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Even Toyota grinds gears

December 23, 2008|Martin Zimmerman

If misery loves company, Detroit's Big Three can welcome Toyota to the club.

The Japanese carmaker said Monday that it would report an annual operating loss for the first time in seven decades, underscoring the breadth of the auto industry's woes amid the global economic downturn -- and proving that even an envied giant such as Toyota Motor Corp. can make mistakes.

"It speaks volumes about the severity of the recession," said George Magliano, an industry analyst at IHS Global Insight. "Nobody's immune, and everybody's taking a hit right now."

Tight credit markets and slumping economies are keeping consumers out of showrooms and making it tough to find financing for those who do want to buy. Sales of cars, pickup trucks and sport utility vehicles fell almost 37% in the U.S. last month compared with November 2007 -- the worst monthly drop since January 1982.

Toyota's sales in the U.S. -- the carmaker's largest single market -- fell 34% last month and are down more than 13% this year.

"The change that has hit the world economy is of a critical scale that comes once in a hundred years," Toyota President Katsuaki Watanabe said at a news conference in Japan. The drop in vehicle sales over the last month was "far faster, wider and deeper than expected."

The Japanese automaker said it would post an operating loss of 150 billion yen ($1.66 billion) for the fiscal year ending in March. Just last month, Toyota had been forecasting an operating profit of 600 billion yen ($6.65 billion).

Operating profit reflects the financial performance of a company's core business, before taking into account costs such as income taxes and interest payments. Toyota said it hadn't recorded an operating loss since it started officially reporting such results in 1941. Based on internal company calculations, however, the automaker had an operating loss in 1938, the year after it was founded.

In addition to slumping consumer demand, Toyota and fellow Japanese automakers Honda Motor Co. and Nissan Motor Co. have been battered by a soaring yen, which has risen 24% against the dollar this year and is currently trading at 89.98 to the greenback.

That raises the cost of importing vehicles into the United States, although the higher prices aren't necessarily passed on to buyers, further hurting the automakers' profits. It also decreases the value of profits the automakers earn in the U.S. when dollars are converted into yen.

But Toyota, whose management techniques, inventory systems and technological advances have been the envy of the industry for years, has also been a victim of some miscalculations.

Last summer, for instance, a shortage of batteries crimped supplies of its hot-selling Prius hybrid just when gas prices and demand for the fuel-efficient hatchbacks were peaking. The shortfall enabled dealers to sell Priuses at fat markups, but those extra profits went to dealers, not Toyota.

Toyota also launched its redesigned Tundra pickup truck in early 2007 just as the U.S. housing market -- a key driver of pickup sales -- was topping out. Although sales of big pickups are down across the board, the Tundra, despite heavy promotion, has fared worse than its competition from Detroit recently and ranks a distant fourth behind offerings from the Big Three.

"Toyota followed General Motors into large, less fuel-efficient vehicles," said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Mich., an unusual move for a company that made its reputation in part by offering vehicles with high fuel economy.

Toyota spokesman Sam Butto noted that products such as the Tundra are planned years in advance.

"Sometimes the timing is right and sometimes it's not," Butto said. "Like everyone else, we've got to ride out this current climate."

Toyota has been cutting production plans in the U.S. and elsewhere to try to whittle down inventories. Just last week, the company said it would indefinitely delay plans to begin U.S. production of the Prius at a plant in Mississippi, and it shut down its Tundra assembly plant in San Antonio for three months.

The automaker currently has a 93-day supply of cars in the U.S. compared with a 39-day supply a year ago, and it has had to rent additional space at the Port of Long Beach to store vehicles awaiting shipment to overstocked dealers.

Despite Toyota's struggles, it is still in far better shape than its competitors in the U.S. and elsewhere. General Motors Corp., Chrysler and Ford Motor Co. have been forced to idle or shut dozens of assembly plants, and GM and Chrysler have turned to the federal government for financial help. On Monday, Korean automakers Hyundai Motor Co. and Kia Motors Corp. cut their joint 2008 sales forecast 12% and said they would freeze pay for executives.

Watanabe also reduced the forecast for the number of vehicles Toyota expects to sell globally this year to just below 9 million, down 4% from last year. And in a departure from previous years, he gave no goal for vehicle sales for the next fiscal year.

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