Japan's Toyota, Hit Hard Now But Equipped to Steer Clear

Toyota President Katsuaki Watanabe with the "ultra-compact" iQ, to go on sale in Japan. In the works: U.S. production of the Prius hybrid. "We plan to use this very severe business environment as an opportunity," a spokesman said. (By Haruyoshi Yamaguchi -- Bloomberg News)

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/28/AR2008102803638.html

Falling Demand, Soaring Yen Drive Down Profits


TOKYO, Oct. 29 -- In Japan, the global financial crisis seems to have singled out some of the world's best-known and best-managed companies for an especially bloody thrashing.

Consider Toyota Motor Corp., whose stock has lost almost two-thirds of its value since February of last year. Like many Japanese exporters, Toyota has been doubly clobbered this fall, first by collapsing consumer demand in the United States and Europe, and then by the exploding value of the yen against the dollar and the euro.

Still, the automaker is exceptionally rich and well positioned for the future. It has about $47 billion in liquid assets, the lowest manufacturing costs in its industry and global leadership in fuel-sipping hybrid cars such as the Prius. It announced this week that it will build a seventh factory with its joint-venture partners in China, where sales, although slowing, have jumped 24 percent so far this year.

So, is the company really worth just a third of what it was worth 20 months ago?

The short-term answer for Toyota and other blue-chip Japanese companies is a qualified maybe, according to economists and investment analysts in Tokyo. The medium- and long-term answer, they say, is likely no. "These stock prices reflect new fundamentals," said Takatoshi Ito, a professor of economics at the University of Tokyo. "Exports earnings are being cut severely because of yen appreciation. Even if Toyota sells the same amount of cars, its earnings decline."


The annual operating profit of Toyota tumbles by about $400 million every time the dollar's value falls by one yen, the company says. Toyota and many major Japanese exporters had expected a dollar exchange rate of around 105 yen throughout 2008, but it has dipped as low as 90 this month.

Although the yen lost value Tuesday in trading against the dollar, many analysts here are predicting the currency's value will continue to increase and squeeze profits out of Japanese companies for at least several more months. The declining popularity of complex transnational bets known as "carry trades" is partly responsible for the pressure on the yen -- in the current turbulence, investors are unraveling these trades and bringing money back to Japan for conversion into yen.

With global recession a near-certainty, Toyota and other Japanese exporters have also had to revise sales and production plans downward. The company recently recorded its first quarterly global sales decline since the downturn that followed the 2001 terrorist attacks. In the United States, Toyota's largest market, sales plunged by 32 percent in September compared with that month last year.

The home market has big problems, too. Japan's real gross domestic product shrank by 2.4 percent in the quarter that ended Oct. 1. Unemployment is at a two-year high of 4.2 percent, and last week the government issued a report warning that the economy "has weakened further."

Fundamentals, though, do not tell the whole story of why stocks in the world's second-largest economy have lost, on average, about a quarter of their value in the past month. Japanese stocks gained back some of their losses on Tuesday, after the Nikkei average reached a 26-year low the day before, but remain at disheartening lows.

"Overseas investors and investment funds are selling Japanese stocks like mad, said Edwin Merner, president of Atlantis Investment Research in Tokyo. "There is panic, and there is blood on the floor."

Merner and several other analysts said foreign investors, including managers of mutual and pension funds, are being forced to sell because they need cash to meet other obligations, particularly for redemption requests from nervous smaller investors.



"Big Japanese stocks like Toyota are easy to sell," said Merner, who has followed the Tokyo stock market for three decades. "Maybe you can't get a good price, but you can certainly sell them quick."

The Japanese government has "very few defense systems" to support the country's stock market, according to Shumpei Takemori, a professor of economics at Keio University in Tokyo.

The central bank here has little flexibility to lower interest rates to make stocks more attractive. They are already at rock bottom, about 0.5 percent for loans between banks. Despite limited capacity for cuts, the central bank will consider a 0.25 percent rate cut when it meets Friday, the Nikkei financial newspaper reported Wednesday.

The Japanese government, however, did move Tuesday to beef up one defense against market speculation. Finance Minister Shoichi Nakagawa said the government has banned the practice known as naked short-selling, which is selling a stock short without first borrowing the shares or making sure they can be borrowed.

While companies here can do little about turbulence in the stock market, many of them do have plenty of cash to ride out the storm.

About 40 percent of publicly traded Japanese companies are debt-free, according to a survey by the Nikkei financial newspaper. Major banks and many large companies have huge cash reserves, a legacy of the cautious management style that came into fashion here after Japan's financial crash in the 1990s.


Thanks to "balance sheets of armored steel," major Japanese companies such as Toyota are much better prepared than their competitors to withstand a long global recession and grab a significantly larger market share when consumers do start spending, said Ken Courtis, former vice chairman of Goldman Sachs Asia.

"My view is that Japanese producers will be hit much less hard by the crisis," he said. "They have lower cost structures, more product, technological momentum and better image. They can put products on the market which people can afford and will want to buy."

Courtis said the Japanese advantage is especially powerful in the automobile market in the United States, where General Motors and Chrysler are teetering on the edge of bankruptcy and in need of government bailout.

Toyota reached into its deep pockets this fall to grab the attention of reluctant car buyers in the United States. Taking the lead from other companies, it created Toyota's first-ever interest-free financing program and applied it to nearly all the vehicles it sells in the U.S. market.

Toyota has also responded to the listless American car market by halting the assembly of big pickup trucks at its U.S. plants for three months.

The company says it has laid off none of its 42,000 workers in North America. Instead, many of them are being retrained.

"We plan to use this very severe business environment as an opportunity to strengthen the flexibility and toughness of the company," said Toshiaki Hori, a Toyota spokesman.

In 2010, Toyota plans to open a new plant in Mississippi to make the Prius, the popular hybrid car that is now imported from Japan. By producing the car in the United States, Toyota expects to escape the punishing consequences of a higher yen.

Sometime after 2010, Toyota plans to begin mass production of all-electric cars. It has already launched a joint venture to design and manufacture long-life batteries for those cars.

"This downturn will probably be to the long-term benefit of Toyota," said Merner at Atlantis Investment. "They have high profit margins and lots of cash. There is going to be a big shakeout in the auto industry. Toyota is in better shape now than ever before to survive it."