Another Loss for Toyota, but Signs of Recovery

In more normal economic times, the announcement of a quarterly loss running to hundreds of millions of dollars would be a grim statistic for Toyota (TM). After all, on its way to overtaking General Motors in 2008 as the world's largest automaker, Toyota would regularly meet or beat profit forecasts. And it made more money than any other automaker. At a press conference in Tokyo on Aug. 4, though, a smaller-than-expected loss was greeted as a sign that the worst may be over for Toyota and other Japanese automakers. "We're making steady progress," Toyota Senior Managing Director Takahiko Ijichi told reporters.

At first glance the figures don't look too great. For the three months ended in June, Toyota lost $818 million, compared with a $3.7 billion profit during the same period in 2008. Its loss compares unfavorably with Honda (HMC), which eked out a small profit in the same period, and Nissan (NSANY), which posted a $158 million loss. It is also the third quarter in a row in which Toyota has lost money.

For all that, the figures were far better than most industry watchers expected. A survey of five Tokyo auto analysts by Bloomberg News projected a loss of $1.9 billion for the quarter. Toyota's red ink was also an improvement on the last two quarters, when it lost $8.1 billion and $1.7 billion, respectively. What's more, it came despite sales slumping 38% year-on-year, to $40.3 billion.

Stimulus Is Working Perhaps more important, Toyota sweetened earnings and sales projections. Citing the positive impact of government stimulus measures in Japan and other countries, it now expects to lose $4.7 billion for the year ending March 2010, compared with a previous loss forecast of $5.8 billion. Sales, meanwhile, are now expected to reach $176.8 billion, $3.1 billion more than its earlier forecast. And Toyota said it anticipates selling 100,000 more vehicles this year than an earlier estimate, after better-than-expected sales in Japan. Government incentives such as "cash for clunkers" schemes had "begun to trigger a revival in some countries," Ijichi said.

Toyota could also benefit from a weakening of the Japanese yen. As the world financial system wobbled last fall, the yen surged against the dollar and other currencies and remains at painfully high levels for Japanese exporters. Toyota's new sales and profit projections assume an exchange rate of 90 yen to the dollar between now and the rest of the financial year. That compares with today's yen-dollar rate of 94.9. Given that a one-yen weakening of the currency's value against the dollar adds about $400 million to Toyota's bottom line, its forecasts could prove conservative if the yen stays below the assumed rate.

Toyota's relatively positive numbers follow the pattern of Honda and Nissan, which announced their numbers on July 29. After auto sales around the world collapsed last fall following the demise of Lehman Brothers, Japan's Big Three automakers each took a series of painful cost-cutting measures, including not renewing the contracts of temporary workers, temporarily closing factories, and delaying or canceling projects.

At Toyota, no saving, it seems, has been too small. In wintertime, the heat in factories was turned down, causing workers to wear sweaters to stay warm. Office staffers were encouraged to take the stairs rather than elevators, to save electricity. And suppliers have been under huge pressure to cut the cost of parts. "We're facing a once-in-100-years crisis," said Akio Toyoda, a scion of the founding family, after Toyota said he would become the company's president. Evidence suggests the bitter medicine is working. Toyota on Aug. 4 said that its cost-cutting efforts, including the creation last fall of an Emergency Profit Improvement Committee, produced $2.4 billion of savings during the April-June quarter.

Hot Demand for the Prius Toyota is also benefiting from the popularity of the new third-generation Prius hybrid. Ijichi said that demand for the new Prius continues to outstrip supply and that production is running at full capacity. Indeed, Toyota would make more Priuses if it could but is constrained by a shortage of battery packs. Relief should come soon. Toyota's battery unit, Panasonic EV Energy, is increasing output of hybrid batteries and will soon have the capacity to make 800,000 packs a year, an increase of 300,000. By next summer, annual capacity will rise a further 200,000.

Yet even if the signs point to recovery, it is difficult to see Toyota returning to previous levels of profitability any time soon. For that to happen, a prolonged recovery of sales in the U.S., traditionally Toyota's most important source of profits, is vital. While U.S. sales are falling less quickly than at the start of 2009 (Toyota was down 11% in July), that still seems far off. For the three months that ended in June, sales in North America slumped to 387,000 cars and trucks, compared with 729,000 for the same period a year ago. That has left Toyota—which has delayed opening a Prius plant in Mississippi and is considering the future of the New United Motor Manufacturing plant in California after joint-venture partner GM said it was dissolving its stake—with substantial overcapacity. One further concern is what will happen once stimulus spending wears off. "The market environment seems to be improving," says Ijichi, "[but] it is not clear yet if sales can stabilize without government measures."

In the absence of robust sales growth, the company, under new chief Toyoda, will continue with efforts to rein in costs. The signs are hopeful: For the full year, Toyota now expects its Emergency Profit Improvement Committee to find savings of $9.5 billion, up from a previous target of $8.4 billion. That won't get Toyota back in profit for the full year, but it at least makes the losses a little less painful. "The car market is surely going to recover sometime in the future—we are not overly pessimistic," Ijichi added. "In the meantime, we will keep reducing our costs."

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