Toyota's Cost-Cutting Restores Profits

Six months after the worst loss in its history, Toyota has posted a surprise quarterly net profit

By Ian Rowley

Toyota (TM) CEO Akio Toyoda called the collapse in auto sales that followed the fall of Lehman Brothers last year a "once-in-a-century" crisis. Yet today, just six months since the Japanese auto giant posted its first annual loss in six decades, Toyota reported today that it eked out $242 million in earnings for the three months from July to September.

Toyota's surprise profit caps a raft of better-than-hoped-for results by Japanese automakers, which were hit hard by the rapid decline in car sales late in 2008 and a simultaneous surge in the yen against rival currencies. Among Toyota's biggest rivals, Nissan (NSANY) cut its full-year loss forecast on Nov. 4, from $1.8 billion to $400 million, while Honda (HMC) almost tripled its net profit forecast, to $1.7 billion on Oct. 27.

For anyone concerned about the health of Japan's automakers, Toyota's return to profit is in some ways the most encouraging development. For one thing, the company, the world's largest automaker, has appeared slower than rivals to get on the turnaround trail. Only yesterday, for instance, Toyota said it would quit its Formula One motor sport sponsorship because of the harsh economic environment—almost a year after Honda, which has avoided full-year losses, pulled out for similar reasons. Critics have also gone after Toyota for expanding too quickly this decade as part of its determination to unseat General Motors (GM) as the world's largest automaker.

Full-Year Profit Still Possible

The quarterly results show that Toyota may not be as nimble—or profitable—as Honda, but at least it's ahead of schedule. Despite cautious predictions for the rest of the year—the company still expects a full-year loss for the year through March 2010—it is possible Toyota could post a full-year net profit this year.

Speaking at a press conference in Tokyo, Executive Vice-President Yoichiro Ichimaru wasn't getting carried away. "The outlook for global vehicle demand remains uncertain," he said. Analysts, though, reckon that Toyota's latest loss forecast of $2.2 billion, compared with a previous forecast of $5 billion, is still conservative.

One source of optimism is the positive impact of government incentives around the world that will, for the time being, boost sales in some markets. In Japan, for instance, a cash-for-clunkers scheme continues through the end of March, while subsidies for "eco cars" have two more years to run. That will help sales of the Prius, the best-selling car in Japan, and other fuel-efficient models, such as the recently introduced Toyota Sai and Lexus HS 250h hybrids. In October, Toyota sold 133,877 cars in Japan, a rise of 14% over a year earlier.

Meanwhile, in China, a market where the government has played an even bigger role in stimulating demand, Toyota's sales have improved after a slow start to the year. In October, Toyota's China sales surged 42% compared with a year earlier. In the U.S., where the cash-for-clunkers program ended in August, sales remain sluggish but have at least stabilized. In October, Toyota's U.S. sales, including Lexus, edged up to 152,165 vehicles, a rise of 164 over a year earlier. Moreover, executives said sales could have been higher but for supply shortages of some models. Recognizing the improving global picture, Toyota today raised its vehicle sales projection to 7.03 million from a previous estimate of 6.6 million.

The Level of the Yen is Key

Even if sales take time to recover further, some other factors could aid profitability. Indeed, perhaps one of the more impressive aspects of today's announcement was an upward revision to the amount of money Toyota expects to save from cost-cutting. When sales plunged last fall, the company formed an "Emergency Profit Improvement Committee" to ferret out an extra $1.4 billion in savings through the end of March.

For the current term, the target is far more ambitious. Toyota today said it is now seeking savings of $13.9 billion, a rise of $3.9 billion over a previous projection. Putting that $13.9 billion number into context, it's only $3 billion less than Mitsubishi Motors' annual sales forecast.

Ultimately, though, the level of the Japanese yen against other currencies could decide whether Toyota can stay in the black. Ichimaru said one reason Toyota still projects that it will lose money from now to the end of the current fiscal year is the yen's renewed strength in recent weeks. The yen trades at around 90 to the dollar, compared with an average of 96 from April to September. Since a one-yen fluctuation of the exchange rate adds or subtracts about $400 million to or from Toyota's profits, the currency's recent strength could make all the difference. "There will be some positives coming from increased sales volumes," Ichimaru added. "At an exchange rate of 90 to the dollar, it's hard to make a profit. We have to go on addressing the long-term structural issues."

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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