IHS Global Insight Perspective | |
Significance | Toyota has reported its first ever operating and net losses for FY 2008/09, and it forecasts an even more dramatic downturn in the current fiscal year. |
Implications | The company has suffered losses as demand for its vehicles has fallen in recent times and as a result of the measures it has had to take to stem the downturn. |
Outlook | Despite hoping to achieve an ¥800-billion improvement in profitability this fiscal year through cost savings, the company is still forecasting that its losses will mount as demand declines further and it comes under increasing pressure from the strength of the Japanese yen. |
Toyota has announced its financial statement for fiscal year (FY) 2008/09, showing that the automaker recorded its first ever annual loss. For the 12 months ending 31 March 2009, the automaker recorded a decline in sales revenues from ¥26.289 trillion (US$265.6 billion) to ¥20.530 trillion, a fall of 21.9% year-on-year (y/y), not helped by a drop in total vehicle sales for the year of 15.1% y/y to 7.567 million units. Operating earnings for the year fell from a profit of ¥2.270 trillion to a loss of ¥461.0 billion, as the company was hit by the appreciation of the Japanese yen against the U.S. dollar and the euro, which had an impact of ¥760 billion, and an additional ¥1.480 trillion spent on its marketing activities. Net earnings also ended the year in negative territory to the tune of ¥437 billion, against a profit of ¥1.718 trillion the previous year.
Toyota's Financial Results | |||
¥ bil. | FY 2007/08 | FY 2008/09 | Y/Y Change % |
Sales Revenues | 26,289.2 | 20,529.5 | -21.9 |
Operating Income | 2,270.3 | (-461.0) | - |
Net Earnings | 1,717.8 | (-437.0) | - |
Much of the deterioration was recorded in the final quarter of FY 2008/09, following on from losses already reported for the third quarter. Over the course of the final three months, sales revenues almost halved from ¥6.567 trillion to ¥3.536 trillion. Earnings also tumbled during this period from an operating profit of ¥396.7 billion to a loss of ¥685.2 billion, and net profit slumped from ¥316.8 billion to a loss of ¥765.8 billion.
Geographically, much of the losses for the year occurred in Toyota's domestic market, the United States, and Europe, which have all suffered substantial sales falls. Its North American sales during the 12 months contracted by 25.2% y/y to 2.212 million units, while in Japan and Europe its sales fell by 11.1% y/y to 1.945 million units (benefiting from the growth of its Daihatsu brand) and by 17.3% y/y to 1.062 million units, respectively. However, all regions suffered some sort of decline, other than the Middle East, where sales grew by 1.5% y/y to 606,000 units.
Outlook and Implications
Although the economic downturn has affected nearly all automakers to some extent, by virtue of the fact that it is the largest producer of vehicles in the world, Toyota has been hit far harder than most. In the final quarter of FY 2008/09 it was forced to make some startling cutbacks on top of those it had already made, with global production for the three months reduced from 2.252 million units a year ago to just 1.211 million units as it tried to clear a build-up of inventory and offset a decline in sales from 2.331 million units to 1.49 million units. This occurred not just through the slowing down of production lines, but also through the halting of production, a process that is extremely expensive and has undoubtedly taken its toll on the automaker's bottom line. Adding to the pressures, the automaker has also become locked in to extremely costly steel contracts as a result of the hike in raw material costs last year, although these have now been reportedly renegotiated as steel-makers have also suffered from the fall in business brought about by the current economic contraction (see Japan: 17 April 2009: Toyota, Japanese Steel-Makers Agree on Steel Price Cuts—Report).
The reduction in material costs will undoubtedly contribute to the company's strategy of cutting back on expenditure, and it has already undertaken action to achieve this. Among the decisions that have already been taken by its "Emergency Profit Improvement Committee" established last November have been the termination of a new rear-wheel-drive (RWD) sports-car project with Fuji Heavy and a new small diesel engine with Isuzu, while it has also delayed projects to expand future production, such as that in Mississippi (United States; see United States: 16 December 2008: Toyota Indefinitely Delays U.S. Prius Production, Mississippi Plant Opening). It is also taking less drastic action, including reducing the costs of plants already being built (see India: 7 May 2009: Toyota to Reduce Investment in Second Indian Plant). By doing this, the company hopes to reduce its research and development (R&D) and capital expenditure significantly from FY 2007/08, and according to Toyota President Katsuaki Watanabe this should lead to a profit improvement of around ¥800 billion.
Following on from its difficult year in FY 2008/09, and despite expecting improvements in profitability and benefits from the launch of four new hybrid vehicles, Toyota is forecasting its losses to worsen during FY 2009/10. This is partly as a result of a further anticipated decline in vehicle sales, now projected at 6.5 million units globally this FY, a fall of 14.1% y/y and down more than 27% from FY 2007/08. This is set to result in a further decline in revenues of around one-fifth to ¥16.50 trillion. Operating losses are expected to almost double to ¥850 billion, while net losses will also fall further to ¥550 billion. Additional factors putting pressure on the automaker will include the continued weakening of the Japanese yen against the U.S. dollar and the euro; the company expects the yen to average ¥95:US$1 and ¥125:1 euro this FY, against ¥101:US$1 and ¥144:1 euro in FY 2008/09. IHS Global Insight tends to think that this is on the optimistic side, anticipating averages of ¥93:US$1 and ¥117:1 euro for the current calendar year.
Watanabe has now also given an indication of the company's strategy for the medium term, which will see it ramp up the development of hybrid technologies and small, fuel-efficient vehicles, to be sold to customers in each of its regions, with a greater emphasis on cost reduction. Toyota also believes that a concentration on "resource-rich and developing countries with the aim of providing high-quality, affordable and attractive models" will also yield great rewards, as will accelerating "the commercialisation of next-generation technologies in the areas of environment, energy and safety including hybrids, plug-in hybrids, next-generation batteries, bio fuels and fuel cell vehicles". However, it has to be pointed out that this is not particularly ground-breaking and many of its rivals will be undertaking similar strategies. It also perhaps underlines the fact that in some respects Toyota, despite its expansion in recent years, is really no better off than its rivals, and its mass scale has now become something of a disadvantage. It will be interesting to see whether the new president and member of the founding family, Akio Toyoda, will be able to bring about the change in mentality and imagination that the company seems to need.