Toyota's Loss Is Worse Than Expected

A feature of Toyota's (TM) rise to the top of the auto world in the past few years was its ability to meet and beat seemingly stiff targets year after year. These days, it seems to be just the opposite. On May 8 in Tokyo, Toyota chief Katsuaki Watanabe marked his final annual results presentation as president by announcing the company's first loss since 1950. At $4.4 billion, the red ink was worse than the $3.5 billion loss Toyota had projected in February and a massive $21.7 billion less than the $17.7 billion of profit Toyota booked a year ago, before the global financial crisis took hold. "Both revenues and profits declined severely," Watanabe told reporters.

The outlook for the fiscal year, which ends in March 2010, is even more grim. Despite Herculean cost-cutting efforts that could save around $8 billion, Toyota projects that its net loss will swell to $5.5 billion during the current financial year. Sales, which fell 21% in the year just ended, are projected to fall a further 20%, to $166 billion. Toyota will also cut its dividend to investors. This year, it will pay out a total of 99¢ per share, compared with $1.41 for the year ended March 2008. For the year ahead, Toyota declined to give a forecast. Asked how he assesses his presidency, which includes three consecutive years of record profits before the downturn, Watanabe said Toyota should have responded earlier to the crisis. Had the company been quicker to take action, he said, "maybe we would not be in this state."

That didn't happen, though, and now Akio Toyoda, who takes over from Watanabe in June, is assuming the top job at a difficult time. While automakers the world over are struggling, Toyota's abject year contrasts with archrival Honda (HMC), which posted a net profit of $1.4 billion for the financial year just ended, despite a big loss in the final quarter. Honda expects to stay in the black this year. (Nissan (NSANY), the last of Japan's Big Three to post its results, is expected to show red ink when it reports its numbers on May 12.)

Global Recession Blues

For Toyoda, just as worrying as the profit plunge is the expected continued decline in sales. For the fiscal year just ended, slumping markets in the U.S., Japan, and Europe contributed to a 1.3 million dip in sales, to 7.6 million vehicles. For the current year, Toyota projects vehicle sales will drop another 1.1 million, to 6.5 million. "We've started to see a few signs of recovery in a few countries, such as India and China, but it appears it will take a little longer for the financial markets in Europe and the U.S. to normalize and the global economy to recover," Watanabe said. "We have to brace ourselves—the severe market environment will continue for the time being."

One thing Toyota won't be doing is shutting factories. While General Motors (GM) is laying off thousands of workers, Watanabe says it's too early for Toyota to be closing plants, despite a capacity worldwide to produce 10 million cars a year—3.5 million more than Toyota's sales projection for the year ahead. "It's a time for perseverance," Watanabe said. Some Toyota watchers have suggested that excess capacity in Japan meant that some domestic plants might be ripe for closure once Toyoda becomes the company's president. But Watanabe ruled that out. "We will not be closing plants," he said.

Instead, Toyota will continue to do what it does best: cut costs. Between November and the end of March, Toyota trimmed an additional $1.3 billion from costs following the formation of its Emergency Profit Improvement Committee. That included measures as varied as reducing labor costs through work sharing and production holidays to cutting back on travel expenses. For instance, on Jan. 19, Lexus engineer Takayuki Katsuda and two colleagues drove from headquarters in Toyota City to Tokyo for the Japan launch of the Lexus RX SUV. Though the trip took four hours, vs. 90 minutes on the Shinkansen bullet train, they saved about $300 in train fares.

Continued Cost-Cutting

For the year ahead, Toyota aims to save a further $8 billion. About $3.4 billion of that will come from soliciting thousands of suggestions on improvements from employees and working more closely with suppliers to find cost savings on models currently being produced, improving factory efficiency, and finding savings during model changeovers. Falling prices for raw material costs should make finding savings a little easier. An additional $4.6 billion is expected to be found by cutting fixed costs. The company will cut capital expenditure 36%, to $8.3 billion. Toyota will also trim its research and development budget by $840 million, to $8.2 billion, although the company insists investment in key technologies, such as those that promote fuel efficiency and car safety, will be unaffected.

Amid the gloom, Watanabe did hint that better times would return eventually. It's also possible Toyota is being ultra-cautious. For example, the automaker isn't including the possible benefits from some stimulus spending around the world that could boost sales. Watanabe said that incentives in Europe and Japan where owners of older cars receive a refund if they buy a new, more fuel-efficient model are hard to project, but he admitted Toyota is a likely beneficiary.

The yen may also give Toyota some much needed relief. While plunging auto sales are the main explanation for the company's losses, the surge in the yen against the dollar and other currencies in 2008 cut its earnings power by a further $7.6 billion—more than Toyota's net loss. This year, though, if the global economic environment improves, some currency economists expect the yen to weaken significantly. Putting that into perspective, a one-yen depreciation against the dollar adds about $400 million to Toyota's bottom line. For the year, Toyota is projecting a dollar-yen rate of 95, compared with today's trading price of 99.

Ultimately, Watanabe argued, making cars that best fit with customer needs will be the key to Toyota's recovery. To meet that aim, he says the company will shorten some production lines, making it easier to produce vehicles in smaller numbers and develop cars in tune with markets, such as China's, that have the greatest growth potential. Toyota will also redouble its efforts to develop plug-in hybrids, electric, and fuel-cell vehicles. In the short term, the company will hope to take advantage of new hybrids. This year, Toyota will launch four new gas-electric models in Japan and three overseas, including the new Prius and the Lexus HS 250h. "I hope [the Prius] will be our savior and have an effect on other models," Watanabe said.

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