It's no secret that Japanese auto giant Toyota (NYSE: TM ) has been hurting in the wake of the Japan disaster, and now it's official: On Wednesday, the giant automaker reported a 77% drop in net profit for the January-March quarter.
That drop cast a cloud over a full-year report that was actually quite impressive, all things considered. For the full year ended March 31, Toyota reported a net profit of $4.7 billion, almost double last year's number and a sign that -- at least financially -- the automaker is getting back on its feet after the difficulties of the past few years.
Or at least it was, until that earthquake hit.
But the earthquake wasn't the only drag on earnings
Unsurprisingly, Toyota executives attributed much of last quarter's drop to production disruptions related to the earthquake and tsunami -- more on those in a moment -- but also cited commodities prices and the strength of the yen as issues squeezing profits. Commodities prices affect all automakers, of course, but the yen's strength makes Japanese-made cars (or cars with a high percentage of Japanese-made parts) more expensive in terms of currencies like the dollar and the euro -- as well as in key emerging markets. But competitive pressures around the world make it hard to raise prices to fully compensate, and that means Toyota's margins have likely been squeezed somewhat.
So how big a problem is this for Toyota long term? While the yen has been strong for a while, that's not likely to last indefinitely. Already we're seeing signs that the U.S. dollar is recovering strength versus other currencies now that the Federal Reserve's quantitative easing program is nearing its end, and a stronger dollar relative to the yen would do a lot to help Toyota's margins in the critical U.S. market.
Production recovering faster than expected
Likewise, the disruptions stemming from the earthquake may turn out to be less dramatic than we've been expecting. Toyota, like fellow Japanese industrial giants Sony (NYSE: SNE ) , Honda (NYSE: HMC ) , and Panasonic (NYSE: PC ) , was widely expected to have gloomy near-term prospects in the wake of the March 11 disaster. But now, Toyota executives are starting to walk back some of their worst-case predictions, saying that factory output (currently running at about 30% of capacity) should be up to about 70% in June. Expect the same to occur across other stigmatized, established Japanese firms. And for several key models, including the popular Corolla, Camry, Highlander, and Sienna minivan, production will be back up to 100%.
That's good news for Toyota's prospects in the key U.S. market, where sales have been hammered by supply issues. If the company can restore production quickly, stymied Toyota buyers may decide to simply put their car-buying plans on hold for a month or two instead of seeking alternatives elsewhere. That's not good news for Ford (NYSE: F ) shareholders who were hoping to see a big sales bump as the Blue Oval captured some of those buyers, but Ford executives have been downplaying that possibility recently.
Toyota's still facing headwinds
Toyota's all but certain to lose the global sales crown to General Motors (NYSE: GM ) this year, but I don't think either company's losing much sleep over that particular point. Even before the earthquake, Toyota was still facing challenges in the U.S. and elsewhere as fallout from last year's unintended-acceleration debacle continued to linger.
Toyota's brand still commands intense loyalty around the world. But the company's challenges are real: products that aren't the no-brainer class leaders they once were, head-on challenges from companies ranging from surging Ford to brash Indian upstart Tata Motors (NYSE: TTM ) , and a product line that isn't well-suited to the needs of emerging markets like China, where Toyota is lagging well behind many of its peers. Fold in some lingering consumer discomfort over last year's recalls and doubts about Toyota's once-peerless quality reputation, and it's clear that the Japanese giant still has work to do.
But few doubt that the work will get done. As GM CEO Dan Akerson said recently, "I want to win in the marketplace, but I want to win against a healthy and vibrant Toyota and Honda. Next year, we'll put the gloves back on, and I'm sure they'll go right back at us and we'll go back at them." Akerson's life may get more complicated with the news that Toyota's factories are starting to return to normal, but the Japanese giant's shareholders can breathe a little easier. Soon, we'll see how quickly that work can get done -- and how well Toyota's competitors will respond.