Commentary: Stop Feeding the Losers, Toyota

Why would the world's third-largest auto maker act like the Salvation Army? That's a question Toyota Motor Corp. (TM ) investors should be asking after the Toyota group agreed on Dec. 27 to inject $83 million into Tomen Corp., a money-losing Japanese trading house in search of a new lease on life.

Tomen hit Toyota up for dough because both belong to the same extended corporate group, or keiretsu. Winners subsidizing losers: It's a time-honored Japanese tradition. What's amazing is that the practice persists in Japan's stressed-out economy. This is the second big bailout since 2000 for Tomen, which has been trying to right its ship for years. So even though the aid to Tomen is pigeon feed for Toyota, with its $125 billion in worldwide revenue, there's a risk that other moribund companies will now turn to the carmaker--and other healthy Japanese companies--for handouts.

Toyota could erase those concerns by stating clearly that Tomen is a unique case. But Fujio Cho, Toyota's president, has indicated the opposite, hinting he's willing to bail out at least one other troubled firm from the keiretsu. On Dec. 17, he didn't rule out helping recapitalize distressed lender UFJ Holdings Inc. Indeed, Toyota's lifeline to Tomen was an indirect holiday gift for UFJ, which as chief banker to Tomen--as well as Toyota--would suffer if the trading house could not keep paying off its loans.

Officially, Toyota is distancing itself from the Tomen deal, saying it was mainly handled by its trading arm Toyota Tsusho Corp., which is Tomen's largest shareholder, with a 12% stake. But that's disingenuous. Toyota owns a controlling 23% of Toyota Tsusho, which can't so much as blink without permission from its big brother. Besides, Toyota Motor says it may inject some funds directly into Tomen.

Granted, Toyota can afford to help. It's flush with record profits, is on a roll in the lucrative U.S. market, and is sitting on $16 billion in cash. This outstanding performance has earned Cho a place as one of BusinessWeek's "Best Managers" this year.

But it's not as if Cho doesn't have any other use for the money lavished on Tomen. Toyota needs to continue spending heavily on cutting-edge technologies such as hydrogen-fuel-cell-powered cars to keep a step ahead of rivals in the U.S. and Europe. It needs to keep pumping money into programs to upgrade its existing lineup. And it could boost its paltry 25 cents annual dividend.

So far, Toyota investors seem oddly unfazed by the Tomen news. Standard & Poor's says the Tomen aid is too small to affect Toyota's creditworthiness. But S&P warns of a slippery slope. Toyota risks being asked to shore up other ailing companies, according to an S&P report. If it opens its purse wider, the report says, "going forward, the rating on Toyota Motor could come under pressure."

There's no doubt Tomen is in trouble. The company reported on Dec. 27 that it expects a loss of $430 million on sales of $16.9 billion for the fiscal year ending in March. The Toyota group offered not just cash but management oversight, which might help Tomen get back on its feet. Even if it does, however, the long-term pay-off for Toyota is questionable. At best, it'll get a merit badge, a bigger piece of a second-tier trading company, and a marginal return on its investment. Meanwhile, it's adding ballast to a bankrupt corporate model in which good companies help bad ones survive--to the ultimate detriment not only of their shareholders but also the struggling Japanese economy.

By Chester Dawson

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