Is Toyota Toast?

The great Toyota (NYSE: TM  ) guessing game may be coming to an end, but the company's troubles certainly aren't. Toyota executives said recently that the company's manufacturing operations may not be back to normal until the end of 2011.

That's not surprising, though it's a bit longer than some analysts had predicted. But it should be just a bump in the road over the long haul, right? After all, the strength of the Japanese giant isn't really in question.

Or is it?

This hasn't been Toyota's decade
It's almost hard to remember that just a few years ago, Toyota seemed unstoppable. Having blown past a collapsing General Motors (NYSE: GM  ) to seize the global vehicle sales crown, the company and its Consumer Reports-friendly products seemed poised to become the global automotive standard-bearer.

But then, as we all know, things got complicated. The unintended-acceleration incidents, the coverup allegations, the recalls, the huge fine, the lingering concerns about Toyota's quality amid admissions by CEO Akio Toyoda that the company had grown too big too quickly, more recalls, a fall to third place in the U.S. market, still more recalls ... The last year has been a nightmare for Toyota, one that executives were surely hoping to put squarely in the rearview mirror.

But even though the immediacy of last year's events is fading, Toyota's reputation for quality (for years, the brand's most important selling point) has taken a big hit, maybe big enough to raise doubts in the minds of many brand loyalists. Add in the fact that many popular Toyota models are likely to be in short supply for months, and we may see lots of people who haven't driven anything but a Toyota in ages considering other brands.

And here's the problem: Some of those other brands are looking really good these days.

The earthquake may not be the only seismic shift
I now know two people who recently went out to buy a Toyota or Honda (NYSE: HMC  ) and came home with a Ford (NYSE: F  ) instead. That's a tiny sample size, but I'm thinking it might become a trend, at least in the U.S. And that trend may already be emerging. The Ford Fiesta and the Chevy Cruze -- direct competitors to Toyota's Yaris and Corolla, respectively -- sold in big numbers in April, while Toyota's sales were down.

For the first time in decades, Ford's showrooms are loaded with fresh products that compete well with the best of Japan -- and its timing is looking awfully good.

Consider: Ford's obviously doing very well, but one of the company's ongoing challenges has been to find a way to reach out to the legions of consumers who wrote off Detroit ages ago, who maybe have never considered an American car. If those consumers find shortages at their favorite dealers in coming months, as seems likely, Ford -- with its sparkling product lineup and bailout-free mojo -- seems particularly well-positioned to benefit.

Of course, Ford isn't the only company poised to benefit, and this isn't just a U.S. problem. GM, Volkswagen, and Hyundai are heavy hitters in China and other emerging markets, where Toyota has been working hard to expand,  but is now almost certain to lose ground. While consumer tastes in markets like China and India are still very much in flux, strong brand preferences will start to emerge as time passes, and the window of opportunity to make big gains in market share will close. Toyota's problems could linger here as well.

The upshot: A long-term decline?
Unless GM somehow shoots itself in the foot (something that can never be ruled out entirely), it's a no-brainer that Toyota will cede the global sales crown to the General this year. Toyota has already lost production of about 500,000 vehicles in the wake of the earthquake and tsunami, and full capacity won't be restored for months. Meanwhile, GM is revamping its U.S. product line and expanding rapidly in China.

But Toyota's problems run deeper: Lingering questions about quality will continue to be fed by products that are no longer the undisputed class leaders in areas like interior fit and finish. While Consumer Reports still gives Toyota high marks for reliability, the magazine (like other critics) is more often favoring other brands these days.

For now, I have to agree with my Foolish colleague Dan Caplinger, who wrote recently that Toyota is hard to recommend even as a beaten-down value play. Toyota will recover from the natural disaster in time, but the self-inflicted problems -- and the loss of customers who may be finding out just how good the competition has become -- may cost the Japanese giant even more in the long run.

