By David Zeiler
Don't count on Toyota Motor Corp. (TM) to regain its place as the leader in global auto sales any time soon. Even though the company is ahead of schedule as it looks to bounce back from the horrible wave of disasters that engulfed Japan in the spring, it now faces another roadblock in the strengthening yen.
Indeed, the good news for Toyota is that it now expects full production in Japan to resume by September, two months earlier than originally predicted. But the bad news for the company is that the dollar has slid from over 90 yen a year ago to about 80 yen now, making all Japanese exports increasingly expensive. The break-even point for Toyota is around 85 yen to the dollar.
For every yen of appreciation, Toyota would need to raise the price of its autos in the United States by 1.25% to maintain the same profit, an unappealing alternative in a challenging economy.
"We've reached the limits of [profitable] Japan-based manufacturing at 80 yen to the dollar," Toyota CFO Satoshi Ozawa admitted last month when the company reported its fiscal fourth quarter results.
Any appreciation of the yen hits Toyota harder than other Japanese automakers because Toyota builds 40% of its vehicles in Japan, compared to 28% for Nissan Motor Co. Ltd. (NSANY.PK) and 27% for Honda Motor Co. Ltd (HMC). Most of the world's automakers try to save freight costs and avoid currency fluctuation issues by operating plants in the destination countries. But historically Toyota has taken pride in retaining a significant amount of production at home.
"Toyota is a Japanese company that will maintain its production base in Japan," Akio Toyoda, the company's president and chief executive officer, said last month.
Although CFO Ozawa has hinted that the continued strain of the strong yen may force the company to consider moving more production out of Japan, such a major shift in policy does not appear imminent, and in any case would take years to implement.
Now, rattled by a daunting series of roadblocks, investors are bailing out. Toyota stock has dropped about 17% from a high of $96.68 on Feb. 16 to the $80 range. And with a price/earnings (P/E) ratio well above that of its peers -- 24.87 compared to 15.47 -- the stock already trades at a premium.
The earlier-than-expected restoration of production at the Japanese factories is clearly a positive, but can't blunt the full impact of the March 11 disasters on Toyota's business. Toyota senior managing officer Takahiko Ijichi told analysts last week the quake would ultimately cost the company $4.4 billion.
Toyota estimated that despite plans to boost production later this year, global shipments for the current fiscal year will slip 0.9% to 7.24 million vehicles from 7.31 million vehicles in 2010. Toyota expects profit to drop 31%, from $5 billion (408.1 billion yen) in 2010 to $3.5 billion (280 billion yen) in 2011.
The shortage of many Toyota models sent some customers to rivals, and will likely cost Toyota its crown as the world's No. 1 automaker. Some analysts have estimated Toyota could fall to No. 3 behind General Motors Co. (GM) and Volkswagen AG (VLKAY.PK). In addition, that the recent shortage followed two years of reputation-damaging recalls means Toyota may need to fight hard to win back market share. Its U.S. sales plunged 33.4% in May, cutting the company's market share to 10.2%, its lowest since 2002, and down from 15.2% a year earlier.
In a press conference last week Ozawa cited "marketing activities" as one factor crimping the company's profit outlook. Analysts interpreted that as an increase in buying incentives such as rebates and breaks on financing.
With so many headwinds, it may be a while before Toyota again sees the kind of profits to which it is accustomed. "Toyota is in a period of restructuring its production after years of expansion," Kazuyuki Murai at Plaza Asset Management in Tokyo told the BBC. "I think Toyota will be in for a sluggish period."