Toyota forecasts first profit drop in five years on yen strength

Tokyo: Toyota Motor said annual net income will probably decline for the first time in five years, as currency swings that had spurred record profits now pose stiff headwinds.
Net income may drop 35 per cent to 1.5 trillion yen ($13.8 billion) for the fiscal year ending in March, Japan’s largest company said in a statement on Wednesday. The forecast trailed the 2.19 trillion yen average of 23 analysts’ estimates compiled by Bloomberg.
President Akio Toyoda has presided over three straight years of record annual profit, as a weakening yen boosted earnings from Japan-exported Corolla compacts and Lexus RX SUVs sold overseas. As the currency has strengthened more than 10 per cent versus the dollar this year and US demand growth has stalled, the automaker is now racing to recover from production disruptions to keep ahead of Volkswagen by worldwide sales.
“We have benefited from an exchange rate tailwind that has helped raise our earnings above the level of our true capabilities,” Toyoda, 60, said in a statement. “Although this has enabled us to take on new challenges, that set of circumstances is likely to change for the worse this year.”
The automaker expects foreign exchange rate changes to reduce operating profit by about 935 billion yen in the year started April 1. Toyota plans to buy back as much as 500 billion yen, or about 3.2 per cent, of its shares and pay a dividend of 210 yen per share.
Production losses
Toyota has revived domestic assembly lines to make up for lost production of about 80,000 vehicles after Japan’s most devastating earthquakes since March 2011. Japan plants that accounted for about 40 per cent of the cars and trucks the company produced last fiscal year also shut for one week in February, due to a steel factory fire.
Recovering some of that output will be crucial to Toyota extending its reign as the world’s top-selling automaker to a fifth-straight year. The company fell behind Volkswagen during the first three months of 2016, with deliveries dropping 2.3 per cent to 2.46 million units. Despite an emissions scandal that’s escalated to the worst crisis in Volkswagen’s history, its deliveries rose 0.8 per cent to 2.5 million.
Challenges on the horizon were already evident before the latest disruptions to Toyota’s production in Japan. Toyoda closed negotiations with the company’s labour union in March by saying business circumstances had changed, citing currency swings and stricter environmental regulations in emerging markets. Toyota raised base monthly wages by just 1,500 yen for this fiscal year, half the increase workers had requested.
Longer term
Toyoda has overseen a series of strategic longer-term moves that could insulate the company from the effects of foreign exchange rate changes and help meet tougher fuel economy and emissions rules.
Toyota has set a target to nearly eliminate conventional gasoline engines from its lineup by 2050 as a means to achieving a 90 per cent reduction in emissions from its vehicles. The goal served as a wake-up call to Toyota group suppliers that will need to transform their businesses to make components for hybrids, fuel cell vehicles and plug-in electric autos.
The automaker is scheduled to build car factories in Mexico and China before the end of the decade, ending a suspension from adding new assembly plants since 2013. In the meantime, the company has honed an in-house global architecture system it sees cutting costs for new plants by 40 per cent and product development by 20 per cent.
Safety systems
Reducing costs will be crucial to maintaining affordability of cars Toyota plans to equip with more safety-related systems. The carmaker plans to make automated braking standard on almost all Toyota and Lexus models in the US by the end of next year, four years ahead of a voluntary agreement automakers and regulators announced in March.
Toyoda has laid down a $1 billion bet on artificial intelligence and robotics to further advance development of vehicles that will be more capable of driving themselves and keeping drivers from getting into collisions. The Toyota Research Institute that started operating in January is led by Gill Pratt, the former programme manager for the US Defence Advanced Research Projects Agency’s robotics efforts.