Toyota Warns of Weak Profits Ahead

Toyota stunned the markets yesterday by warning that its profits for the year are going to drop by 29.5% compared with 2007. The company also announced that this quarter income declined 28% to ¥316 billion (US$1=¥105). This is the first slide in quarterly profits on a year-over-year basis in three years, and it took analysts by surprise. The causes are a weak US dollar, rising commodity prices including oil, and generally bad economic conditions in key markets.

Toyota’s main problem is its reliance on the North American market for 50% of its operating profit. The American economy’s weakness coupled with gasoline at $3.60 a gallon means there’s not much interest in buying new cars. Bloomberg reports, “The carmaker forecasts its North American sales will drop to 2.77 million vehicles this fiscal year from 2.96 million last year.” Moreover, the weaker dollar has shaved $6.6 billion from its earnings.

However, Toyota is a very conservatively managed operation. Its forecasts operate under Murphy’s Law -- that is, anything that can go wrong will go wrong. Indeed, some of Toyota’s managers make the mythical Murphy look like a starry-eyed optimist. That means that when things do go wrong, Toyota usually has a plan on the shelf to cover the events in question.

The company has decided to delay opening plant number 8 in North America. This plant was to build the Highlander SUV starting in 2010. With gasoline at current levels, the SUV may well be a thing of the past. People with the monsters can’t get rid of them on the used-car market. And they pay a huge bill every time they fill up. Toyota’s decision is sound.

Moreover, Toyota is starting to look to Asia for increased sales. In China, it believes it will sell 640,000 vehicles this year up from 470,000, which will offset the drop in US sales. In Asia excluding China and Japan, the Company expects to sell an additional 144,000 cars, putting the figure over 1 million for the first time ever.

Toyota’s boss, Katsuaki Watanabe, is certain that the 10% profit margin is secure. He intends to keep it that way by reducing raw material costs, dropping the amount of resins used by 30% and reducing the types of steel used. He told a press conference in Japan earlier this week (translation by Bloomberg), “It’s now time to readjust our structure after having years of constant growth. It’s a golden opportunity to eliminate waste.” Given his attitude and Toyota’s track record, the weakness in the Company profits may not last very long.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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