Floods Slow Toyota’s Recovery

Nov. 11, 2011 - PRLog -- Toyota has reported that its second-quarter operating profit is down 19% versus last year’s numbers, to $970 million, on lower sales due to severe supply chain disruptions from the floods in Thailand which complicated its recovery from Japan’s tsunami in March and the impact of a strong yen. The company has been forced to halt operations at its three Thai plants until at least November 12, as a shortage of parts disrupts output at home, in Asia and as far away as North America and South Africa. Toyota estimates that between October 10 and November 12, the Thai floods will have resulted in 150,000 units of lost production. All its Thai plants are shut and manufacturing in other parts of the world is being affected by a shortage of parts. Toyota is in a much better position than Honda, however, which faces costly repairs to its flood-damaged plant in Thailand. A lack of parts has forced Honda to postpone model launches in the US and Europe and, like Toyota, it announced a sharp drop in quarterly earnings. Honda said vehicle output in North America would be at about half the level it had planned until November 10.

With the yen at record levels against the US dollar, competitiveness has also been eroded against overseas rivals such as Hyundai Motor and Volkswagen. Toyota executives have said in the past that the yen's strength against the dollar costs the company about $4,000 in profits per vehicle, on average, and the company said on Tuesday that the yen's strength cost it about 80 billion yen (a billion dollars) in profit in the quarter. In contrast, Nissan seemed to be in better shape. Last week Japan’s number two carmaker reported better profit than had been expected and raised its full-year guidance. Toyota's U.S. market share has fallen from 17% in 2009 to about 12.6% through October. The company is unlikely to recover that ground anytime soon, as rivals like GM, Hyundai, and Ford have far more competitive products now and have won over some of Toyota's long-time customers. Nevertheless, Toyota's outlook should improve incrementally as production and inventories finally recover; at least from a sales perspective. Assuming the yen drops to a rate of 85 to the dollar, the company will break even on sales of 7.5 million vehicles around the world next year (Toyota sold 8.4 million vehicles in 2010). Regardless, with the yen currently trading around 78 to the dollar even after government intervention, predicting profits will remain a challenge even after production is restored.

Despite the profit squeeze, Toyota remains the world's most valuable automaker, with a market cap over $110 billion. This value is eroding share prices of Toyota and Honda has taken a beating this year because of the natural disasters. Toyota’s stock is down 22 per cent, and Honda’s stock is down 28 per cent. During the same period, the Nikkei 225 index has seen a decline of 15 per cent. However, Toyota Vice President Satoshi Ozawa said that although sales in Japan and the US had fallen due to these natural disasters, demand from emerging economies had made up some of the shortfall.

# # #

About Corolla Financial:
Corolla Financial specializes in providing a range of financial advisory and brokerage services to personal and corporate clients. Regardless of what stage of life or business you are at, Corolla delivers comprehensive advice and services custom designed to address your needs. - http://www.corollafinancial.com