Toyota’s ‘Made-in-Japan’ Mantra May Not Apply in Wake of Quake, Strong Yen

Toyota Motor Corp. (7203), the automaker that built 45 percent of its cars in Japan last year, may need to produce more abroad because of the yen’s near-record strength following the nation’s most powerful earthquake.

“How much longer should we insist on producing in Japan?” said Chief Financial Officer Satoshi Ozawa, seated next to President Akio Toyoda at a press conference in Tokyo yesterday. “I feel strongly that our efforts may have exceeded the limits of what is possible in dealing with the yen’s impact.”

Even as Toyoda said he wants to protect Japanese jobs, the company’s profitability is suffering with the yen close to a post-World War II high and Korean rivals benefiting from a weaker won and a new U.S.-South Korea free trade agreement. The yen and parts shortages after the March 11 temblor contributed to fourth-quarter profit falling 77 percent and may cause Toyota to lose its crown as the world’s biggest automaker to General Motors Co. (GM) this year.

The stronger yen cut operating profit by 290 billion yen ($3.6 billion) in the year ended March 31, Toyota said. That was more than the 110 billion-yen cost from the 9-magnitude temblor and tsunami, which forced Toyota to halt production at Japanese plants for two weeks and led to a plunge in domestic sales.

China, Europe

“You’re going to see more investment from them in southeast Asia, more in China, though it’s trickier there because they work with two local partners,” said Jim Hall, principal of 2953 Analytics, a consulting firm in Birmingham, Michigan. “They’ll probably expand in Europe as well, with a focus on eastern Europe.”

Toyota’s ratio of domestic production is higher than Japan- based competitors. Nissan Motor Co., the nation’s second-largest carmaker, built 25 percent of its vehicles in Japan last fiscal year. Honda Motor Co., the third-biggest, produced 26 percent of its cars at home.

“I fully understand that we can’t go on with just a desire to protect manufacturing in Japan,” Toyoda, 55, said.

Toyota rose 2.5 percent to 3,350 yen as of 9:15 a.m. in Tokyo. The stock has dropped 8.2 percent since March 10, the day before the earthquake. Yokohama-based Nissan has fallen 3.8 percent, while Honda Motor Co. has declined 8.8 percent.

Postwar High

Japan’s currency soared to a postwar high of 76.25 per dollar on March 17. The yen, which traded at 80.96 yesterday, may approach the record level again as “risk-averse” Japanese investors refrain from spending on overseas assets following the earthquake, according to JPMorgan Chase & Co.

The currency is also likely to continue rising because of weaker demand for the dollar as the U.S., the world’s largest net-debtor nation, keeps borrowing costs low, said Junya Tanase, chief currency strategist at JPMorgan in Tokyo.

Toyoda’s comments contrast with his previous pledge to keep at least 3 million units of annual production in Japan.

Ozawa said he intends to advise his colleagues and Toyoda on the need to revise the balance of domestic and overseas output and may question keeping 3 million units in Japan.

“The strong yen has been a problem for a while, and it barely weakened after intervention” by the Group of Seven nations on March 18, said Yuuki Sakurai, president at Fukoku Capital Management Inc. in Tokyo. “Toyota and other Japanese manufacturers need to assume that the yen will gain to between 75 and 80 yen.”

Fourth Quarter

Toyota said fourth-quarter net income fell to the lowest in 1 1/2 years amid parts shortages following the quake. Profit for the three months ended March 31 fell to 25.4 billion yen from 112.2 billion yen a year earlier, it said.

Quarterly profit missed the 104 billion-yen average of four analyst estimates compiled by Bloomberg in the past four weeks. Sales dropped 12 percent to 4.64 trillion yen.

Output disruptions may cause Toyota to fall behind GM and Volkswagen AG (VOW) in global sales this year. The disaster follows Toyoda’s first full year as president, which was dominated by recalls of more than 10 million vehicles for problems related to unintended acceleration.

The Japanese company sold 8.42 million vehicles globally last year, compared with GM’s 8.39 million. Volkswagen sold 7.14 million.

Toyota said yesterday it expects domestic and overseas production to begin recovering in June, at least a month earlier than previously announced. It maintained a forecast that output will return to normal levels by November or December.

“Toyota’s production will most certainly fall from last year’s level, while both GM and Volkswagen will make big gains in the U.S., Europe and China,” said Koji Endo, an auto analyst at Advanced Research Japan in Tokyo. The Japanese carmaker’s global output may decline to fewer than 6.5 million vehicles this year from 8.4 million in 2010, he said.

Sales Decline

Toyota’s global vehicle sales dropped 12 percent from a year earlier to 1.79 million in the three months ended March 31. The decline was led by a 37 percent decrease in Japan. Sales in North America fell 12 percent to 551,000 while in Asia excluding Japan, deliveries rose 23 percent to 345,000.

The carmaker may have lost output of 300,000 vehicles in Japan and 100,000 overseas through the end of April due to quake-related shutdowns, Executive Vice President Atsushi Niimi said April 22.

Toyota’s global output in June will be about 70 percent of capacity, the company said. About 30 parts remain in short supply following disruption caused by the quake, compared with 150 in April, Toyoda said.

The carmaker resumed output at all Japan plants at half of normal capacity on April 18. All of the company’s factories were closed for two weeks following the quake, with hybrid-car production resuming March 28.

Profit Forecast

Like Honda, Toyota declined to provide an earnings forecast for the fiscal year that started April 1, citing the effect of the earthquake on production. Toyota may issue a forecast in mid-June, Toyoda said.

The carmaker may post 311 billion yen in net income for the current year, according to the average of 11 analyst estimates.

The recovery may also be hindered by electricity shortages in Japan after the earthquake cut the nation’s power-generating capacity by 8 percent.

Chubu Electric Power Co., which supplies electricity to Toyota’s factories in Aichi prefecture, decided earlier this week to shut a nuclear plant in Shizuoka prefecture, west of Tokyo. Prime Minister Naoto Kan requested the shutdown until the plant’s tsunami defenses are improved, citing a government study that showed an 87 percent likelihood of an 8-magnitude quake striking the area within 30 years.

“We want to do our best in balancing the needs of the economy and the need to save power,” Toyoda said yesterday.

Honda said April 28 its net income dropped 38 percent to 44.5 billion yen for its fourth quarter, which ended March 31. Nissan reports earnings today.

To contact the reporters on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net; 堀江政嗣 in Osaka at mhorie3@bloomberg.net

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net

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