Weak profitability in North America is
hurting Toyota’s auto-segment margin largely because of lower demand for passenger cars relative to sport
utility vehicles.

Toyota first invested an unspecified amount in Grab in 2017 through its trading company, Toyota Tsusho
Corp. (A3 stable). Other Japanese companies are also investing in ride-hailing service providers: Honda
Motor Co., Ltd. (A2 stable) invested an undisclosed amount in Grab in December 2016 for motorcyclesharing
services in Southeast Asia, and SoftBank Group Corp. (Ba1 stable) has invested in Uber, Grab,
Chinese ride-hailing service provider Didi Chuxing and India’s ride-hailing company Ola Cabs.

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