If Toyota Is Projecting a Loss, Imagine the Pain Detroit Is in For

To give you an idea of how tough things are for the Auto Industry right now, Toyota (TM) is projecting a loss for the present fiscal year:

(From The NY Times): "TOKYO — Toyota Motor, the Japanese auto giant, said Monday that it expected its first operating loss in 70 years, underscoring how the economic crisis was spreading across the global auto industry.

On Monday, Toyota said it expected an operating loss in its auto operations of 150 billion yen, or $1.7 billion, for the fiscal year ending March 31. That would be the company’s first annual operating loss since 1938, a year after the company was founded, and a huge reversal from the 2.3 trillion yen, or $28 billion, in operating profit earned last year.

Analysts said Toyota’s downward revision, its second in two months, showed that the worst financial crisis since the Depression was threatening not just the Big Three but also even relatively healthy automakers in Japan, South Korea and Europe. Many other companies will also soon be reporting losses.

Worse, analysts said that they expected next year to be even more painful, amid forecasts that the global economy would continue to slide until at least the summer. This could cause a significant shakeout, driving smaller and weaker companies into the arms of a smaller number of bigger, richer players.

“It is just a matter of time before all major automakers are losing money,” an auto analyst in Tokyo for Credit Suisse Securities, Koji Endo, said. “And things will just get worse next."

For the record I'm not posting this to say that things are so bad that we should go easy on Detroit, or to support the idea that giving them enough cash to buy time will allow them to recover when the market recovers. Instead I post this in order to provide some perspective on the auto industry overall:

Detroit was losing money/struggling to turn a profit during the height of the credit boom, an era when companies like Toyota were reporting record profits. Now that market conditions are abysmal, well run companies with no debts (or the myriad liabilities of Detroit) are losing money, losses they may or may not be able to mitigate with various cost cutting initiatives/adjusting the scale of their operations to fit the market.

Chances are the multi-year downturn in auto sales will force some of the healthy manufacturers to make some severe changes in the form of cutbacks, merging with competitors, etc, etc.

I.e. if companies like Toyota are facing a multi-year period where they'll lose money, imagine how bad it's going to be for Detroit.

Considering the above it's practically a given that Detroit is going to continue to lose money (and/or need Government support) for all of 2009 if not 2010, even if they're able to magically fix all of their efficiency issues within the next quarter or two. This means that they're probably going to require government support of some kind well into the foreseeable future.

As a result if the government is going to help Detroit they need to not only force feed a bankruptcy (or a similar form of restructuring), but also force some business changes around shedding brands, ending product overlap (sell 1-2 versions of each car as opposed to eight), etc, etc. If they're going to wind up supporting these companies no matter what, they might as well attempt to limit the resources needed to get Detroit healthy again.

If sometime down the road it makes sense for companies like GM to bring back various brands that they shut down, restore old strategies around replicating the same car across multiple brands, etc, then fine. But for the immediate future they need to think in terms of a "bare bones, lean and mean" strategy, that's more aimed at helping them survive as if an outright collapse and failure is imminent, because even with government help that's exactly the situation they're in right now.

You can read more here.

Sources:

The NY Times: "Toyota Expects Its First Loss in 70 Years" -- Martin Fackler, December 22, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[ctj:]

Of course, this is all assuming that all your assumptions are correct...that toyota really is a well managed company and that the american auto companies are poorly managed. And that despite correctly predicting the market toyota can't make money in it so how could the american auto companies who can't understand the american market have a hope of making money. If your assumptions are right...fine. But, I might suggest if you look at the actions and investments of the last 2 years you might find your assumptions are in need of updated data and certainly a little deeper research then what you demonstrate in this story. I'll leave it there, but this industry is not where you think it is and the announcements by toyota, honda, and other manufacturers over the last 2 weeks give you a pretty good indication of the chaos in this industry that defies the easy and old perceptions of japanese=smart, savvy, american=incompetent, hapless..

