Putting Toyota’s Big Loss In Perspective
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.
Filed Under: Auto News