Monday, 29 December 2008
Car Slump Jolts Toyota, Halting 70 Years of Gain
A surprisingly grim forecast from Toyota Motor – that it will lose money this fiscal year on its vehicle business for the first time in seven decades – is the latest sign of the global auto industry’s sharp slowdown after years of rising profits and rapid expansion.
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Car Slump Jolts Toyota, Halting 70 Years of Gain
By Bill Vlasic and Martin Fackler
23 December 2008
A surprisingly grim forecast from Toyota Motor – that it will lose money this fiscal year on its vehicle business for the first time in seven decades – is the latest sign of the global auto industry’s sharp slowdown after years of rising profits and rapid expansion.
Worldwide vehicle production has been growing an average of 3 percent annually since the beginning of the decade, according to the research firm CSM Worldwide. But with sales falling in virtually every region because of weak economies and tight credit, auto companies will reduce total vehicle production as much as 10 percent next year, CSM predicted.
“The sales decline has been so precipitous that production has to be reduced to catch up,” said Michael Robinet, CSM’s vice president for global vehicle forecasts.
The fall-off in sales has accelerated in the last three months as consumers have struggled to get loans to buy vehicles. In turn, auto companies have closed factories to reduce inventories and taken other steps to save money.
Global vehicle production fell 16 percent in the fourth quarter, according to the firm IHS Global Insight. “The collapse is far sharper than anything previously expected or previously experienced,” said George Magliano, the firm’s head of auto industry research for North America.
The industry already has far more production capacity than it needs to meet consumer demand. Most major automakers have been steadily building factories in markets like India, China and Brazil in anticipation of millions of new, first-time buyers entering the market.
CSM estimates that auto companies have enough factories to build 90 million vehicles a year. It said, however, those plants will produce only about 66 million vehicles in 2008 and even fewer next year.
Detroit’s struggling Big Three automakers have been cutting production in the United States to levels not seen since the 1950s. Last week President George W. Bush approved $17.4 billion in U.S. government loans to keep General Motors and Chrysler from going bankrupt.
But the downturn is testing even the strongest companies, including industry stalwart Toyota.
The company projected its first-ever operating loss on Monday, for the current fiscal year that ends in March, since it began releasing such figures in 1941. At its annual news conference in Nagoya, Japan, the company declined to even set a worldwide sales goal for 2009.
“The tough times are hitting us far faster, wider and deeper than expected,” said Katsuaki Watanabe, Toyota’s president. “This is an unprecedented crisis requiring urgent action.”
Toyota has offered steadily bleaker forecasts in recent months, and been forced to take unusual steps after reporting eight consecutive years of record profits before this year. In the United States, for example, it has halted work on a plant in Mississippi, and enrolled idled employees in classes at its truck factory in San Antonio, because fewer of them are needed on the production line.
Analysts said the industry shake-out is likely to get worse next year, with weaker companies being forced out of business or acquired by stronger competitors.
“It is just a matter of time before all major automakers are losing money,” said Koji Endo, an auto analyst in Tokyo for Credit Suisse Securities.
Automakers have been steadily reducing their production plans in the United States since the spring, but have been slower to react in other regions.
Besides cutting production to balance shrinking demand, the auto companies are also delaying or cancelling new factories in countries like Thailand and Russia.
“This is going to be felt throughout the entire system,” Magliano said. “There’s very little growth anywhere out there in the next year.”
Toyota’s announcement underscores what Detroit’s auto executives told lawmakers during congressional hearings on their requests for a U.S. government bailout – that no company was immune from the global downturn and credit crisis.
Toyota, which is poised to pass GM for bragging rights as the world’s largest vehicle maker, said it still expected to eke out a narrow net profit for the fiscal year because of contributions from its non auto operations.
But the company lowered the number of vehicles it expects to sell this year to 8.9 million from its earlier forecast of 9.5 million.
“The change in the world economy is of a magnitude that comes once every hundred years,” Watanabe said.
He said Toyota will suspend investment in new plants in addition to the factory in Mississippi, and reduce production in some plants to single shifts. The company has even unplugged electric hand dryers at some offices in an effort to cut costs.
Other automakers are following suit. Hyundai Motor and Kia Motors of South Korea cut their joint 2008 sales forecast by 12.5 percent and said they would freeze pay for managers amid slumping vehicle demand.
Europe has not been immune to the pain. Last week, Fiat extended its program of temporary plant closures in Italy by two months into February. The Italian company acknowledged this month that its car business needed a partner to survive the economic crisis.
PSA Peugeot Citroën, the French carmaker, has temporarily halted production in dozens of factories across the country in recent weeks.
Honda Motor, Japan’s second-largest carmaker, last week cut its profit forecast for the current fiscal year by two-thirds. The company’s president, Takeo Fukui, spoke of an “abrupt change” in the conditions facing the global industry, a “severe business environment” and a “sharp sales downturn” since mid-September.
“They’ve caught the same cold that Detroit has caught,” said Christopher Richter, senior analyst in Tokyo at Calyon Capital Markets Asia.
The Detroit auto companies have closed dozens of plants and cut more than 150,000 jobs in the last three years. But the deterioration in sales has forced even deeper cuts recently.
Chrysler has shut down all 30 of its North American manufacturing plants for a month to save money and reduce inventories. GM will permanently close two of its assembly plants, in Wisconsin and Ohio, on Tuesday as it continues to reduce its production of sport utility vehicles.
Even though production is being cut around the world, analysts believe that economic stimulus efforts by governments will get the industry back on a growth track eventually.
“We’re still looking at this as a cyclical phenomenon, and that once all the stimulus packages kick in the industry will be back to where it once was,” Magliano said. “But it’s clearly going to take longer than anyone envisioned.”
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