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Toyota's Recovering: Bad News for Ford

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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.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter at @jrosevear. General Motors is a Motley Fool Inside Value pick. Ford is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Ford. You can try any of our Foolish newsletter services free for 30 days, with no obligation.

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.

Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On May 14, 2011, at 11:57 AM, spawn44 wrote:

    Sorry, I don't buy your take. The quake is a temporary bump and has little to do with what is happening in the autos. For the first time in many years the Japanese will have real competitiion from the U.S. auto company's in every segment of the market. They will not enjoy the gas mileage and quality advantage they had in the past. I believe it will be the Japanese company's that will be the receivers of bad news in the years to come.

  • Report this Comment On May 15, 2011, at 12:43 AM, baldheadeddork wrote:

    I'm not buying, either, John.

    The quake hit twenty days before the end of the FY, it's a non-factor in the 2011 report but it's going to be a big mark for 2012.

    Toyota's profits doubled from last year, but who didn't? Ford tripled their profits in 2010.

    But more important than how much they made was how they made it. Toyota only sold 71,000 more cars in 2011 than they did in 2010, a 1% increase. Net revenues from automotive operations were up 0.8% for the year. Yet profits for automotive operations doubled.

    One guess how that happened. From the 2011 earnings summary: "The increase in operating revenue was mainly due to cost reduction efforts and increases in both production volume and vehicle unit sales, despite the effects of changes in exchange rates."

    Get that? Production volume and sales were up 1%, the exchange rate continued to suck, but they doubled profits by trimming 172b yen in fat. (That equals 1% of net revenues from auto operations.)

    Because, y'know, Toyota was overbuilding their cars so much going into 2010 they could afford to squeeze out some more cost savings without hurting quality.

    Dig into it a little further and the numbers get a little worse. Most of the profits for the company as a whole came from Financial Services (4:1 over automotive operations) and all of that came from North America. But the profits mostly came from a decrease in the provisions for credit losses. Toyota didn't necessarily make more money, they just had to set aside less in anticipation of loan defaults.

    Their gain in sales is equally underwhelming. Japan was going to be bad this year before the quake, and now it's going to be a disaster. In the US, Toyota was flat in 2010 even though that was comparing against the carpocalypse numbers of 2009, and for the first four months of 2011 their gain in sales has been fourth worst of all companies in the US market. Toyota's 9.3% gain YTD is only better than Mercedes (+9.2%), Bentley (+0.2%) and Maybach (-19%). Try not to laugh too hard when you read this, but so far Suzuki, Mitsubishi and Mazda are having better years than Toyota.

    But wait, not only is Toyota not even hitting half of the gain for the industry as a whole in 2011 (up 19.6% YTD) and underperforming the weakest brands in the US market. They can't beat Suzuki even though they're comparing against 2010 numbers where they were in the darkest days of the unintended acceleration fiasco.

    If their quality problems of 2010 really are in the past and the customers have forgiven them or forgotten, then they should be beating the ever loving snot out of those 2010 numbers. They're not. Their market share continues to slip, down more than two full points from 16% a year ago and still sliding for the first four months of 2011.

    Toyota is still a company in free fall. If Ford is backing away from talk of grabbing market share, it's because someone wisely sent out a memo to STFU and get back to work. The opportunity is still there, and if anything I think it's more likely after reading Toyota's 2011 report.

  • Report this Comment On May 15, 2011, at 3:22 AM, Pickle8182 wrote:

    I'm with them. Ford has been doing great, and unless you have your own stake in Toyota and hoping this will help you out, I don't see much sense in the assessment. Who wants a Toyota right now anyway? Or for the next few years? You'll come out glowing. lol Personally, I think Ford has been doing a great job, saved face with the country not taking any money, and has potential for big growth.

  • Report this Comment On May 16, 2011, at 9:57 AM, TMFMarlowe wrote:

    @Pickle8182: Just a hint for the future -- if you actually want to get substantive responses from writers, it's best to avoid casually accusing them of serious ethical breaches just because you happen to disagree with them. Not everyone who sees the world differently is attempting to manipulate the market in their favor. As it happens, I own F and not TM -- as you can see from the disclosure at the end of the article -- and I am in fact a longtime TM critic, as you can see from dozens of articles in the Fool's archives.

    @baldheadeddork, my point is this: If F grabs US share from TM (still more likely than not, I agree) it's going to be on straight-up merit, not on opportunistic conversions due to supply problems (which was everybody's favorite thesis a week ago).

    In other words, "so much for that idea."


  • Report this Comment On May 16, 2011, at 9:59 AM, SMOKEN42 wrote:


  • Report this Comment On May 17, 2011, at 5:05 PM, Jazzenjohn1 wrote:

    I agree with Baldheadeddork. Toyota claimed the tsunami was the reason for their comparatively poor performance when it is not. The fallout from the disaster will show up in the second and maybe third quarters. The exchange rate is a big problem for TM and HMC right now. Despite all the high profile boloney about how "American" they are, and the "high content" of their vehicles, the truth is very different. As companies their content is only about 45% American, and about half their cars are made in Japan. The Domestics are about 85% American content, with the vast majority of their cars made here. The exchange rate is a problem because of their low content. They still have a protected home market, and because of the disaster they will have some increased sales there, but Suzuki may be the bigger beneficiary in Japan.

    The strategy all the automakers are using for the higher commodity prices (all), exchange rate (TM,HMC), lack of product (TM,HMC), etc. is small increases in prices but large reductions in incentives. TM has reduced incentives by $1000 per vehicle. This will slow the sales of vehicles so the shortage won't appear to be as acute in the dealers lots, but sales and profits will tell a different story.

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