There was a time when Toyota was said to have “more money than God by one of its key competitors. And its latest earning report was unquestionably impressive. Nonetheless, the Japanese giant has received an unexpected warning that could signal financial troubles ahead.
Though Moody’s has given Toyota’s latest bond offering a strong “Aa3 rating,” it also has issued a negative outlook for the future that reflects potentially broader problems with the Japanese economy.
“While disruptions caused by several natural disasters contributed to (a) period of underperformance, the company’s financial results have also suffered from product quality issues, market share erosion, and cost pressures exacerbated by volatile market conditions,” the ratings agency explains. “Because it is more reliant than its peers on units and components exported from Japan, Toyota’s earnings have significantly weakened because of the fluctuation in the currency market since the financial crisis of 2008-09.”
That might come as a surprise to some. Indeed, Toyota has long been viewed as an almost unstoppable competitor by many in the industry, former Ford Vice Chairman Alan Gilmour once gaping that the maker had, “more money than God.”
And, indeed, it seems to be printing it lately considering that Toyota earnings doubled during the most recent quarter, to 313.9 billion yen, or $3.2 billion. Meanwhile, it projected that during the next fiscal year, which ends March 2014, it expects a 1.37 trillion yen or $13.8 billion profit, up from 962 billion yen for the full year ended March 2013.
But there are reasons for concern, other analysts echo. And the challenges seem to be coming from every direction.
“Although Toyota has seen solid growth in market share and sales since 2012, sales declined in April,” noted Alec Gutierrez, senior analyst at Kelley Blue Book. “Toyota now finds (itself) in one of the most competitive environments the industry has seen in decades, facing strong entrants from familiar competitors Honda and Nissan, as well as reinvigorated competition from U.S. and Korean automakers.”
Meanwhile, Toyota is undergoing a dramatic shift in its manufacturing base as it moves to reduce its dependence upon Japanese home market production in the wake of the devastating earthquake and tsunami that struck the island nation in March 2011, effectively putting Toyota out of production for several months and then leaving its global manufacturing network operating at a reduced rate for the rest of the year.
“The transition to a greater level of local-market production will require time as well as incremental investment,” said Moody’s. “But Toyota has made progress with the number of localized cars increasing to account for nearly 60% of total global production,” the agency added.
There are other challenges. In China, now the world’s fastest-growing automotive market, Japanese makers, as a whole, are suffering in the wake of a political dispute between the two countries over a chain of uninhabited islands in the East China Sea. Senior Toyota officials recently warned the impact of a subsequent boycott is lasting longer than expected.
Like all major makers, Toyota clearly will have to invest heavily to remain competitive. That’s a factor that is one reason why Toyota is issuing 60 billion yen worth of new debt securities. That includes 40 billion yen worth of bonds due in 2016 and another 20 billion yen due in 2023.
While Moody’s is raising concerns, the agency was not entirely negative, noting that, “Still, Toyota continues to maintain a strong balance sheet and abundant liquidity, elements that provide the company with financial flexibility and support its rating while restructuring initiatives are being implemented.”
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