Putting Toyota’s Big Loss In Perspective

Posted by Jason in May 18th, 2009

If you’ve been paying attention to automotive news in the last week, you’ve undoubtedly heard that Toyota lost an obscene amount of money in the first quarter – $7.7 billion to be exact. Toyota was quick to point out that this loss is against a $3.3 billion profit in the previous three quarters, resulting in a $4.4 billion loss for the 2008 financial year. (NOTE: Toyota’s financial year ends after the first quarter.) Worst still, Toyota anticipates losing about $5.5 billion for the coming year.

Toyota’s Loss is Big, But Don’t Let Anyone Fool You
photo credit: Andres Rueda

In other words, Toyota lost a lot of money last year and they’re planning on losing a lot of money this year too. Considering the fact that Toyota hasn’t had an operating loss since 1950, this is a big deal. Toyota has taken sweeping action with tremendous production cuts, cost cutting measures, and most recently announcing that they’re going to fire half of their corporate management team.

However, before anyone starts worrying about “Toyota being the next GM,” here’s some perspective:

1) Toyota needs more balanced international production – too many vehicles are made in Japan. Did you know that the biggest single source of Toyota’s loss last year was the devaluation of the American dollar? Because many Toyota models are manufactured in Japan, there value is based on the value of the Japanese currency the Yen. When the dollar is strong against the Yen, Toyota can export vehicles from Japan for profit. When the dollar is weak against the Yen, Toyota loses money. When the American dollar nose dived following the credit crisis of 2008, Toyota started racking up huge losses.

The solution? Build more vehicles in the USA. Besides reducing Toyota’s exposure to currency fluctuations, increasing North American production is the right thing to do. Otherwise, the only way Toyota can limit their losses on currency valuations is to cut back on production (which is what they’re doing).

2) A Loss Is Inevitable. New vehicle sales in North America are down 36% industry wide YTD, and the best estimates are that sales will be down more than 30% in North America for 2009 when compared to 2008. Toyota is the largest automaker in the world – when auto sales drop this much, they’re bound to see a drop in profits.

3) Toyota’s horizon is long term – Toyota will never be the “next GM.” In 1998, GM attempted to address their labor cost issues with the UAW. The result? The UAW went on strike for 53 days until GM backed off of their demands for lower labor costs. GM failed to address their labor cost issues (again), ultimately setting the stage for a government bailout in 2008 (and a probable bankruptcy in 2009).

Yet in that same year, GM’s share price before and after the strike was nearly unchanged. GM President Rick Wagoner received a half million dollar bonus following the strike, despite the fact GM lost as much as $5 billion for the year. If you’re wondering how this could have happened, it’s important to recognize that at GM it’s all about the share price. No one on Wall Street was (or is) thinking 10 years down the road, so no one in GM’s board room was thinking about it either. Only when the company is at death’s door will major changes occur.

Toyota leadership, on the other hand, is completely focused on the future. When Toyota determined they were looking at a loss for 2008, they canceled all executive bonuses (which I had a problem with, for the record). Toyota is following that action up by firing half their management team – do either of those moves sound like something GM would have done in 1998?

Until Toyota starts rewarding execs and unions for multi-billion dollar loses, the comparison to GM is completely unfounded.

While Toyota’s recent loss is big, there’s no reason to question Toyota’s future. Toyota holds $30 billion in cash reserves, so they’re not going to have any trouble taking a loss in 2009 or 2010. When the market rebounds in 2011 or 2012, Toyota will be well positioned to compete with a full prodcut line-up, a slew of hybrids, and hopefully an updated Tundra.

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13 comments

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Mickey Said in May 18th, 2009 @2:38 pm

Great report Jason… Now you know the rest of the story (Paul Harvey).

admin (Jason) Said in May 18th, 2009 @4:54 pm

LOL – Thanks man. I kept reading all the “buzz” last week wondering why there was so much gloom and doom.

Mark Said in May 19th, 2009 @12:50 pm

If toyota is so well run why are they firing half of their management team. either they are not as well run as you say or they are firing competent managers to make a point. The average age of a toyota buyer is second oldest only to GM. In an era when quality is expected (the top 10 JD power scores were statistically a tie) then selling cars as an appliance (toyota) becomes a less viable strategy.
If all they have to do is build more cars in America, why aren’t they? What happens to the plants in Japan? Volkswagen has already overtaken toyota for number 1 and toyota is lagging in China, the fastest growing market.

admin (Jason) Said in May 19th, 2009 @3:17 pm

Mark – You raise quite a few good points. First, you’re 100% correct about Toyota’s average age being too old. I’ve always disagreed with the notion that Toyota is losing traction because it’s vehicles are “bland” simply because Toyota has the Tacoma, the Prius, the Lexus IS, and Scion – vehicles that are far from bland and popular with younger buyers. I think the best selling Camry and Corolla are bland, but isn’t that OK? Best selling vehicles should be everything to everyone, shouldn’t they? Still, the facts are what the facts are.
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You’re right about the plants in Japan – Toyota made a mistake when they avoided building more capacity in the USA, but that’s not really today’s problem. If Toyota wants to stop losing money on currency exchange, they need North American plants. I bet Chrysler or GM has a couple they would be happy to unload some, and I’m betting it’s cheaper to run a couple of Japanese plants at half capacity than it is to lose 5-10% of revenue to the weak dollar.
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As for China, I hate to say something like this, but Chinese attitudes towards Japanese products generally aren’t very positive. See “Second Sino-Japanese War” for more info.

Mickey Said in May 19th, 2009 @6:59 pm

Isn’t GM bringing the China connection here to the US?

admin (Jason) Said in May 20th, 2009 @7:22 am

You talking about GM selling Buick to Yangfang Motors (or something like that)?

Mickey Said in May 20th, 2009 @6:48 pm

Jason the news here put out that GM will be bringing in China made vehicles alongside theirs. I can’t find anything about that. That’s why I asked.

admin (Jason) Said in May 21st, 2009 @9:35 am

Huh – hadn’t heard that one yet, but it makes sense long term. In the not too distant future the Chinese auto market is going to dwarf the North American market, and it wouldn’t surprise me to see models designed for China being sold in the USA as part of a “economy of scale” play.

Mickey Said in May 21st, 2009 @1:45 pm

Jason I think I heard either 2012 or 2013 is when this will happen. I’ll do some more research to try and find it.

admin (Jason) Said in May 25th, 2009 @6:56 pm

Cool man – I’m up for posting something about that on the blog. I’ll look too.

Realist Said in November 2nd, 2009 @5:22 pm

Wow – Ford Motor Company just truned a 1billion dollar profit. American plants, UAW labor, and exciting, well made products.

Toyota is failing because they build boring vehicles. They claim quality, but have you ever been in their ‘flagship’ Prius? It has to be worst vehicle since the Renault leCar. Their stay on top as the worlds largest automaker will be over by July 2010.

Admin (Jason) Said in November 2nd, 2009 @6:17 pm

Realist – I agree that Toyota isn’t going to be the world’s biggest automaker much longer. However, I disagree as to why. I think Toyota made a critical error when they based so much of their production in Japan. Had Toyota built more plants in the USA during the 90’s, their profits wouldn’t be disappearing now because of a weak dollar. By the way, did you see that the UAW is already trying to erode Ford’s advantage? http://www.tundraheadquarters......otiations/

Mickey Said in November 2nd, 2009 @9:23 pm

Realist have you ever been in a Prius? I have and when you can get 60mpg then you can talk. Nothing like using your car’s battery to run as a generator while your power is out.