2008 Dec 23 09:34 AM

[John D:]

If Toyota, Honda, Kia & Hyundai had been more like the European car companies which have their corner of North American market which they are content with, the global car market would not be in the sad state it's in - the Asians were WAY to GREEDY and kept dumping cars here - oh sure they built a few plants here as well but they came with the intentions of taking way too much of the North American auto turf and now all of them and us are paying for it.
If the North American auto industry was not laying off 100's of 1000's of workers all of that money generated would still be going back into the economy now but we as North Americans figured we were invincIble and started to buy more & more imports, which as we now know was just shooting ourselves in the foot and we were all holding the gun when it went off.
If the economy is to be turned around we must educate the people and this is a hard lesson learned. We need to suck it up, realize we are not as strong in the global market as we all thought and start buying what our neighbors, friends and realitives all build or we will find ourselves in a hole that we will take decades to get out of. Just think of all the jobs and futures of our children that will not happen if we don't. The governments have all signed DEALs with other countries (not enough thought put into them for the long term) that they cannot get out of but we as the people are free to buy as we want so we now know to buy NORTH AMERICAN and help OURSELVES survive the economic crisis. "BUY AN IMPORT AND DRIVE NORTH AMERICA INTO DEPRESSION"

2008 Dec 23 09:34 AM

[Carlos Lam:]

John D, I live in Indiana, and our "Big 3" are Toyota (Princeton, IN pickup plant), Honda (Greensburg, IN assembly) and Subaru (Lafayette, IN assembly). My neighbors DO make these "foreign" brand vehicles. They are high-quality vehicles that get decent mileage per gallon. While I currently own a Saturn and a Ford Focus, I'd have no qualms buying a "foreign" brand, particularly one made here in Indiana.

2008 Dec 23 10:22 AM

[Carlos Lam:]

John D, our Big 3 here in Indiana are Toyota (Princeton truck assembly), Honda (Greensburg assembly) and Subaru (Lafayette assembly). My neighbors DO make these "foreign" brand vehicles. For the most part, they're high-quality cars that get decent gas mileage. Though I currently own a Saturn and Ford Focus, I'd have no qualms about buying one of these "foreign" vehicles.

Moreover, the Big 3 helped create their own demise. I've read about consumers in the late 70s to early 80s questioning whether a car was made on a Monday or Friday for fear that it was put together shoddily. Growing up in Latin America, I actually saw the Big 3 cede market share to the Japanese and Koreans in the early to mid 80s simply because they did not produce smaller vehicles. Finally, I saw the Big 3 during the late 90s and early 00s put a lot of money and marketing into SUVs instead of building consumer loyalty to their higher mileage models.

2008 Dec 23 10:30 AM

[Gary P:]

Toyota's been expanding world wide like crazy for the past two years, while Ford has been contracting for the past six years. Toyota took a big gamble and built big pickups in the US, and fuzzed up their image with Scion. Now the market has collapsed. Ford is lean; Toyota is bloated. Toyota (as far as I can tell) forcast a $6-9 B loss in the last six months of their current fiscal year. We'll see.

2008 Dec 23 10:45 AM

[John D:]

AP
Indiana mayors hope fed loans preserve auto makers
Tuesday December 23, 10:33 am ET
By Rick Callahan, Associated Press Writer
Mayors from Marion and Kokomo in Indiana hope federal package can save their cities' auto jobs

Clam - as I said they are way to greedy - if you flood a market when it's already saturated this is the result - google the article above and see the other side of the coin - you also have a great dependecy on NORTH AMERICAN manufacturers as well in Indiana - don't forget where most of the profits go from the Toyota's & Honda's - Back Home! not on mortgages here.

INDIANAPOLIS (AP) -- The mayors of two of Indiana's automotive powerhouses -- Marion and Kokomo -- said they hope $17.4 billion in federal loans can stabilize General Motors Corp. and Chrysler LLC and safeguard their cities' large number of auto-related jobs.

