By on May 11, 2011

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.

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18 Comments on “At The Toyota Financial Results Conference: We Doubled Our Profit, And The Yen Is Killing Us...”


  • avatar

    Weak dollar is not good for America either, because it decimates savings (which is kinda the plan: the government wants to pay off the monstrous debt by debasing the currency).

    • 0 avatar
      toxicroach

      The weak dollar has positive ramifications too. If you work in manufacturing, a weak dollar encourages buying domestic and increases the viability of exports. It makes things like, say, Chinese imports, less attractive. It reduced the motivation to outsource jobs.

      On the whole, we probably need a weaker dollar. We deserve a weaker dollar, given what is going on. Good news is that it helps in a lot of ways.

  • avatar
    th009

    A strong yen not only shrinks the size of the US$ profits, it also makes it difficult to earn even the US$ profits as many components are more expensive in US$ terms.

  • avatar

    one simple solution for the yen…import Ben Bernanke.

    • 0 avatar
      CJinSD

      COTD! whoops, wrong site.

    • 0 avatar
      rnc

      What the japanese did during thier two lost decades make bernanke’s policies look like chicken feed. Let’s face it, Obama from Bush and bernanke from greenspan, inhereted almost impossible situations, the country needs to suck it up, it’s either the working class accepts that things aren’t going to go the way they were because it wasn’t real and the (super & ultra) rich are going to have to pay a significant tax, I mean screw it, rather than whining about having to pay such high taxes, perhaps they should appreciate the fact that they were born or introduced into a country that allowed them to obtain said wealth in the first place.

      • 0 avatar
        CJinSD

        The situations they inherited were not good, but both have done everything in their powers to make our chances of ever recovering disappear. Expensive and scarce energy won’t help the working class, but it is Obama’s passion. The super and ultra rich aren’t threatened by Obama’s policies. They’re able to put their capital where Obama’s graft flows the freest. Bernanke’s money printing is a tax on the working classes, as comodities are rapidly becoming luxuries. Nice of Michelle to pretend that pricing food beyond anyone who isn’t entitled to redistributionism is actually a master diet plan, but the reality is that Obama and Co are destroying our standard of living every day, using an army of simpletons to suggest that austerity is for our own good.

  • avatar
    Philosophil

    This could be the tip of a very dangerous iceberg for Japan. If others follow Toyota’s suggested lead, their already damaged economy will be hit even more severely.

    My question is, why is the yen so high?

    • 0 avatar
      th009

      The real question is, why is the dollar so low?

      Compare it against yen, euro, C$, AU$, just about any freely-traded currency and it’s worth a pittance these days.

    • 0 avatar
      PenguinBoy

      Japan’s economy has been hollowing out for years – when was the last time you saw a “Made in Japan” label on Japanese branded consumer electronics? The crumbling infrastructure and high yen will only serve to speed up the process.

      Other than nationalism, I can’t really think of any reasons for Japan to make many cars for export. It would make sense to either make cars close to major markets, or in low cost regions – right now Japan is neither.

      While Toyota has a strong enough balance sheet to weather this storm, I suspect some of the second tier Japanese automakers might not make it…

  • avatar
    Secret Hi5

    “Not unscathed, but not as badly affected as some officially fear and silently hope.”

    Aww . . . Do I have to change my name to Silent Hoper? (HIGH FIVE!)

  • avatar
    DC Bruce

    The wages of having organized a mercantilist economy now must be paid. Other emulators of the Japanese model (Korea, China) should take heed of the consequences of building an industrial base that is primarily focused on serving export, rather than domestic, demand. For decades, Japan has had a kind of two-tiered economy: a highly competitive export sector and a non-particularly competitive or efficient domestic sector. The result has been to limit the growth of domestic demand, creating trade imbalances and, consequently, currency appreciation.

    Given that Mr. Toyoda is talking about competition from Korea and Germany, it is clear that this is not a Yen vs. US dollar problem, but a Yen vs. the rest of the industrial world’s currencies problem. In short, it is a yen problem, not a US dollar problem. (Which is not to say that the US dollar doesn’t have problems and that the benefits of the Fed’s cheap money policy no longer exceed the costs of that policy.)

    Whatever one says about their cars, one has to respect Toyota as an industrial organization.

  • avatar
    KitaIkki

    Not just Toyota. Japan will come out of the quake/tsunami stronger as well.
    http://www.city-journal.org/2011/21_2_japan.html

    • 0 avatar
      PenguinBoy

      I don’t see it. Japan will continue to be one of the worlds leading economies, but their economy has been bouncing along the bottom for 20 years now, and I don’t see any reason for this to change.

      Japan has the most indebted government in the world*, they have been printing money and keeping interest rates at zero for 20 years, their population is aging and not being replaced by immigration, and now they have to rebuild their battered infrastructure.
      _________________
      *https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html

      • 0 avatar
        KitaIkki

        Very few people were upbeat about Japan in 1946. As late as 1965, the US government was worried about a default by the Japanese government.
        The country has survived and prospered after worse hardships, time and again.

        Yes, the population is aging and shrinking, but their high-tech economy has outsourced almost all labor-intensive manufacturing overseas, while still keeping high-value manufacturing at home. The top-of-the-line Nikon cameras are made in Japan, for example, so will the top-of-the-line Lexus.


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