Toyota Warns of First Profit Drop in Nine Years

Rising cost of steel and other raw materials, plus credit crunch weigh on profit

Toyota Motor Corp. warned May 8 it expects the first drop in annual profits in nine years because of a weak U.S. economy, a stronger yen and soaring raw material costs. The gloomy forecast came as Japan's largest automaker reported another record performance for the financial year to March on the back of brisk demand in fast-growing emerging economies. Toyota posted a 4.5% rise in annual net profit to 1.72 trillion yen (US$16.4 billion). It said operating profit increased by 1.4% to 2.27 trillion yen as revenue climbed by 9.8% to 26.29 trillion yen -- both all-time highs and roughly in line with the company's own forecasts.

But a credit crunch, the surging cost of steel and other raw materials, and a falling dollar are now weighing on their earnings prospects. "The business environment is extremely difficult," Toyota president Katsuaki Watanabe said. The higher yen and raw material prices "will be major issues for us to tackle," he said. "We will cut waste and review our ways of doing business."

Toyota forecast a 27.2% plunge in net profit to 1.25 trillion yen in the current financial year to next March. It sees a 29.5% drop in annual operating earnings to 1.60 trillion yen this year and a 4.9% fall in revenue to 25.0 trillion yen. "

It's going to be the first year-on-year decline in nine years which really suggests that even for Toyota the current situation is very, very tough," said Credit Suisse auto analyst Koji Endo."The U.S. market is slowing down and even Toyota seems to be facing a very tough time selling their light trucks. Raw material costs -- especially steel, precious metals and plastics -- are going up and that's probably going to be very significant this year," said Endo.

Toyota said it had sold a record 8.91 million vehicles last year, up 4.6% from the previous year, despite a drop of 3.7% in Japan where a shrinking population is weighing on the market. After taking the giant U.S. car market by storm, Toyota and its rivals are now targeting emerging economies to maintain their growth. "While the economy of the U.S. and other industrialized nations is slowing down, we have seen a rapid expansion in markets in resource-rich nations and emerging economies," said Watanabe.

Sales in Asia rose 21.1% to 956,000 vehicles on strong demand in China while operating income in the region more than doubled."Earnings growth in Asia has become a key driver for our company," said Toyota senior managing director Takeshi Suzuki.

Sales in North America gained just 0.5% to 2.96 million vehicles, led by the new Camry and Prius vehicles, while other markets including the Middle East, South Africa and Australia saw an increase of 17.9%.

Copyright Agence France-Presse, 2008

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