On Dec 23 10:30 AM clam75 wrote:

> John D, our Big 3 here in Indiana are Toyota (Princeton truck assembly),
> Honda (Greensburg assembly) and Subaru (Lafayette assembly). My neighbors
> DO make these "foreign" brand vehicles. For the most part, they're
> high-quality cars that get decent gas mileage. Though I currently
> own a Saturn and Ford Focus, I'd have no qualms about buying one
> of these "foreign" vehicles.
>
> Moreover, the Big 3 helped create their own demise. I've read about
> consumers in the late 70s to early 80s questioning whether a car
> was made on a Monday or Friday for fear that it was put together
> shoddily. Growing up in Latin America, I actually saw the Big 3 cede
> market share to the Japanese and Koreans in the early to mid 80s
> simply because they did not produce smaller vehicles. Finally, I
> saw the Big 3 during the late 90s and early 00s put a lot of money
> and marketing into SUVs instead of building consumer loyalty to their
> higher mileage models.

2008 Dec 23 12:03 PM

[User 324925:]

Agree with jzt absolutely. Toyota is paying the price of unwise expansions, e.g. their pickup plant in Texas. They do not have competitive pickups to compete with Ford or GM, but they thought they could just come to eat Big 3's lunch.
The auto market, like housing market, has been a bubble for the past 7-8 years. There is no question that Toyota benefited most from the bubble. I would not be surprised to see them falling hard as a result of its aggressive expansion. Others such as Ford, who seemed "missed" bubble, could end up to be the winner as it has been restructuring ever since.

2008 Dec 23 02:41 PM

[User 324925:]

Further point, Toyota, in fact, all Japanese auto manufacture's difficulty mainly came from $ to yen exchange rate, which is at $1 to 90 yen now, vs. 120 yen early this year. One could argue that Toyota's rapid expansion was fueled by the unfair exchange ratio. That point seemed lost in the debate.

2008 Dec 23 02:55 PM

[EC48:]

It is appearent to me that all the so called "experts" and media know only of one solution, bankruptcy. Whenever they conduct an interview or write a column, regardless of what anyone says the only thing they want hear is that bankrutcy is not only an option but "the" option.
If all the experts and the media were unemployed we'd be a whole lot better off.
I don't own a Detroit vehicle, am not a fan of unions and the amount of shares i own in the auto sector wouldn't buy you a decent vehicle but I do hope the Detroit 3 make it just to shut these guys up.

2008 Dec 23 05:32 PM

[User 325036:]

Go ahead, jump in, the water is warm. The American Auto Industry is a very popular target these days. We are missing the true villans in my opinion. Hedge funds gone wild and the ignorance of the FCC.

Ford motor company actually looks poised to come out of this a big winner, (with a little help from investors), and here's why:

1. The Obama administration won't let Ford go down. This is great support for investors.
2. Hedge funds are out of steam (and under scrutiny).
3. New SEC. Say hello again to the uptick rule and banking regulation.
4. Banks will start lending and consumers will start buying, (summer 09).
5. Ford has a World Class and diverse product line-up, with more to come. (40 mpg Fiesta, 40 mpg Fusion Hybrid)
6. Ford quality is as good or better than Honda and Toyota across the board. (Ref. Consumer reports and JD Power & Associates).
7. Sales of Trucks and Big SUV's will recover in 09 as gas prices hover around $1.50/gal through 2010. Big revenue for Ford. Ford's big F-150 and Expedition now get 20 mpg, highway.
8. Ford is growing in China, and has a strong foothold in Western Europe. Have you seen these European cars?
9. Despite the bad PR from the congressional circus act, Ford only needs consumer lending to flow and the economy to pick up to become profitable again. They need oxygen, not surgery.
10. Ford operations in 90% of their facilities are as lean as Toyota, Nissian and Honda, and the Unions are working hard on a bridge compromise that defers some legacy costs until the economy recovers.

With regard to Ford, perception just doesn't match reality. Give this company some economic air, and they not only survive, they thrive! If economic air is not available over the next several months, then we need to offer up some investment grade oxygen. This company was making all the right moves, then the hedge funds and mortgage crisis hit. This was the perfect storm as Ford was heavily invested in positive change. They reacted quicker than GM and Chryslerberus, mortgaging everthing but the F-150 logo, which is why they remain viable today.

