Toyota's Surprise Losses Highlight the Dire State of the Global Auto industry: An Unprecedented Situation, needing Urgent Action

By David Bailey on Feb 8, 09 09:24 PM in Automotive

Toyota, which overtook GM to become the biggest auto manufacturer in the world last year, shocked the auto world on Friday by announcing that its expected loss for this financial year (to end of March) will be more than double the estimate it gave out just under 2 months ago.

It now says that it expects its first full-year operating loss in its 71 year history to be around ¥350 billion yen (£2.6 billion or nearly $4 US billion), with the operating loss on its auto business adding up to some ¥450 billion yen, (£ billion or $5 billion).

By way of comparison, in the previous financial year the firm raked in huge profits (around ¥1.72 trillion).

It blames the loss on the collapse in sales in key markets (the US, Europe, Japan and China) and the rapid appreciation of the Yen (which rose 23% against the Dollar and 29% against the Euro last year). The latter has the effect of reducing the Yen value of overseas earnings. The firm has been especially hit in the US market (usually its most profitable) where sales fell over 30% in the last quarter of 2008 compared with the same period in 2007.

The credit-crunch induced downturn is hammering the auto industry, but until a few months ago Toyota seemed in good shape and able to ride things out. Not any more...

Just last December, Toyota was predicting a 2008 operating loss of around ¥150 billion, and that it actually expected to earn a small net profit overall.

It's not clear that we should take the new figures very seriously, as Toyota - like other auto manufacturers - is unable to tell how bad things will get. Its Vice President, Mitsuo Kinoshita, said that "we cannot tell what will happen next year but we hope we are now hitting the bottom."

"Er, Who knows?" is perhaps the best interpretation of that. As the boss of Fiat said recently, it's rather like swimming in the ocean and not knowing where the bottom is as you can't feel it.

Yet Toyota is not yet looking to cut permanent jobs, and has been praised by unions in the UK for how it has dealt with the worst auto slowdown in 35 years.

Toyota officials also insisted last week that despite the dire figures, it would continue to invest in new environmental technologies, with a new version of its Prius hybrid being unveiled in May, and the first Lexus hybrid coming this summer.

Toyota is aiming to cut costs by 10 percent, and will cancel or postpone further plant construction. A third of its 74 plants worldwide have been put on single shifts.

As a result of the losses, Toyota lost its top ratings status, with both Moody's and Standard & Poor's downgrading the firm from a top rating previously. This will make it more expensive for the firm to service debt as that debt comes up for renewal.

The bottom line here is that Toyota is probably the most efficient and successful auto firm in the world. Its production techniques are copied around the world. If it can't make a profit, it's difficult to see how any firm (maybe with the exception of Honda) will in 2009.

Meanwhile, there was more grim news here in the UK last week, with Ford announcing 850 job cuts. This includes 500 voluntary redundancies at its Southampton Transit plant (some 40% of the current headcount there) as the plant goes from a double to a single shift. Ford is also seeking another 350 voluntary redundancy across its 4,000+ salaried UK staff.

One wonders whether this heralds the beginning of the end for Ford vehicle production in the UK. Mass production was shifted to the continent some years ago and its sale of Jaguar Land Rover last year left the Transit plant as the only assembly plant in the UK (although it does make engines here).

Last week also saw car sales figures for January down by almost a third compared to January 2008. This has intensified calls for urgent government action to boost demand, a point which featured strongly at the Birmingham Auto summit last week and in the communique handed by Post editor Marc Reeves to Lord Mandelson (see here).

The situation facing the UK industry looks bleak. Sales have fallen off a cliff (January's sales were the worst since 1974) and sales this year may fall by 20%.

Whilst the government's plans to support the industry through a £2.3 billion loan and loan guarantee package have been welcomed as a useful first step, last week's auto summit highlighted the urgent need for action to stimulate demand and shore up credit insurance as well as the need to implement a wage replacement scheme so that key jobs and skills can be kept in place until demand picks up (as it will eventually).

Support for Jaguar Land Rover in particular was seen as essential given its huge R&D spend, its impressive environmental investment, and the length of supply chain it supports.

More generally, it was noted that the UK auto industry is fundamentally efficient. After a wave of plant closures and the end of MG Rover in 2005, what's left of the industry here is both efficient and high quality. It has already restructured. It's time for others to do it, such as the Big 3 in the US.

An efficient car industry in the UK is now collateral damage from the financial crisis which is engulfing the real economy. These are unprecented times, and the government needs to act quickly to stop a crisis becoming a catastrophe. As one participant at last week's auto summit summed up, "without action in the short-term, we won't have a long-term".

David Bailey is Professor of International Business and Economic Policy at the Birmingham Business School and Chair of the Regional Studies Association, a major learned society.