Fool contributor John Rosevear owns shares of Ford and General Motors. General Motors is a Motley Fool Inside Value selection. Ford is a Motley Fool Stock Advisor pick. The Fool owns shares of Ford. You can try any (or all!) of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On May 03, 2011, at 9:28 PM, baldheadeddork wrote:

    Bloomberg has a story up today that analysts are estimating Toyota will post a $1.9b loss for the current quarter, with another $700m in red ink for the following quarter. A Japanese analyst for Citigroup said output in Japan may not return to normal until next April.

    I think all of those numbers are on the optimistic side. The Japanese domestic market was looking at a brutal 2011 and 2012 before the earthquake. Auto sales in Japan were down 21% _in January._ That's the context behind today's announcement that April sales were down 51% in the wake of the earthquake. Toyota in particular was already looking at a double-digit drop in its home market and another year of underperforming in the US because of the recall - before the earthquake made it impossible to build enough cars for the people who did want to buy them.

    Toyota can't say this, but the best thing they could do is look at this as a decade-long restructuring. They need to do what they have to do to get by until 2014 and 2015, but the real focus right now needs to be on fresh-sheet cars that can live up to what Toyota used to mean, and they need to spend what it takes to make those cars great. If they do this, they'll have a lineup as strong as anyone in the world by 2020, but it will still take years into the next decade for buyers to believe in them again.

    The other option would be running on their reputation and believing the damage isn't as bad as it seems, basically what GM and Ford did for a decade or three. Will Toyota do the smart thing? I don't know. The conceit they showed last year doesn't give me a lot of confidence.

    But even if Toyota starts nailing it with great product and a genuine rehab of their image, they'll never return to the growth and dominance they had in the 70's, 80's and 90's. Japan Inc. caught the US and European auto industry sleeping in the 70's. They won't catch anyone off guard today.

    So what kind of market share can Toyota have in the US if it doesn't have decades of goodwill behind it? Nissan is making some great cars and they have a 7% market share. I don't think Toyota will fall to that level, but if "toast" means a 11.5-12.5% market share in the US when everything gets back to normal, then yeah - Toyota is probably toast.

    Link to the Bloomberg article cited in the first graf: http://www.bloomberg.com/news/2011-05-02/toyota-may-report-f...

  • Report this Comment On May 04, 2011, at 7:58 AM, TMFMarlowe wrote:

    "They need to do what they have to do to get by until 2014 and 2015, but the real focus right now needs to be on fresh-sheet cars that can live up to what Toyota used to mean, and they need to spend what it takes to make those cars great."

    I think that's dead-on. I also think you could sub in the word "Honda" for Toyota and be dead-on again. (Seen the new Civic? Yikes.)

    I'll have more on that front early next week.

    John

  • Report this Comment On October 11, 2011, at 11:11 PM, MHedgeFundTrader wrote:

    Today Toyota, the world’s largest car maker, has been slammed by the perfect storm that has taken its shares down a gut churning 60% from its 2008 peak. They took eight years to find a defect in an American made accelerator component that caused thousands of accidents, and dozens of deaths, forcing a worldwide recall of 10 million vehicles.

    To me, this all adds up to a great screaming “BUY.” You can start with the recall, the largest in history, covering eight models, which promises to be speedy, lavish and generous. It prompted a production shut down, an unprecedented measure in auto history. The company is going all out to reinforce customer loyalty. Toyota still makes great cars. And let’s face it, many people would rather die than drive an American car.

    There are a few additional angles here. Since the company is Japan’s largest exporter, it would benefit greatly from any weakness in the yen, which I consider as the world’s most overpriced currency. Think of the stock as a long dated yen put. Look at the charts for Ford, US cars sales, and the palladium used for catalytic converters, and it is obvious that the world is seeing a surge in global car sales.

    I know the philosophy, and the strengths of this company intimately, and they will come roaring back. Let the ruckus over the recall burn out, and add Toyota to your “buy on dips” list. Keep in mind that this is not a day trade, but something to bury in your portfolio and then lose behind the radiator. It will also not be immune from the calamities that strike the stock market.

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