Ford is an American Icon. The company is woven into the American fabric, literally. This is one company that's worth saving, deserves our support and the true story to be told. As with Harley Davidson, investors have an opportunity to save this company, and reap the rewards down the road, yet we choose to group this company with the likes of GM and Chryslerberus, beacause it's convenient. The BIG THREE, right?

No. Smart investors will jump at this opportunity for all the reasons stated above, and after all is said and done, those investors can be proud to say that they helped save an American Icon, along with Capitalism and the American economy. So I say damn the hedge funds and the ignorance of the media. Screw the worthless ratings. We don't need no stinking bailout, just the power of optimistic Capitalism and a little Patriotism.

Where would America be today without Harley Davidson? Who would we be? Or a better question; Who are we? For the same reasons, I say Ford is worth saving, just as Harley Davidson was in the 80's.

GM and Chryslerberus need major surgery, but Ford just needs a dose of oxygen from investors until the Obama economy emerges early summer of 09. I say we Bull Rush Ford! Let's show the developing world that American Capitalism and Patriotism are alive.

Author and "recent" Ford shareholder,
Phil Black, IDSA
[e-mail]

Comments welcome

2008 Dec 23 06:09 PM

[jepittman:]

This is the most compelling rebuttal for a super alpha buy I have seen on this site since I have been accessing. If this poster turns out to be right Ford will be a multi bagger buy for those with the testicular fortitude to ACT. I am a buyer with a portion of my speculative funds.


On Dec 23 06:09 PM User 325036 wrote:

> Go ahead, jump in, the water is warm. The American Auto Industry
> is a very popular target these days. We are missing the true villans
> in my opinion. Hedge funds gone wild and the ignorance of the FCC.
>
>
> Ford motor company actually looks poised to come out of this a big
> winner, (with a little help from investors), and here's why:
>
> 1. The Obama administration won't let Ford go down. This is great
> support for investors.
> 2. Hedge funds are out of steam (and under scrutiny).
> 3. New SEC. Say hello again to the uptick rule and banking regulation.
>
> 4. Banks will start lending and consumers will start buying, (summer
> 09).
> 5. Ford has a World Class and diverse product line-up, with more
> to come. (40 mpg Fiesta, 40 mpg Fusion Hybrid)
> 6. Ford quality is as good or better than Honda and Toyota across
> the board. (Ref. Consumer reports and JD Power & Associates).
>
> 7. Sales of Trucks and Big SUV's will recover in 09 as gas prices
> hover around $1.50/gal through 2010. Big revenue for Ford. Ford's
> big F-150 and Expedition now get 20 mpg, highway.
> 8. Ford is growing in China, and has a strong foothold in Western
> Europe. Have you seen these European cars?
> 9. Despite the bad PR from the congressional circus act, Ford only
> needs consumer lending to flow and the economy to pick up to become
> profitable again. They need oxygen, not surgery.
> 10. Ford operations in 90% of their facilities are as lean as Toyota,
> Nissian and Honda, and the Unions are working hard on a bridge compromise
> that defers some legacy costs until the economy recovers.
>
> With regard to Ford, perception just doesn't match reality. Give
> this company some economic air, and they not only survive, they thrive!
> If economic air is not available over the next several months, then
> we need to offer up some investment grade oxygen. This company was
> making all the right moves, then the hedge funds and mortgage crisis
> hit. This was the perfect storm as Ford was heavily invested in positive
> change. They reacted quicker than GM and Chryslerberus, mortgaging
> everthing but the F-150 logo, which is why they remain viable today.
>
>
> Ford is an American Icon. The company is woven into the American
> fabric, literally. This is one company that's worth saving, deserves
> our support and the true story to be told. As with Harley Davidson,
> investors have an opportunity to save this company, and reap the
> rewards down the road, yet we choose to group this company with the
> likes of GM and Chryslerberus, beacause it's convenient. The BIG
> THREE, right?
>
> No. Smart investors will jump at this opportunity for all the reasons
> stated above, and after all is said and done, those investors can
> be proud to say that they helped save an American Icon, along with
> Capitalism and the American economy. So I say damn the hedge funds
> and the ignorance of the media. Screw the worthless ratings. We don't
> need no stinking bailout, just the power of optimistic Capitalism
> and a little Patriotism.
>
> Where would America be today without Harley Davidson? Who would we
> be? Or a better question; Who are we? For the same reasons, I say
> Ford is worth saving, just as Harley Davidson was in the 80's. <br/>
>
> GM and Chryslerberus need major surgery, but Ford just needs a dose
> of oxygen from investors until the Obama economy emerges early summer
> of 09. I say we Bull Rush Ford! Let's show the developing world that
> American Capitalism and Patriotism are alive.
>
> Author and "recent" Ford shareholder,
> Phil Black, IDSA
> [e-mail]
>
> Comments welcome

