Hello All,
There was an interesting cover page article about Toyota in the Wall Street Journal on 12/23/08 (see below). Now this article raised a bunch of questions which I explored and would like to share my answers about:
1. What is the difference between Operating Profits and Net Profits? So investorwords.com says – A measure of a company’s earning power from ongoing operations, equal to earnings before deduction of interest payments and income taxes. also called EBIT (earnings before interest and taxes) or operating income. Whereas Net Income adds back Interest earned and other misc income. Hence, Toyota made a loss but will still make a Net Profit because of all the other incomes it has!!
2. Another thing I feel is that this is news for us the general public, Toyota execs might have seen this coming a long time. So somehting to look at may be we should look at is what was the sales pattern of stock options by Toyota execs.
3. Another interesting thing I agree to from the article is that if Toyota a paragon for effeciency in the auto sector is not making money, this means the sector sucks right now!! Hence not to be touched……
4. So why was there a loss at Toyota? Well Op Profits = Rev – Fixed Costs – Variable Costs. So Sales nosedived BIG TIME hence Rev decreases, now we understand that the variable costs decrease as sales decrease but with the no lay off and such other policies the Fixed costs remained the same and overwhelmed the Rev – Variable Costs delta! Just for a sense of the Sales drop – sales fell from 23 Trillion Yen to 21.5 Trillion Yen. So what is the upshot, layoffs might be around the corner at Toyota!!
5. Finally, the appreciation of the Yen did not help either – see how this plays out. So say a car costs 1000 Yen to make, and sells in the US for $20. Now say 90 Yen = $ 1, hence Toyota made $20*90 = 1800 Yen or 800 Yen profit. Now say the Yen goes to 80 Yen = $1, hence new Toyota profit = $20*80 = 1600 Yen so Toyota made just 600 Yen 
Now, one would ask the quesiton why would Toyota not hedge the currency risk, well with the volatile swing in the sales ow much will you hedge say you hedged 15 Trillion Yen and you sold 14 trillion Yen you are overhedged!! and vice versa, so either way he company is screwed if the sales can not be predicted or change on a volatile manner.
Anyways that is all I had to say here.
Article Start:
Toyota Sees First Loss in 70 Years
Global Plunge in Car Demand Creates an ‘Emergency That We’ve Never Experienced’
By YOSHIO TAKAHASHI and KATE LINEBAUGH
Toyota Motor Corp. forecast its first annual operating loss since 1938, a dramatic indicator that the troubles roiling the auto industry extend beyond the U.S. and are taking a toll on even the strongest car makers.
Toyota, the world’s largest auto company by sales, still expects to report a small net profit for the fiscal year ending March 31. But it forecast a consolidated operating loss of 150 billion yen, or about $1.7 billion, amid falling demand in the U.S., Europe, Japan and other major markets, as well as a strengthening of the yen.
Bloomberg
Toyota vehicles are preparedfor shipment inYokohama City, Japan.
The downward revision underscores how far the car industry’s fortunes have sunk since financial markets were jolted in September. “It’s a kind of emergency that we’ve never experienced before,” Toyota President Katsuaki Watanabe said at a news conference. “The environment surrounding us is extremely harsh.”
Mr. Watanabe said the rapidly changing market conditions make it difficult to predict how well Toyota will do in the coming fiscal year. “It’s not yet possible to tell where the market’s bottom will be,” he said.
The recent pleas from the Big Three U.S. auto makers for a bailout from Washington have kept the spotlight on Detroit. But Toyota’s forecast of an operating loss indicates auto makers of every stripe are facing extraordinary challenges.
Like the U.S., Europe and Japan are experiencing steep declines in new-vehicle sales. Sales in Japan are expected to hit a 31-year low next year. Western and Central European sales fell 26% in November and are down 7% so far this year.
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Once-booming emerging markets are also in decline. Auto sales in China have fallen in recent months. Russian sales fell 15% last month, prompting Ford Motor Co. to halt production at a plant in St. Petersburg and Renault SA to shut a Moscow plant for two weeks this month.
Auto sales in Brazil — thought to be the one industry bright spot — plunged 25% last month from a year earlier and dropped almost 26% from October.
The declines are now hitting auto companies’ bottom lines. Honda Motor Co., which like Toyota has been one of the industry’s steadiest profit-producers, last week slashed its earnings outlook, saying it now expects net profit of 185 billion yen in the year ending March 31, down from a previous forecast of 550 billion yen. The forecast implies a significant loss in its fiscal second half because it made 370 billion yen in the first half.
