Toyoda Says Cresting Profit Deliberate as Automaker Regroups

May 08, 2014 8:16 pm ET

(Updates with share price in fifth paragraph.)

May 9 (Bloomberg) -- Toyota Motor Corp. President Akio Toyoda, who battled back-to-back crises in his first years leading the world’s largest automaker, says he’s content with seeing a plateau in profit.

Fresh off a record 1.82 trillion yen ($17.9 billion) profit last fiscal year, Toyota forecast yesterday that net income will slip 2.4 percent in the year ending March 31. That’s even as the company predicts deliveries to increase in every major region, except Japan, where demand will be hit by the nation’s first sales-tax increase in 17 years.

“Right now, in this temporary lull in the growth of profitability, maybe people would wonder, do we not want to continuously grow?” Toyoda told reporters in Tokyo yesterday. “But if we just keep harvesting, there needs to be some additional sowing of the seeds.”

Behind his reluctance to chase after growth are lessons from 2009, when Toyoda says the company expanded too quickly before industrywide demand plunged, resulting in the company being saddled with its first annual loss in 59 years. The risk is that the automaker will miss out on a bigger slice of global auto sales that’s projected to reach a record this year.

Toyota was little changed at 5,530 yen as of 9:13 a.m. in Tokyo trading, leaving its decline this year at 14 percent, compared with a 13 percent slump in the benchmark Nikkei 225 Stock Average.

‘Intentional Plateau’

“Akio-san is very careful about making the same mistake that company did during its rapid-growth days,” Masahiro Akita, an analyst with Credit Suisse Group AG in Tokyo, said by telephone. “Will this plateau last long? My impression is no.”

Developing Toyota’s 330,000 employees and investing in technologies such as fuel-cell cars are among the priorities the grandson of Toyota’s founder has put ahead of the sort of speedy expansion being pursued by rival Volkswagen AG.

“We positioned this fiscal year to be a plateau intentionally,” Toyoda said. “Our goal is to have sustainable growth.”

Tree Analogy

While Toyota’s record profit last fiscal year indicates the company has bounced back from the recession and the 10 million vehicles recalled in connection with sudden acceleration, it’s still grappling with defects.

The company called back more than 6 million vehicles to fix top sellers such as the Camry sedan and RAV4 SUV last month and 1.9 million Prius hybrids in February to upgrade software. Its handling of the sudden-acceleration recalls led to a $1.2 billion settlement with U.S. regulators in March for misleading consumers.

“Our human resources development did not keep pace with the expansion, and as a result, our employees and partners were overstretched,” Toyoda said of his early years as president. “Our fall into the red during the global financial crisis and our large-scale recalls were perhaps a result of this. We were like a tree that grew too rapidly, that as a result was not able to form a strong enough trunk to protect it from the elements.”

Waning Currency

Even with industrywide auto sales that IHS Automotive projects will climb to a record 85 million this year, Toyota will continue to face the elements.

The yen, which boosted the value of sales from Prius hybrids and Lexus vehicles exported from Japan as it weakened the last two years, has stabilized, making it less likely to provide as big of a boon this year.

Toyota is basing its earnings projections on currency assumptions of 100 yen to the dollar and 140 yen to the euro. Analysts estimate the yen, which recently traded at 101.75 versus the dollar in Tokyo, will reach 110 by the end of the fiscal year.

Camry Slips

The limited boost to earnings from exchange rates would be a departure from the last two years, when Japan’s biggest company led a surge in the nation’s corporate earnings as Prime Minister Shinzo Abe’s economic policies helped weaken the yen by 8.7 percent against the dollar in the 12 months ending in March. In the year-earlier period, the yen fell 12 percent.

The increase in Japan’s consumption tax, which took effect on April 1, contributed to a 5.5 percent drop in industry sales last month. At Toyota, deliveries fell 17 percent to the lowest since June 2011.

Intensifying competition in the U.S. market also poses a threat. Toyota’s sales have increased at a slower pace than the total industry in the first four months of 2014 as deliveries slipped 0.2 percent for the Camry, the top-selling car for the last dozen years. Sales of the Prius, which last underwent a major overhaul in 2009, have slumped 18 percent this year, putting the company on course for a second-straight year of lost market share.

China Plans

To compensate for its aging lineup, the automaker has boosted spending on incentives by 10 percent in the first four months of 2014, more than the industry average of 6 percent, according to data from Woodcliff Lake, New Jersey-based Autodata Corp.

A restyled Camry also will roll into showrooms in the second half of this year. The sedan debuted at last month’s New York International Auto Show with more contoured body panels, softer-touch interiors and added welds for sportier handling.

Sales will be sought after even more intently in China, where Toyota rolls out new Corolla and Levin compact cars later this year and hybrid versions with locally sourced batteries in 2015. Still, the company has announced no plans to expand production capacity in the world’s largest auto market.

Shareholder Returns

The strategy contrasts with plans at GM, which is spending $12 billion in China from this year through 2017 to add manufacturing capacity and offer new and refreshed models. Volkswagen has said its Chinese joint ventures will invest 18.2 billion euros ($25 billion) through 2018 to expand in the world’s largest auto market.

For now, the upside to Toyota’s refraining from building new factories appears to be the returning of cash that has built up on its balance sheet to shareholders.

Toyota said yesterday it’s proposing to raising the year- end dividend to 100 yen a share, or 165 yen for the full year. The company is also buying back stock for the first time in five years. In March, it said it would repurchase as many as 60 million shares, equivalent to a 1.9 percent stake, for 360 billion yen.

“President Toyoda’s comments that ‘we intend to continue paying dividends in a stable and sustainable manner,’ plus the addition of buybacks suggests that Toyota is taking shareholder returns seriously, which we welcome,” said Ben Williams, a London-based fund manager at GAM (U.K.) Ltd., which oversees about $300 million in Japanese equities.

--With assistance from Siddharth Philip in Mumbai and Ma Jie in Tokyo.