2008 Dec 23 08:10 PM

[Carlos Lam:]

John D, Marion and Kokomo have been "company" (aka Big 3) towns for decades. Princeton (Toyota), Greensburg (Honda), and Lafayette (Subaru) have not. Of course, the mayors of Marion and Kokomo are going to be asking for federal help.

And "profits" from Toyota, Honda, and Subaru don't all go back to Japan. Their employees earn wages, bonuses, and benefits which they end up spending and/or saving.

2008 Dec 24 10:44 AM

[HBWOW:]

" IF" is the big doubtful here. IF you buy their story then I have a big bridge to sell you. Next, with their gradual invasion of assembly plants in the states, they will be asking for a "bailout". Any reduction in their total production will be done in their U.S. plants while making up the difference in
moe imported units from their homeland plants.
THEY HAVE BEEN IN A TRADE WAR WITH US (the free traders) FOR OVER FORTY YEARS. Washington has been asleep for many years just like on December 7, 1941.

2008 Dec 24 10:55 AM

[Paul Killinger:]

As regards the transplants, they pay federal and state income taxes on the products they sell here in the U.S. And sales taxes are the same whether vehicles are made in Detroit or not, as are the inventory taxes paid by their dealerships. As for the companies themselves, they carry their LOSSES back to their home countries, just like their profits.

2008 Dec 24 11:56 AM

[Paul Killinger:]

We had this same discussion a long time ago when U.S. textile manufacturers were going bust. Even Warren Buffett couldn't save the Hathaway (they made shirts) in his enterprise, Berkshire Hathaway, arguably the most successful in our nation's history, and that was many years before anyone even thought of NAFTA.

The secret to saving Detroit isn't a government handout, but ending the sense of entitlement the automakers and their employees somehow believe they've earned. They need to stop bellyaching, take their hits, roll up their sleeves and get to work.

2008 Dec 24 12:13 PM

[Paul Killinger:]

So Ford is banking their future on $40K hybrids and $30K pickup trucks. Meanwhile, Nissan has introduced a U.S. made compact that sells for under $10K. Let me guess who's going to win this one.

2008 Dec 24 12:20 PM

[Paul Killinger:]

All you Detroiters had better pray that Obama decides to have the government promote NGV's. That's the ONLY way the BIG trucks and SUV's that Detroit produces can be profitable.

2008 Dec 24 12:26 PM

[Kunst:]

Toyota has made $100 billion in profits in the last 4-5 years.

2008 Dec 24 07:32 PM

[Europa:]

American Auto makers F,C,GM are responsible for what is happening to them,like anyone else who has anything in there head i think that buidling sedans,trucks and SuV's with a big**s engine is a crazy thing and while european and japan's auto makers built eingines dependable and with decent size(unlike US 3.7,4.6,5.0,6.2 etc)so yeah of course its going to bite 'em back and not only because of ridiculus engine displacement but also because of quality and reliability..p.s.excus... my spelling since im a foreigner and so is my car.

2008 Dec 25 10:17 PM