Toyota Gets Stuck in a Pair of Ruts

While a strengthening yen eats up profits, the carmaker's reputation for quality is taking a hit
A Toyota and Lexus dealership in downtown Tokyo Everett Kennedy Brown/EPA/Corbis

Tokyo—For a moment, Toyota Motor (TM) CEO Akio Toyoda sounded a lot like an executive from Detroit. Motown brass whined for years about how a cheap yen made Japanese exports hugely profitable. Now that a weak dollar and strong yen are hammering Toyota's profits, Toyoda said in a recent speech, the exchange rates and economic weakness could force Toyota's "capitulation to irrelevance or death."

If he sounds melodramatic, you'll have to cut the new CEO some slack. In October, Germany's Volkswagen (VLKAY) passed Toyota in global sales, a fleeting victory for VW but also a sign of Toyota's slipping dominance. Toyoda is also wrestling with an ugly recall in the U.S. involving sudden acceleration in multiple models, underused plants in Japan, and weak earnings that have forced him to cut, among other things, Toyota's once-sacred research and development budget. "The company is in a big storm," says independent auto industry analyst Maryann N. Keller. "Toyota is facing multiple structural problems at the same time."

Take the runup in the yen. When the currency traded between 100 and 110 to the dollar, Toyota's exports to the U.S. were hugely profitable. But every one-yen fall costs the company $400 million a year. In the first half of its fiscal year, which ended Sept. 30, the strong yen has cost Toyota $3.6 billion. It's a big reason why Toyota lost $1.5 billion in the first half.

It doesn't look like Toyota will be getting much relief, either. Massive deficit spending in the U.S. is keeping the dollar down. Japan's new government, meanwhile, isn't keen to weaken the currency the way its predecessors did. Japanese Finance Minister Hirohisa Fujii has said he is not interested in manipulating the yen.

Pressure to Shift Factories Outside Japan

Of the vehicles Toyota sells in the U.S., 43% are built in Japan (Honda Motor (HMC) and Nissan Motor (NSANY) make more of their U.S.-sold cars in North America). If the yen stays strong, Toyota could be pressured to cut capacity at home and build more of its cars elsewhere. It already has plans to eliminate a line at its compact-car plant in Takaoka, Japan—and more cuts could be coming. "They have a long-held tradition of trying to maintain factories in Japan," says Michael Robinet, vice-president of research firm CSM Worldwide. "At 90 yen to the dollar, that becomes extremely difficult."

Toyota's reputation for quality has taken a hit, too. This year, for the first time, Hyundai Motor passed Toyota in a J.D. Power & Associates (MHP) survey that measures how many problems a model has in the first three months. Chevrolet and Ford (F) brands have just about caught up with Toyota in Power's quality survey. Meanwhile, the National Highway Traffic Safety Administration has been looking into rust problems on the frames of older Toyota Tundra pickups and, more seriously, complaints about sudden acceleration in many models, possibly caused by floor mats.

Toyota has been working on a solution since late September but hasn't come up with a remedy. A company spokesman declined to comment. But plaintiffs' lawyers are talking tough. David C. Wright, a partner at Redlands (Calif.) law firm McCuneWright, says he has filed a class action alleging the problem, which has been linked to several deaths, is due to a technical flaw that has nothing to do with floor mats. Even if he is wrong, Toyota has a problem. "They built their success on quality and reliability," says J.D. Power analyst David Sargent. "If something happens to that, it could be very bad for them." As if Toyoda-san needed another headache.

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