Thursday, May 21, 2009

Toyota Not Perfect


There are many Americans who are convinced that U.S. automotive manufacturers would be viable and competitive if and only if they were like Toyota. The Toyota that makes small, perfect cars that are built by technicians in white lab coats. The Toyota that always make sound business decisions based on environmentally-friendly strategies. The Toyota that places social justice ahead of profits.

It is those Americans who should take notice of the following from Automotive News:

How Toyota fell so spectacularly

Exports backfire as yen rises; neglect of compact cars?

TOKYO — In six short months, Toyota Motor Corp. collapsed from the world's biggest, most profitable car company to the industry's top quarterly money loser.

The roughly $28 billion swing — from record operating profit to loss — was whiplash-fast, but the problems behind it had simmered for years.

After 50 years in the United States, Toyota still imports 45 percent of the vehicles it sells there.

A decade-long expansion drive added to the automaker's costs. A push to speed new models to market hurt quality, opening the door for rivals. Toyota neglected the compact cars that had made it great in favor of luxury models, large SUVs and pickups.

Then it all boiled over.

In January to March, Toyota's red ink outpaced the loss at General Motors, which is on the verge of bankruptcy. And Japan's No. 1 automaker warns that things will get worse.

Toyota tailspin
Globally, Toyota stumbled due to
• Neglect of small, affordable vehicles in favor of big, expensive ones
• Overreliance on Japan exports
• Large exposure to exchange rate shifts
• Rapid overseas expansion that added costs, strained resources
• Slipping quality ratings

Excess and waste

"In each area, we have excesses, waste and overextension," outgoing President Katsuaki Watanabe says.

Watanabe's remedy: Refocus on compact cars and hybrids.

That would reverse Toyota's drift from its roots in small, low-priced cars such as the Corolla. Over the past decade, Toyota favored full-sized pickups and SUVs, as well as luxury Lexus vehicles laden with expensive features.

"When the last new Corolla came out, they didn't put much effort into changing" what had been one of their most critical cars, says Kurt Sanger, an auto analyst with Deutsche Bank Securities. "Their focus was elsewhere."

That shift was ill-timed. In a U.S. market collapse of 37.4 percent so far this year, Toyota Motor Sales tumbled 38.4 percent. While the Corolla and its Matrix sibling held up relatively well by slipping just 21.5 percent, the rest of the lineup dragged the total down.

Imploding demand, as well as Honda Motor Co.'s low-price positioning of the Honda Fit, Civic and Insight hybrid, finally woke Toyota up.

"We are determined to reduce the cost basis of our compact and hybrid vehicles," Watanabe said.

Toyota priced the redesigned Prius below what analysts had expected, apparently in order to compete with the Insight. So it is already moving in that direction. But Toyota is limited in reigning in rising prices by a critical weakness.

As the biggest auto exporter from Japan to America, Toyota is vulnerable to the stronger yen. The company got burned as the yen suddenly soared as much as 14 percent against the dollar in the fiscal second half that ended March 31.

Toyota posted an operating loss of ¥461.01 billion, or $4.74 billion at current exchange rates, in the fiscal year. Toyota made money in the April to September 2008 fiscal first half; the losses came entirely since Oct. 1.

Import reliance

Automakers Nissan and Honda import from Japan 23 to 28 percent of the vehicles they sell in the United States. But Toyota sold 999,527 imports in the United States last year — or 45.1 percent of its total sales. A stronger yen trims profits from every dollar sale.

In 2007, when this year's cars were being developed, a dollar bought an average ¥118 so planners could figure each $1,000 in profit was worth ¥118,000 to Toyota. At today's rate, $1,000 is only ¥96,000.

Over time, that will pressure Toyota to raise U.S. sticker prices, particularly for vehicles built in Japan, such as the Prius and most Lexus models.

Toyota's reliance on exports and exposure to currency risk has soared. Last year, Toyota exported about 61.5 percent of all the vehicles it built in Japan. In 1996, it exported just 35.9 percent, says Chris Richter, an analyst with CLSA Asia-Pacific Markets. "It added to the pain," he says.

Moreover, Toyota expanded production at home. Toyota's capacity in Japan grew from 3.73 million units in 2001 to 4.32 million last year, says Ta-tsuo Yoshida, an auto analyst at UBS Investment Research. Industrywide sales in Japan have fallen for years so all of the extra capacity was exported.

Toyota expanded even faster abroad. Global capacity jumped to 9.3 million from 6.4 million in that same period, Yoshida says. Now Toyota faces a 3 million unit gap between what it plans to sell this year and what it can build.

"They weren't ready for the downside," Yoshida says. "They were expecting a 10-meter tsunami, and what they got was a 30-meter one."

A push for ever-quicker vehicle development hurt quality. Recalls are up. Rivals, including Hyundai Motor Co., have caught or passed Toyota in J.D. Power and Associates' Initial Quality Study in the United States.

"What Toyota really needs to be careful of is that the quality gap between it and other competitors is narrowing," says Dave Sargent, vice president of automotive research at J.D. Power. "A lot of people were attracted to Toyota because of the quality."


Toyota slashed global production 48.7 percent in the first quarter. In the United States, it has frozen wages, idled plants, cut hours and offered a voluntary exit program. Back home, it cut two-thirds of its 9,200 contract workers. It targets $8.22 billion in cost cuts this year.

Despite the yen-driven need to build more vehicles in North America, it has delayed opening a Mississippi plant to build the Prius.

Toyota says it will cancel some plants outright, but it hasn't said where. It so far has avoided drastic measures such as massive layoffs or plant closings. Even in the United States, it sidesteps forced layoffs of full-time workers.

Despite the red ink, no one is talking about bankruptcy. Toyota has an ample cash cushion. Says Deutsche Bank Securities' Sanger: "They're not on the verge of a GM sickness."

'Bold change'

Real change may come June 23, when Akio Toyoda, 53, takes over as president. Toyoda, the scion of the company's founding family, promises "bold change."

He is stacking the boardroom with confidants, including Yoshimi Inaba. Inaba, 63, left Toyota to run an airport but was called back to invigorate North American sales and manufacturing.

At his final earnings press conference, Watanabe said: "We are currently taking steps to give concrete form to our revival efforts, which include putting in place a new management structure. And with this team playing the central role, I believe a new Toyota will be born."

Kathy Jackson contributed to this report

Of course, not all Americans are surprised....


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February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)