When I arrived at Toyota’s downtown Tokyo basement conference room, I bumped into Toyota spokesman Paul Nolasco, who was in the grips of stage fright. Annual results conferences with the world watching can do that to a spokesman. Trying to cheer Paul up in my charming way, I said: “Come on Paul. This one will be great. It’s the next ones that will be rotten as hell.” Paul gave me a pained look.
When I left an hour and a half later, I had changed my mind. Toyota will survive this crisis just like it survived the previous two: Stronger. Not unscathed, but not as badly affected as some officially fear and silently hope. What may not survive are Japanese jobs.
In a packed conference room in downtown Tokyo, Toyota CEO Akio Toyoda announced this afternoon that Toyota finished the fiscal year to March 31, 2011 with a group net profit of 408.1 billion yen ($5 billion), up 95 percent on the year. This despite an ever increasing yen that is driving the company – and a lot of the Japanese industry – “to the limit” as CFO Satoshi Ozawa warned.
Ozawa put the impact of the March 11 earthquake and tsunami at 110 billion yen ($1.36 billion) in lost operating income. The fiscal year had ended two weeks after the catastrophe. If two weeks cost you a billion and change, no wonder that the quarter is down. (The $1.36 billion is most likely a charge taken for future quake-related expenses.) A fact that had been lost on some commentators from the wire services that feverishly typed that the 4th quarter was below expectations, and hit send.
They missed that the worst is yet to come. Akio Toyoda expects a “bottom hit” of total production for May or June. After that, the ramp-up to normal is expected to go faster than forecasted. On April 22, Toyota had announced that normalization of production is expected to start in August. Toyoda now expects that Toyota will be on its way back to normal beginning in June, with hopefully 70 percent of production reinstated in summer. By then, Japan will go back on a two shift schedule. All lines and models won’t be back to 100 percent normal before November / December – this has not changed.
End of April, Toyota had been short 150 parts positions. By now, the number is down to 30.
The March 11 earthquake and tsunami will get Toyota customers a unique feature: A genset, free with purchase of a hybrid. Toyota was moved by the fact that people who had not electricity, but who had gasoline, rigged their hybrid to produce at least a little power. Akio Toyoda announced that “all Toyota hybrids will receive a new function that allows them to be used as emergency generators.” If they are lucky, this could turn into something. If an umbrella in a car becomes a topic with a Rolls Royce and a Skoda Superb, imagine what a free emergency generator can do.
Toyota itself appears to be in excellent financial and operational shape to weather a few quarters until production is back on line. Through a mixture of marketing efforts and cost reductions, Toyota can now get by on an annual volume of 6.6 million units and still break even – as long as the yen would be at 85 to the dollar, Ozawa said. In 2009, Toyota’s break even level was 8 million units. A 6.6 million break even level will give Toyota a soft cushion that allows it to ride out the expected “bottom hit” in April and May and reduced levels for the rest of the year – if the yen plays nice.
Toyota did not make any projections of how the year will look like financially. There are too many unknowns. Both Toyoda and Ozawa steadfastly refused to give anything that could be interpreted as guidance for stockholders or analysts. But if you listened closely, you could hear hints.
“Assuming that we can continue our improvement, we expect to generate improved profits by the end of this fiscal year, “ said CFO Ozawa, and added: “Even at an exchange rate level of 85 to the dollar.”
The problem is, a dollar buys only 80.8 yen as I type this. The yen had been way below 85 to the dollar for most of the year. And that is Toyota’s biggest worry. A massive recall, a once in a millennium tsunami, with a dose of “genchi genbutsu”, all that can be overcome and left behind. Against a steamroller currency, even the largest multinational is powerless.
A strong currency is murder when you export, even if you make your cars abroad. Because once those foreign profits are converted back into your currency, suddenly, those profits get smaller. Still, producing abroad at a smaller profit beats producing at home and selling for a loss.
For a while, the press conference turned into a currency trading room with “fx rates” (foreign exchange for those in the know) in every sentence.
And there was interesting interplay.
Akio Toyoda said he is trying “hard to preserve jobs in Japan. Toyota is a global company that was born in Japan and was nurtured in Japan. I love Japan.”
His balding CFO, who looks like a Japanese Kojack anyway, plaid the bad cop.
“The current valuation of the yen represents the limit for conducting manufacture in Japan. Our strongest competitors are the German manufacturers and the Korean manufacturers, they enjoy their cheaper domestic currencies. There is a huge competitiveness gap between ourselves and these competitors because of the exchange rate. The limit has been reached for a single Japanese company to get through this difficulty.”
The American manufacturers enjoy an even weaker currency at the moment, but apparently, there were not deemed a competitor worthy of mention. At least not today.
The hints came even heavier: “From the viewpoint of a CFO,” said Ozawa, “I have to consider how long we can continue insisting on conducting manufacturing activities in Japan.”
Everybody wrote that down? No? Ozawa dropped an even heavier hint:
“From the viewpoint of risk diversification, some people may argue for relocating production in Japan. If the negative exchange rate factors continue to stay, that relocation will take place not within Japan, but outside of Japan. And once that takes place, it will result in a complete hollowing out of the Japanese industrial base. To avoid that I hope that appropriate countermeasures or appropriate policies will be taken, so that the hollowing out can be avoided.”
And then, something unheard of happened. Toyoda asked the media to help Toyota to make their case – with the Japanese government, central bank or whoever has their finger on the currency trigger. Said Toyoda:
“By enlisting the cooperation of you, the media of Japan, I hope you can generate a strong force for creating a better environment for the manufacturing sector, so that it can remain viable in Japan.”
And in case they had not heard it the first time, Toyoda said it again a few minutes later:
“We are a carmaker which has a strong desire to sustain and preserve the manufacturing base here in Japan and I hope I can enlist your support and cooperation.”
“Looking back at the past two years, I was faced with so many difficulties,” reminisced Akio Toyoda. “After the Lehman Bother debacle Toyota recorded a net loss. Then we were faced with the recall crisis and quality issues. Now we are in the aftermath of the earthquake and tsunami.”
He faces the biggest disaster of them all: His own godzilla-strength currency.
At the way home, I stopped at a Citi machine to change a few hundred dollars into yen for a week of subway rides. Toyoda and Ozawa have my full support. That rate hurts. See, I already did spread the word. Doitashimashite.