Nov 7, 2008

Business - Toyota vulnerable after chasing fast growth

TOKYO: Toyota Motor Corp's shock profit warning shows its strategy of breakneck expansion has left it especially exposed to an industry crunch The New Corolla Altis
brought on by the global financial crisis.

As recently as last year, Toyota was riding high after eight years of earnings growth, during which time profits more than tripled and sales mushroomed to make it the world's biggest carmaker ahead of General Motors Corp.

But Thursday's grim warning that profits would shrink by three-quarters this year was proof that even the mightiest are at risk from the current turmoil, raising the need for increased flexibility and, some say, more prudent investment from the Japanese giant.

"Toyota has become used to carrying excessive investment, and this has left it vulnerable in a downswing," said JPMorgan Securities analyst Takaki Nakanishi, who has a neutral rating on the company.

"It's important to recognize that the current steep decline in Toyota's earnings is not only a cyclical problem -- the downturn has been exacerbated by its own structural problems."

The worst financial crisis since the Great Depression has sent car sales tumbling in the developed world and slammed the brakes on growth in emerging markets, dealing a blow to automakers everywhere.

Japanese automakers have also been crippled by a soaring yen, which makes exports less competitive and diminishes the value of earnings made overseas.

Even so, the 63 percent cut in Toyota's operating profit forecast to 600 billion yen ($6.1 billion), a 13-year low, was far beyond the most bearish forecasts and highlighted the severity relative to its domestic rivals.

Japan's second-ranked Honda Motor Co, for instance, lowered its operating profit forecast by just 13 percent to 550 billion yen -- within reach of Toyota's new figure.


Toyota's troubles surfaced last year when its entry into the full-sized pickup truck segment in the United States coincided with a climb in gasoline prices to record levels.

At the time, Toyota's Tundra model was welcomed as an overdue addition to a segment that had grown to around 15 percent of the U.S. market. Similarly, some chided Honda for not venturing into the market dominated by GM, Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) and Chrysler.

But demand for gas-guzzling vehicles evaporated, and Toyota is now trying to repair the damage, deciding this year to build the popular Prius hybrid instead of the Highlander SUV at a planned new factory in Mississippi.

It is also trying to find ways to build fuel-efficient compact cars more profitably, while speeding up the rollout of hybrid vehicles, starting with four fresh models next year.

On Thursday, it announced further measures, setting up an emergency committee chaired by President Katsuaki Watanabe to look at costs ranging from labor to R&D in a bid to improve short-term profitability.

Delaying new factory launches and halving the number of temporary workers in Japan to around 3,000 are options Toyota said it is considering, although its choices are limited on further restructuring.

An unwritten pledge to avoid laying off permanent staff means Toyota will spend some $300 million this year to keep U.S. staffers on the payroll while factories are idled, it said. Nissan Motor (7201.T: Quote, Profile, Research, Stock Buzz), meanwhile, is culling 2,500 permanent jobs outside Japan as it also faces excess capacity.


But despite its problems, with $18.5 billion in cash or near cash and little debt, Toyota faces none of the imminent threats to survival that some of its rivals do.

Toyota sees little benefit from buying one of those troubled rivals, preferring to focus on growing its owns brands and maintaining the status quo it dominates -- thanks in a large part to its strategy of chasing fast growth during the past decade.

Without its aggressive investments, Toyota would not have raked in more than 1 trillion yen ($10 billion) in net annual profit in the past five years. Honda's investments have been cautious in comparison, but so have its rewards.

"For companies like Honda or Mazda that haven't been stepping on the gas as much, the (negative) impact is limited now," said UBS Securities analyst Tatsuo Yoshida.

"Toyota can withstand a 3-meter wave while GM and Ford drown in a 1.5-meter wave, but what we have now is a once-in-a-century tsunami," said Yoshida, who cut his rating on Toyota to neutral from buy after the profit warning.

While most analysts are confident of Toyota's medium-term growth prospects with its big lead in clean-vehicle technology, few are upbeat about a quick recovery in its shares.

Toyota's shares plunged as much as 13 percent on Friday to their daily limit-low before ending at 3,460 yen, down 9.2 percent. Shares fell more than 10 percent the previous session and are now down 43 percent this year.

The broader market .N225 declined sharply on the stunning outlook cut, with many coining the term "Toyota Shock" to follow the "Sony Shock" of April 2003, when a huge quarterly loss by the electronics giant sparked a two-day sell-off in the market.

"Toyota's announcement was a huge shock, especially because it has such symbolic meaning as a representative Japanese company," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.

"But with U.S. carmakers hit so hard it would be surprising for Toyota to be unscathed, and it may actually be a good thing to have all of this bad news out in the open now."


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