Yen and Floods Sap Toyota

TOKYO—Toyota Motor Corp. reported a 19% drop in profit for the July-September quarter, blaming the yen's rapid appreciation against the dollar and production cutbacks in the U.S. and Japan due to parts shortages that hit sales.

Japan's largest auto maker on Tuesday postponed a possible revision of its earnings forecast for the full-year, citing volatility in current markets and uncertainty on resumption of normal production due to flooding in Thailand. In August, Toyota had called for a profit of ¥390 billion ($5.01 billion) and sales of ¥19 trillion for the fiscal year ending next March.

Enlarge Image

Close

Reuters

Toyota Motor suspended its full-year profit outlook on Tuesday as Thai floods pose a fresh threat to production.

"A lot of negative factors have piled up one after another," Toyota Executive Vice President and Chief Financial Officer Satoshi Ozawa said at a news conference. The company said it will update its outlook once the full impact of the production disruptions becomes clear.

Just as Toyota's production was recovering from shortages due to Japan's earthquake and tsunami in March, its global output was crimped by component shortages from the massive flooding in Thailand, where it builds parts and some autos for export.

Honda Motor Co., Ford Motor Co., computer chip and disk-drive makers trimmed production after flooding swamped Thai factories and key suppliers. Honda, which withdrew its earnings outlook last week on the flooding impact, said on Tuesday that its North American factories will operate at between 50% and 75% of normal output for about three more weeks.

Toyota cited the surging yen as the chief culprit, noting the average dollar-yen exchange rate in its fiscal first half through September fell by ¥9 to ¥80 from ¥89 in the same six-month period last year. It said that contributed to a ¥69.3 billion loss in the red-ink stained Japanese operations, which include exports from Japan. It was profitable in North America, Europe and Asia.

"The extreme rapidity of the yen's rise has dented our recovery efforts," Mr. Ozawa said.

The company posted a net profit of ¥80.4 billion in its fiscal second quarter ended September, down from ¥98.7 billion in the same period a year earlier.

Enlarge Image

Close

Japanese car makers have been waging a desperate battle with the stubbornly strong yen, scrambling to cut costs and, in some cases, shift more production overseas. A stronger yen bites into income earned overseas and erodes the price competitiveness of exports.

In the July-September quarter, Toyota's sales declined 4.8% to ¥4.575 trillion from ¥4.807 trillion, and operating profit from its underlying automotive business fell 32% to ¥75.4 billion from ¥111.5 billion. That was above the company's own operating profit projection of ¥67.96 billion, but below analysts' median forecast of ¥96.69 billion.

Mr. Ozawa said Toyota won't compromise on its pledge to keep domestic production at 3 million vehicles a year. But he indicated Toyota would seek to sell more cars in Japan and limit exports annually to 1.5 million vehicles, down from the current level of 1.7 million.

Mr. Ozawa said Toyota must do more to raise local procurement of components at its factories outside Japan. His comments indicate the company may seek to limit the number of Japanese-made engines and other parts for export.

Toyota currently produces 4.5 million engines a year in Japan, which is well above its domestic vehicle production and sales.

In a further challenge to Toyota's traditional business ways, Mr. Ozawa said the recent disruptions in its global supply chain may prompt the company to rethink the principles of its renowned Toyota Production System, or TPS, including "just in time" inventory for some key parts.

Reuters

"We may have to think outside the confines of TPS in the procurement of parts or materials from other industries," Mr. Ozawa said, adding that the company may take lessons from rival Nissan Motor Co., which has suffered less damage from the Thai flooding.

"Just observing the impact on production from the Thai floods, we may have some things to learn from Nissan," he said.

Nissan Chief Operating Officer Toshiyuki Shiga said last week the company aims to resume part of its production in Thailand on Nov. 14 by using parts from other countries. Nissan estimates a production loss totaling 40,000 vehicles in Thailand and an additional 20,000 vehicles in Japan.

Toyota says output of some 150,000 vehicles has been affected by the flooding in Thailand, including 40,000 in Japan. Production has been cut from planned levels by about 60% in Southeast Asia, 20% in Japan and 10% in North America. But the company says there has been little or no impact on manufacturing operations in China or Europe.

Toyota has said the shortages are concentrated in three areas: electronics, plastics and forged parts. Toyota has declined to specify which Thai-made parts are unavailable, but company insiders say the items include dashboard-mounted navigation systems.

The company had hoped to ramp up production in the back half of the year to make up for losses after a historic earthquake and tsunami in March in northeastern Japan, which delayed output of 760,000 vehicles globally. But the elevated yen and flooding in Thailand have frustrated those plans. It is now unclear how much of that production Toyota will be able to reinstate by year's end.

Toyota reports earnings under U.S. accounting standards.

Write to Chester Dawson at chester.dawson@wsj.com and Yoshio Takahashi at yoshio.takahashi@dowjones.com

dollar yen exchange rate, honda motor co, dollar yen exchange, ford motor co, yen exchange rate, chief culprit, toyota motor corp, american factories, component shortages, flooding in thailand, honda motor, north america europe, global output, massive flooding, negative factors, toyota motor, largest auto, auto maker, ford motor, computer chip

Online.wsj.com