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Toyota Warns It May Have To Move Production Out Of Japan.

Full-year earnings up, but exchange rate, recalls likely to yield 2nd-half plunge.

by on Nov.05, 2010

It's becoming increasingly difficult to keep building vehicles, like the Prius, in Japan, warns Toyota.

Toyota Motor Co. did markedly better during the first half of its fiscal year, a senior company official disclosed Friday, but while strong sales in key markets, such as Asia will help it deliver better earnings than expected for the current year, the rising value of the yen and its ongoing recall problems will result in a plunge in earnings during the second half of 2010.

Income for the full fiscal year, which ends March 31, 2011, is now expected to rise to 350 billion yen ($4.31 billion), up from an earlier forecast of 340 billion yen.

That projected improvement comes “despite the influence of the strong yen,” which has been a serious problem for the maker in dealing with its largest foreign market, the United States, said Toyota Managing Officer Takuo Sasaki, speaking through an interpreter, during a teleconference to discuss the company’s latest quarterly earnings.

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Looking ahead, Toyota now anticipates an exchange rate of 85 yen to the dollar, down from an earlier forecast of 90.  But on November 1, the exchange rate fell to its lowest level in more than 15 years, the yen plunging to 80.22 against the dollar.

“If we assume the (exchange rate) remains at 80 yen to the dollar, the environment will be extremely tough,” cautioned Sasaki, and would raise questions about how long the company can continue producing vehicles in Japan.

“Currently we are striving very hard to make sure we can remain profitable” on Japanese-made products, he said, through extensive cost-reduction efforts.  The process may require may require the development of products specifically geared towards building in Japan.

But if that doesn’t work, Sasaki warned, “We will be compelled to consider other alternatives,” which, while unspoken, seems to suggest the need to shift vehicle production outside the home market.

The first half of the current fiscal year was buoyed by a variety of factors, despite the worsening exchange rate situation.  Net revenues rose 15.5%, to 9.68 trillion yen, while operating income reversed last year’s 136.9 billion yen loss to reach 323.1 billion yen.

For the July-September quarter, profits rose to 98.7 billion yen, or $1.2 billion.  That was up from 21.8 billion yen during the second quarter of 2009, but lower than industry analysts had predicted, signaling problems ahead.

Indeed, the numbers to follow won’t look so good, Toyota warned, with second-half profits expected to drop by as much as 77%, to 61 billion yen. By comparison, the maker posted earnings of 265 billion yen during the first half of the 2009 fiscal year.

In a little more than 12 months, Toyota has had to recall more than 10 million vehicles worldwide, the vast majority of them for a pair of problems that could cause unintended acceleration problems.  The impact of those two recalls alone could cost the maker more than $2 billion, several analysts have forecast – more if the courts rule against Toyota in a series of lawsuits now working through the U.S. courts.

To underscore the ongoing recall problem, Toyota preceded the first-half earnings report with the announcement that another 135,600 vehicles sold in Europe and Japan will have to be recalled.  None of the products were sold in North America.

But the exchange rate issue is a broader and potentially longer-lasting issue.  It is also one that faces the maker’s Japanese competitors, as well.  But, like Toyota, both Honda and Nissan are predicting better full-year earnings than initially estimated, largely the result of booming sales in China.

The good news from Asia stands in sharp contrast to its problems in North America, where vehicle sales are now expected to decline for the year, from 2.098 million to 2.09 million – and down from an early estimate of 2.17 million.  Significantly, October sales fell 4% in the U.S., even while most of Toyota’s key competitors, including U.S., Korean and Japanese brands, rose by double-digit levels.

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One Response to “Toyota Warns It May Have To Move Production Out Of Japan.”

  1. [...] Toyota is selling cars – but currency exchange rates are taking a big bite out of profits.  Toyota ways that if this keeps up, they may have to move production out of Japan. [...]