Auto Bailout: Et Tu, Toyota?

There's a surprising addition to the list of automakers asking for billions of dollars in bailout funds. Until Moody's and S&P cut Toyota's (TM) ratings last month to their second-highest rating, the company had been one of the handful of nonfinancial companies in the world with the highest possible ratings from the agencies. Even after the recent one-notch downgrades, the Japanese automaker's credit rating has remained the envy of rivals like General Motors (GM) and Ford (F). Difficulties raising funds in the U.S. mean Toyota now has something in common with its ailing Detroit competitors: It is following their lead and turning to the state for a helping hand.

According to reports in Japan's local media, Toyota is in talks to borrow a little over $2 billion from the state-backed Japan Bank for International Cooperation (JBIC) to secure funds for its U.S. operations. Toyota, which expects to lose $3.9 billion this year, through a spokesman confirmed it is discussing the loan, but declined to discuss the details. If Toyota does reach a deal, it will be the first Japanese automaker to apply for assistance from the new emergency fund, which is tapping $5 billion from the Japanese government this month to lend to Japanese corporations that operate internationally.

But Toyota is just the latest Japanese automaker to ask for government assistance. Last month, Nissan (NSANY) and Mitsubishi Motors both signaled their intent to ask for loans from the Development Bank of Japan. Meanwhile, Toyota's European arm is planning to request funding from the European Investment Bank to finance research and development into clean technologies.

Funds from Japan's Foreign Exchange Reserves

With the Japanese auto industry ailing, chances are JBIC will need an injection of more bailout funds soon. As the credit crunch hits even the strongest automakers, the outlook remains desperate, particularly as many customers need access to credit to buy new cars. The current $5 billion JBIC has available comes from the country's $1 trillion of foreign exchange reserves. "Taking into account the current severe conditions for those trying to procure foreign funds, we've decided to lend foreign currencies [from the reserves] to the JBIC as a temporary, extraordinary measure," Kaoru Yosano, Japan's new Foreign Minister, said on Mar. 3. Yosano replaced Shoichi Nakagawa, who created a storm last month after appearing to be drunk at a Group of Seven press conference in Rome. Nakagawa denied he was intoxicated and said he had taken too much cold medicine, but he quickly stepped down.

Analysts responded positively to the news that Toyota is talking with JBIC, saying automakers should tap easily available government funds at a time when credit at reasonable interest rates is otherwise so tight. In Tokyo trading, Toyota's stock closed down 0.3%, a better performance than the market as a whole, which fell 0.6%.

The Toyota news comes at a time when automakers are seeing a few positive glimmers. Since reaching a 13-year high in December, the yen has weakened by nine yen per dollar, or 10%. A one-yen weakening adds about $400 million to Toyota's earnings over a full year. With the worst news seemingly in the public domain, stock prices have stabilized: Although the benchmark Nikkei index is down 18% so far this year, Toyota's stock price is up 4.2%, and Honda's (HMC) shares have done even better, rising 21%. Even Nissan, the weakest of the big three, has only dipped 5%.

Some Layoffs May Be Reversed

Despite news on Mar. 2 that Japanese car sales touched a 35-year low in January, carmakers are indicating that they will gradually raise local production in the coming weeks following huge cutbacks. Nissan, after cutting production in January and February by 60% and 70%, respectively, will increase Japanese production this month. To be sure, sales remain depressed, but inventory levels are edging back toward acceptable levels. Similarly, Honda, which cut Japanese production 23% in January, has said it will gradually increase production from April onward. The company's executive vice-president, Koichi Kondo, has said that by the end of the first half, inventories should "return to normal."

There's even talk of reversing some layoffs. According to a report in the Japanese press on Mar. 3, Toyota Motor Kyushu, Toyota's manufacturing subsidiary in western Japan, is planning to keep 1,000 temporary workers it had been set to lay off. According to the Nikkei newspaper, the agency-supplied workers will receive new contracts from Toyota or become permanent staffers in the expectation that production will increase. With sales still slumping, production remains depressed compared with previous levels, but after the shock of plunging sales in November and December, Japan's carmakers at least appear to be managing the crisis more adeptly.

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