In South Korea, meanwhile, Hyundai Motor Co. and Kia Motors Corp. cut their joint 2008 sales forecast Monday by 12.5% and froze managers’ pay.
“It is pretty obvious that the global economy is following the U.S. economy down and nobody is left untouched by this,” said Aaron Bragman, an analyst at IHS Global Insight.
Grave Forecast
Founded in 1937, Toyota has reported an operating profit every year since 1939. For the current fiscal year, it expects net income of 50 billion yen, helped by interest income and dividends from affiliates. That’s less than a tenth of its previous forecast of a 550 billion yen profit, and a fraction of the 1.72 trillion yen it posted in the year-earlier period.
The grave forecast by Japan’s flagship exporter and corporate bellwether will likely have ripple effects throughout the nation’s export-dependent economy. Since Toyota also is viewed within the auto industry as a model of efficiency, its inability to generate profit from making cars this fiscal year may send a chill through the whole sector.
On Monday, Japan said exports dropped by their sharpest rate on record in November, due mainly to falling shipments of cars and car parts to the U.S. and Europe. Also Monday, Japan described the economy as “worsening” for the first time in almost seven years, due to the deterioration of many economic sectors at an exceptionally high pace.
Toyota, like other major Japanese exporters, has been hurt by the yen’s sharp gains. A strong yen means sales in dollars and euros are worth less on Toyota’s books. On Monday, Toyota said it expects the dollar to be worth 93 yen on average through the company’s fiscal second half, and the euro to be worth 123 yen. The dollar was trading at 90 yen Monday, while the euro was just under 126 yen.
Toyota also reduced its revenue projection to 21.5 trillion yen from 23 trillion yen. The reduction is in line with its revised estimate for its global vehicle sales of 7.54 million units in the fiscal year, down 8.5% from its previous projection of 8.24 million units.
Some of Toyota’s most pressing concerns come from North America, its largest market and home to seven of its assembly plants. For most of the decade, Toyota was growing rapidly in the U.S. In 2005 it added a plant in San Antonio as part of a push into full-size pickup trucks, one of the few remaining segments of the U.S. market dominated by Detroit.
This fall, the company released its newest product, a large wagon designed only for North American dealers by its U.S. design team. The vehicle, the Venza, came on the market as Toyota’s U.S. sales slump worsened. Earlier this month, Toyota’s Mr. Watanabe attended the opening of the company’s newest North American plant, in Ontario, Canada, aimed at producing 150,000 RAV-4 crossover vehicles a year.
AFP/Getty Images
Toyota President Katsuaki Watanabe
But the company already had reacted to the slowdown. Over the summer, when sales of trucks and sport-utility vehicles sank as gas prices soared, Toyota announced a three-month shutdown at two plants making the Tundra pickup. Now, only one of the two manufacturing lines at its San Antonio plant is running.
Several months ago, Mr. Watanabe created an emergency committee to assess ways to save cash. One result was to postpone indefinitely the opening of the company’s eighth North American assembly plant, a Mississippi factory that was slated to begin making the top-selling Prius hybrid vehicle in May 2010.
In keeping with its corporate culture, Toyota hasn’t laid off workers but instead has them make improvements to their work areas and attend seminars aimed at boosting their skills.
Mr. Bragman, the IHS analyst, said Toyota is dealing with the same issue as Detroit’s auto makers: “They have too much capacity.”
Cutting Costs
“We are looking at every project we are involved with” to cut costs, said Toyota spokesman Irv Miller. That could include combining production of vehicles into a single plant or reviewing the viability of a particular product, Mr. Miller said, declining to be more specific.
Toyota already has canceled its 2009 gathering of U.S. dealers. These meetings are usually lavish affairs. The recent 2008 meeting in Las Vegas featured entertainment by musicians Sheryl Crow and Santana.
Like all car makers, Toyota has slathered on incentives to try to boost sales, but such moves have had little impact. Dealers say tight credit and low consumer confidence are keeping buyers away from showrooms and threatening to hold down car sales in the coming year. John Bergstrom of Bergstrom Automotive, a dealer of Toyota and other makes in Wisconsin, said consumer confidence is so low “it’s almost like they need permission to buy something.”
—Juro Osawa contributed to this article.
Write to Yoshio Takahashi at yoshio.takahashi@dowjones.com and Kate Linebaugh at kate.linebaugh@wsj.com
