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Why Toyota's Production Cuts Are a Warning Sign for All Auto Stocks

By John Rosevear – Aug 19, 2021 at 11:30AM

Key Points

  • Toyota said it will cut 40% of its global production next month.
  • Until now, Toyota has managed to keep most production going amid the semiconductor shortage.
  • The new cuts could mean rougher seas ahead for all global automakers -- and their shareholders.

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If even Toyota is now facing parts shortages, the whole industry could be in for a rough ride.

Auto giant Toyota (TM 1.06%) said on Thursday that it will cut its global production output by 40% in September, because of parts shortages affecting its factories in Japan and elsewhere.

This is a big deal, not just because of Toyota's huge global footprint but because Toyota has so far largely avoided production cuts amid a global shortage semiconductors. But if even Toyota is now feeling the effects of supply chain disruptions, it suggests strongly that that the global shortage of new vehicles won't end any time soon. 

Here's what we know and what it might mean for auto investors holding shares of Toyota and other big automakers.

What Toyota said about its upcoming production cuts

Toyota announced it would suspend production for all or part of September at 14 of its factories in Japan. The affected plants include those that build several key models for export to markets including the United States, including the Prius hybrids and most Lexus brand vehicles. 

A worker attends to Toyota sedans on the production line at the company's Motomachi plant in Toyota City, Japan.

Toyota's flagship Motomachi assembly plant is one of 14 Toyota factories in Japan that will see production cuts next month. Image source: Toyota.

The cuts are expected to reduce Toyota's September output by about 40% from its previous plan, or about 360,000 vehicles. About 140,000 of those will be at Japanese plants, with the remainder at other Toyota plants around the world that depend on parts from Japan. 

A Toyota executive told Reuters that for the moment, the company is sticking with its full-year production guidance, 9.3 million vehicles for the fiscal year that will end on March 31, as well as its target of 8.7 million sales over that period. (The extra vehicles will go to replenish depleted dealer inventories.) 

Why Toyota is now forced to cut production

Here's what makes this a big deal: Until now, Toyota has been relatively unaffected by the chip shortage. The company had a large stockpile of chips going into the shortage in early 2021, thanks to a business-continuity plan it adopted after the 2011 earthquake and the Fukushima nuclear plant disaster.

But now it's facing two separate but related issues. First, that chip stockpile has been largely drawn down, exposing Toyota to the same supply line woes that forced rivals including Ford Motor Company (F 0.36%) and Honda Motor (HMC 1.33%) to trim production of key products in the first half of the year.  

Second, the new outbreaks of the delta variant of COVID-19 are affecting suppliers of other parts as well. Many of the companies that supply parts for Toyota's plants in Japan have factories in Southeast Asian nations like Thailand that have been hit hard by the delta variant. Production cuts at those plants will have downstream effects at auto factories around the world.

What it means for auto investors

Here's the takeaway: The COVID-19-related supply chain issues that hit most automakers' top lines in the second quarter aren't going away any time soon. Not long ago, automakers were hoping to be through the worst of the chip shortage before the end of the end of the year. That's looking less likely now. 

I think this Toyota news suggests that we should expect automakers' shipments and revenue to remain well below pre-pandemic levels for a while longer -- certainly beyond the end of 2021. 

But what about profits? Toyota, Ford, General Motors (GM 0.87%), BMW AG (BMWYY 0.43%) (BAMXF 2.64%), and others were able to generate good margins in the second quarter, despite some revenue shortfalls, thanks to high consumer demand that allowed them to largely do without costly incentives. (High used car prices also helped automakers' finance subsidiaries get more money for off-lease vehicles, which in turn also helped profits at Ford, GM, and some others.) 

If consumer demand for vehicles continues to be strong, then Toyota, like Ford and GM in Q2, will probably be able to muddle through the next few months without having to book losses and spend significant cash. But if that demand starts to fade -- and it may have faded a bit in the U.S. in July -- then all of the global automakers, and their stocks, will be in for harder times. 

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Toyota Motor Stock Quote
Toyota Motor
TM
$148.27 (1.06%) $1.56
Ford Stock Quote
Ford
F
$14.08 (0.36%) $0.05
General Motors Stock Quote
General Motors
GM
$40.46 (0.87%) $0.35
Honda Motor Stock Quote
Honda Motor
HMC
$24.43 (1.33%) $0.32
BMW Stock Quote
BMW
BAMXF
$85.45 (2.64%) $2.20
Bayerische Motoren Werke Stock Quote
Bayerische Motoren Werke
BMWYY
$29.24 (0.43%) $0.12

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