Toyota Stuck in Distress Until Year's EndBy Dale Buss April 26, 2011
Toyota won't even begin a return to production normalization in Japan until July, and not until August outside of Japan, top Toyota executives told a global webcast-conference audience on Tuesday. They were elaborating on remarks by Toyota Chairman Akio Toyoda last week that the company currently is operating at a low point of about 50 percent of previous output in Japan, and 40 percent elsewhere, and wouldn't return to full production again until November or December. Others continue to be affected by and to react to the bad news that has been streaming out of Toyota and other Japanese automakers about the aftermath of the March 11 earthquake and tsunami.
Debt-rating firm Standard & Poor cut its outlook for Toyota, Honda and Nissan as well as parts makers Aisin Seiki Co., Denso Corp and Toyota unit Toyota Industries Corp. It has investment-grade ratings on all six companies, and the agencys next step could be to actually downgrade their debt and raise the companies borrowing costs. Largely as a result of S&Ps move, the Nikkei 225 Stock Average fell in trading on Tuesday by 1.2 percent, the biggest drop in a week.
The auto makers are to begin reporting their quarterly earnings in the next few days, which are likely to reflect not only the financially brutal results from production disruptions in March but also to outline their grim expectations for the current fiscal year, which began for them this month. A consensus forecast by 11 analysts who follow Toyota showed a reduction of 65 percent in their forecast of the quarterly profits that Toyota is to announced next month, to an operating profit of $3.44 billion.
Rivals Blowing By?
Advances by General Motors and Volkswagen also seem likely to threaten Toyotas status as the worlds biggest carmaker on an annual basis. Toyota sold 8.42 million vehicles last year versus 8.39 million for GM, and VW expects 2011 sales to top its 7.14 million of last year. On Monday, Toyota had announced that its production in Japan fell a staggering 63 percent in March, the lowest since 1976, when the company began maintaining production figures. Global production in March dropped by 30 percent. Meanwhile, Hondas March output in Japan dropped as well by 63 percent, and worldwide it fell by 19 percent. Nissans Japan output fell by 52 percent during the month.
Now, there is a growing competition among these rivals for who can spring back most quickly to normal levels of production. While being less specific than Toyota so far, for example, Honda also has indicated that it expects to be more or less back to normal by the end of 2011. And the continually unfolding ripples in supply chains because of Japans difficulties are reaching out to affect more than just Japanese brands and suppliers.
On Monday, for instance, Ford idled for two weeks a Taiwan assembly plant where it builds some Escape, Focus and Mazda 3 models. A plant in South Africa that produces Focus and other vehicles, and a joint-venture Changan Ford Mazda Automobile facility in China were idled for one week. Global supplier Johnson Controls said that production cutbacks in Japan and elsewhere would cut output at about one-fifth of its 250 plants this quarter and trim its earnings. But Stephen Roell, CEO of the Glendale, Wis.-based company, said that auto makers cutbacks would be short-lived and recoverable.
No consensus has developed yet around the issue of the ultimate recoverability of every unit that is being lost in production this year to the quake disaster. IHS Global Insight, for instance, last week projected that 15 percent of lost volume in Japan never will be replaced. Of the remainder, about 65 percent of lost global production will be compensated for this year, and the rest in 2012.
George Magliano, chief automotive analyst for the Lexington, Mass.-based economic-consulting firm, projected that total lost production would be 2.7 million units globally in the second quarter on top of last quarters loss of 560,000 units. Volume losses will cease by sometime in the third quarter, he predicted, with an overall recovery during that period of 55,000 of the lost units. The fourth quarter would see the recovery of another 1.85 million of the lost units, and the first half of 2012 would see the makeup of a bit more. About 275,000 units will be lost altogether, Magliano said.
Not So Easy
In the meantime, Toyota executives on Tuesday were fielding some hard questions posed by financial analysts from around the world about exactly how they were going to ramp production back up. But through translators, company leaders including Atushi Niimi, executive vice president of production control, production engineering and manufacturing, offered little new information.
Overall at this point, Toyota has about a 2.5-month supply of vehicles in its global inventory. About 150 critical parts are posing the biggest problems for Toyota as it seeks to get all of its production back on-line, Niimi and another executive said. And the most problematic types among those crucial parts are microchips, rubber-related items, and paint additives. The company enjoys multiple sourcing of many of its parts among Tier One suppliers, they said, but they rely upon single sources for many of these difficult parts. The [suppliers of these parts] are known for their high engineering capabilities, so we dont think it will be easy for us to switch to other sources, one executive said through a translator.
A Close Look
They also said that it is difficult for Toyota to give a generalized answer to what levels of supply inventory it holds of the parts that it needs. Different models use different parts and critical parts may vary, one executive said. Even if a single piece or part is missing, of course a car cannot be assembled. The executives said that Toyota is prepared to help its dealers and other constituencies cope with the temporary shortages of vehicles through stepped-up customer service and stepped-up support; they didnt elaborate.
But they parried the general thrust of questions by one analyst, who maintained that Toyota might be lagging the pace of production recovery by its rivals because it might be more sensitive to quality issues presumably because of its safety recalls last year or because executives want to avoid a second stoppage of production later in the summer. While declining to comment on competitors situations, the Toyota executives noted that Toyota has been analyzing and assessing the situation of our [critical] suppliers by actually visiting them [one by one] and looking into their situations first hand. So we have a clear idea of the suppliers circumstances.