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Toyota Motor Corp President Akio Toyoda

Toyota Chief Says He's Looking at Spending Cuts as Profit Slides

May 10, 2017
“For the company to forecast drop in profit for two consecutive terms is like successive defeats in sports,” Toyota Motor Corp. President Akio Toyoda said. “I don’t like to lose.”

Toyota Motor Corp. President Akio Toyoda said the automaker will take a closer look at its investments after forecasting a second straight annual decline in profit.

“In an environment where sales are stagnating, it’s tough that we need to invest in areas which won’t generate profits due to paradigm shifts,” Toyoda said at a briefing in Tokyo on May 10, without being more specific. “We need to make the decision to look at where to stop when sales are stagnating.”

A back-to-back profit decline would be the first for Japan’s largest automaker since 1994 and a setback for Toyoda, who has made it a goal to insulate the company from the boom-and-bust cycles in the auto industry. Toyota posted a loss in 2009 after the collapse of Lehman Brothers Holdings Inc. sent the global economy into a downward spiral.

Part of the problem, the 61-year-old executive says, is Toyota’s size and history. Despite creating in-house companies last year to speed up decision-making and make the automaker more responsive to changes in the industry, it’ll take more time before the results are apparent, Toyoda said.

“We posted a loss after the Lehman shock. The fact that we troubled many of our stakeholders then has been rubbed in my soul,” Toyoda said.

Focus Spending

Toyota could look to cut back on spending more on conventional cars and instead focus on hybrid, plug-in hybrid and electric vehicles, according to Edwin Merner, president of Atlantis Investment Research Corp., which owns the automaker’s stock. “If you don’t have these things, then you could end up being at a very big disadvantage,” he said.

While the Japanese automaker may increase production capability overseas in the U.S., Europe and India, at home it will look to automate more rather than increase capacity, Merner said. “The main focus will be cutting your production costs per car to become more efficient,” he said.

Toyota forecast operating profit to fall 20% to 1.6 trillion yen (US$14 billion) in the fiscal year through March, based on expectations for an increase in U.S. incentive spending and the yen appreciating to 105 yen to the dollar. The automaker said it will buy back as much as 250 billion yen of its shares from May 17 to Aug. 31.

Spending on research and development will probably rise about 1% to 1.05 trillion yen while capital expenditure will increase 7.3% to 1.3 trillion yen in the current financial year, according to the company.

Toyota’s U.S. sales have fallen more than analysts forecast every month this year, even as the company increased incentive spending. It’s a trend across the biggest manufacturers in the industry, reinforcing the view that the world’s second-biggest auto market is headed for its first annual contraction since 2009. A tumble in used-car prices is exacerbating those concerns, as carmakers come under pressure to give out bigger discounts to sell their new models.

U.S. Incentives

“U.S. incentives are trending up and competition is getting fiercer,” executive vice president Osamu Nagata said at the same briefing. “We won’t get involved in excessive incentives.”

Spending on incentives last month through April 16 reached a record for the month of $3,499 per vehicle, according to J.D. Power. The current level of discounting is “not sustainable” and automakers will have to start cutting production, Jim Lentz, Toyota’s North American chief executive officer, said this month.

The automaker is increasing its supply of light trucks to tap the demand in the U.S., Nagata said. The company released the all-new C-HR crossover in April, while fresh versions of the RAV4 compact SUV, Sequoia full-size SUV and the Tundra pickup truck will be on dealer lots in September.

Toyota projects global revenue will fall 0.4% to 27.5 trillion yen in the year through March. Deliveries will stay largely unchanged at 10.25 million vehicles worldwide, the company said.

“For the company to forecast drop in profit for two consecutive terms is like successive defeats in sports,” Toyoda said. “I don’t like to lose.”

By Kevin Buckland and Emi Nobuhiro

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