Downturn Hits Industry Stalwart Toyota

November 8, 2008 Updated: November 9, 2008
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The “Big Three” automakers’ recent turmoil has been well-documented, but recent news of a struggling Toyota Motor Corp. was a surprise for many analysts.

Overall U.S. auto sales sunk to 25-year lows in October as potential buyers stashed away savings and shunned SUVs and pickup trucks, traditionally the most profitable vehicles for General Motors, Ford Motor Co., and Chrysler LLC.

Last week Toyota announced weaker second-quarter financial results and in an unexpected announcement, revised down its estimates for fiscal year 2009. Net income for last quarter decreased almost 48 percent compared to last year, and overall revenues dropped 6 percent.

The results were even bleaker in North America. Operating income declined by 113 percent from the second quarter of 2007, due to a decrease in sales volume and a shift to smaller vehicles.

The decrease in sales compared to 2007 wasn’t a surprise to analysts, but Toyota also revised down its full-year projections by more than half. Its estimated net income for 2009 was 550 billion yen ($5.6 billion), down from previous estimates of 1.25 trillion yen ($12.7 billion). The company also cut its unit sales targets to 8.24 million vehicles globally, down almost 6 percent.

“Currently, the financial crisis is negatively impacting the real economy worldwide, and the automotive markets, especially in developed countries, are contracting rapidly,” Toyota Executive Vice President Mitsuo Kinoshita said in a company statement.

An increasingly stronger yen also deflates Toyota’s earnings. A major portion of its business comes from North America and Europe, and Toyota’s earnings would further contract as it converts reported profits into Japanese yen.

Downturn Came ‘Faster Than We Feared’

Toyota’s forecast revision caught many experts off guard.

For years, Detroit’s “Big Three” struggled as higher gas forced consumers to shun big SUVs and pickup trucks, while Toyota—along with other Japanese automakers—was already a market leader in fuel efficient and compact automobiles.

On Friday GM announced a staggering $4.2 billion loss for its third quarter, and warns that without federal aid, the company may run out of cash in mid-2009.

“Big Three” automakers, faced with shifting consumer demand and skyrocketing gas costs, simply couldn’t cut costs fast enough. GM recently pleaded to the United Auto Workers union to drive down legacy pension and healthcare costs to stave off an impending crisis.

Toyota’s assembly plants in the United States are not unionized, and it quickly became the most profitable automaker in the world. With its groundbreaking “just-in-time” assembly and distribution process, reputation for quality and durability, and most recently, its market leadership in hybrid vehicles, Toyota was poised to displace GM as the world’s largest automaker.

But recent the recent economic deterioration became too great for even Toyota to overcome. While it isn’t anywhere close to becoming the next GM, Ford, or Chrysler, Toyota’s announcement last week nonetheless offered a glimpse of consumer confidence, and an ominous prophecy that even the most successful firms will be negatively impacted by the global economic downturn.

“We expected the global economy would weaken, but it's deteriorating much faster than we feared,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd. on Bloomberg Television. “I didn't imagine Toyota would be forced to lower its earnings forecast by this degree.”

Along with the second quarter announcement, Toyota formed a new “Emergency Profit Improvement Committee” headed by President Ken Watanabe to reduce costs and maximize revenues.