Toyota Motor Corp. (NYSE: TM) reported a staggering 77% decline in quarterly profits this month due to production disruption from the Japan earthquake and a strengthening yen. Many now wonder if the automaker can maintain its strong manufacturing presence in Japan without losing too much in profit.
Chief Financial Officer Satoshi Ozawa said at a news conference yesterday (Wednesday) that he will advise Toyota President Akio Toyoda on the need to rebalance the company's domestic and overseas production. Toyota makes 45% of its vehicles in Japan.
Toyota has "reached the limits of our ability to manufacture in Japan," said Ozawa. "We have done as much as we can do as a single company."
Toyota reported its fourth-quarter profit for the quarter ended March 31 was fell 77% from a year earlier to $313.9 million (25.4 billion yen). Operating profit fell 52% to $571.5 million (46.1 billion yen) - less than half the amount analysts' predicted - and sales were down 12%.
The March 11 9.0-earthquake that rocked Japan and the resulting power outages forced the company to halt production at all Japanese plants for two weeks after the quake. It is now operating at 50% its regular level in Japan and 30% in North America.
The plant closures contributed to a $1.36 billion (110 billion yen) cut in Toyota's operating income, even though the disaster occurred just three weeks before the quarter's end.
While the quake's effects are temporary, Japan's strengthening yen also dealt a blow to the automaker's earnings, cutting them by $3.58 billion (290 billion yen). Toyota's ability to absorb the extra costs from a stronger yen was hampered by the quake's effects on production.
The automaker expects to resume to 70% of normal production levels in June, and full production by November or December of this year. But some analysts think expenses from manufacturing in Japan will continue to weigh heavily on earnings.
"I expect (profits) to recover in the second half and to grow next year," Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, told Reuters. "But looking ahead, Toyota's production rate in Japan is high... and with energy and electricity costs in Japan expected to rise, I think it will be necessary for them to rethink their global production strategy."
The company refrained from releasing sales and earnings forecast because the continued effects of the quake were still uncertain.
CFO Ozawa stressed that there isn't much more Toyota could do to handle rising costs while the yen continues strengthening against the dollar and the euro.
"How much longer should we insist on producing in Japan?" Ozawa said at the press conference. "I feel strongly that our efforts may have exceeded the limits of what is possible in dealing with the yen's impact."
The yen is trading at around 80 per dollar, close to its post-World War II high of 76.25, reached March 17. Toyota has said it needs the dollar valued at 85 yen or weaker to break even in Japan.
The yen is likely to keep climbing as long as the United States keeps borrowing costs low and the U.S. dollar remains weaker than foreign currencies. Toyota's struggle could put pressure on the Japanese government to intervene in currency markets to correct the yen's four-year rise.
But president Toyoda said he is still committed to keeping a significant portion of the company's manufacturing business at home in Japan.
"Toyota was born in Japan, raised in Japan and is now a global company," Toyoda said at the conference. "I love Japan, and I want to keep the tradition of manufacturing strong here."
Toyoda admits it'll take more than will, but feels Toyota's global presence can help rebuild Japan's economy.
"My desire is to maintain employment and protect Japanese manufacturing, but we cannot operate on desire alone," said Toyoda. "The auto industry has a very broad reach, and we have the ability to drive Japan's recovery during these very tough times."
Toyoda previously pledged to keep 3 million units of annual production in Japan, but justifying that goal to investors is increasingly difficult with poor earnings. Many of Toyota's investors have accused the company of putting Japan's interests ahead of shareholders'.
"As long as the president is saying, ‘Let's keep fighting and get through this' we will do that," Ozawa said at the news conference. "But as the one responsible for the coffers, I have to say that the current environment makes it very, very difficult."
Toyota's shares have slumped about 10.4% on the Tokyo Stock Exchange since the day before the quake, more than Japanese rivals Honda Motor Co. Ltd. (NYSE ADR: HMC), down 7.9%, and Nissan Motor Co. Ltd. (PINK ADR: NSANY), down 3.9%.
Toyota has been hit harder than other Japanese automakers because it has much more exposure to the region. Honda and Nissan only make about 25% of their vehicles in Japan.
Toyota also suffered more supply chain disruptions since it operates using the "just-in-time" process for manufacturing, which means the company doesn't keep many parts and supplies in inventory. When those distributors were slammed by the quake as well, Toyota's supply chain crumbled.
The Japan quake hit Toyota while it was still rebuilding its reputation from recalling more than 14 million vehicles over the last two years, due to issues with accelerator pedals and floor mats.
"Toyota has been socked with one thing after another," Edmunds.com senior analyst Michelle Krebs told CNNMoney. "They had not yet recovered from last year's (recall) fiasco when the Japan earthquake knocked out some of its production."
Toyota's struggle will likely result in the company slipping this year from the world's largest automaker to the second or third spot, behind No. 2 General Motors Co. (NYSE: GM) or No. 3 Volkswagen AG. Toyota became the world's largest automaker in 2008, after GM held the title for more than 70 years.
"Toyota's production will most certainly fall from last year's level, while both GM and Volkswagen will make big gains in the U.S., Europe and China," said Koji Endo, an auto analyst at Advanced Research Japan.
Toyota's South Korean rivals, like Hyundai Motor Co. and Kia Motors Corp., have also stolen some market share as Toyota deals with limited production.
"There is no denying that Hyundai and Kia have improved their brand recognition in the U.S. market, as their Japanese rivals were struggling from the recall crisis," Ahn Young-Hee, a fund manager at KTB Asset Management, told Reuters.
South Korean auto manufacturers also benefited from a fall in the country's currency, the won, compared to the strong yen.
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