Toyota Trips Up: Posts Bigger Loss than GM in Q1

I just read two interesting articles regarding Toyota's financial performance in Q1, 2009. The first was published in the Wall Street Journal on 5/9 and the other in the New York Times on 5/13.

Toyota posted a loss of $7.7 billion in Q1, 2009. This exceeded the loss by GM in the same period. Luckily Toyota has the cash to survive, unlike GM which will probably file for bankruptcy by the end of this month.

There are many factors for the miscues which caused Toyota to incur it's first annual loss in 59 years:

• Toyota failed to recognize and exploit the growth of the small car market in China. GM is the dominant auto company in the Chinese market where it has partnered with two local OEM's.
• A mistaken belief that demand would continue to increase in the US car market. Toyota chose to increase it's presence in the light truck market just as the market collapsed. This has led the company to idle lines at several plants and place construction of a new plant in Mississippi on hold. Sales for the Toyota Tundra are down by 55% compared to the same period last year.
• The price of gasoline, which was up to $4 per gallon last year, has decreased to $2 per gallon, based on the latest prices in Michigan. This has meant that US consumers have lost interest in paying the extra premium for hybrids or in buying smaller vehicles. As an example, the Toyota Prius is now selling at a discount whereas last year it sold for full sticker price. Sales of Toyota's Yaris small car are also down by 50% compared to the same period last year.
• Toyota was not as aggressive as the big three in offering incentives to sell vehicles. Consequently the company slipped to third place, behind Ford, in US new vehicle sales for Q1.

Toyota management has taken several steps in attempting to remedy this situation. Vehicle inventory, which had increased to 100 days on hand is being reduced to 60 days. Toyota accomplished this by closing its plants in late 2008 and early 2009. This is in line with similar inventory levels at the big three. Toyota is also offering more sales incentives to boost sales. A new model of the Prius hybrid is also being launched and this is expected to increase customer traffic at sales rooms. Toyota's assembly plants are also engaged in cost cutting to help boost its bottom line.

The fact that Toyota, which is experienced in small vehicle and hybrid manufacture, should stumble in today's eco friendly atmosphere is a somber reminder to the big three on how big their task really is. Since gas prices continue to fluctuate, US consumers feel no real compulsion to buy hybrids or small vehicles. The big three must build small vehicles that are attractive and competitively priced if they are to take market share from the transplant OEM's.

Ford takes a Gamble on an Electric Focus

Ford announced this week that they would invest $550 million to retool the Michigan Truck Plant in Westland (MI) and Louisville (KY) to build an all electric Ford Focus. The North American version of the Focus is currently produced by Ford at the Wayne Stamping Assembly plant. While this is very encouraging news, since it will save and create jobs in Detroit, I have several concerns with Ford's strategy.

Firstly, Ford does not currently make any profit on the current Focus. This is generally true for all small cars produced by the big three and explains why the big three have never been keen on the small car market until the increase in oil prices forced them to rethink their strategy.

Ford is counting on economies of scale to reduce the cost of the Focus by simultaneously launching the Focus in the US, Asia and Europe. However, launching global programs can be problematical. Extra coordination is required for ensuring tooling is the same, materials are consistent and all suppliers must work in tandem to ensure a smooth launch. Changes will also require more coordination. This will add cost and complexity to the launch. Ford management is also negotiating with the UAW to further reduce labor costs and benefits. These negotiations also involve introducing flexible manufacturing and work practises so that several models can be assembled on the same line.

The typical north American consumer will also need to be enticed to buy an electric Focus since they regularly like to buy larger vehicles such as SUV's and pick-ups instead. This would have been an easier sell with gas at $4 per gallon rather $2 per gallon as it is today. Ford will need to add features to up-sell the Focus as they do in Europe. But, the European version of the Focus is more expensive than the north American version. Europeans are also more used to driving smaller vehicles since the price of gas is substantially higher (due to government taxation) and the cost of living is higher.

Ford also needs to prove to consumers that their Focus can compete on the same level as the compacts from Toyota and Honda. They will have to show that they can produce at an equivalent or higher quality standard than the transplants.

While Ford has my vote as the most likely of the Detroit big three to survive, I remain skeptical of their new car strategy. Bottom line US consumers will never seriously look at small cars unless the price of gas remains consistently high (as in Europe). Last year when the price of gas went to $4 per gallon, sales of the Focus increased. While I am against a new government tax on gas to promote energy conservation, we do need sustained government programs to promote the sale of small fuel efficient vehicles.

Chrysler Bankruptcy Filing Impacts Suppliers and Dealers

As many of you are aware Chrysler LLC filed for bankruptcy in New York on Friday, 5/1/09. Per the reports in the news, deals had been worked out with the UAW, Fiat and most of the creditors and bondholders in order avoid the chapter 11 filing. However, a small group of hedge funds held out for a better deal for their investors, and refused to accept the offer from Chrysler. Unable to resolve this issue before a government imposed deadline of 4/30/09, Chrysler had no choice but to file for bankruptcy.



This filing has several ramifications:

1. Chrysler will shutdown all its plants starting Monday, 5/4/09. They will not reopen until the company re-emerges from bankruptcy.

2. The supply base will be significantly impacted. Existing bills will be paid by the federal government. But the suppliers, who are already hurting due to falling sales, will now have to idle their plants until Chryslers plants re-start. The President stated on Friday that he wants a quick bankruptcy. However experts are stating that given the size of Chrysler and its issues a 30-60 day bankruptcy may not be feasible. With this loss of revenue there are likely to be many suppliers forced into bankruptcy. This could have a ripple effect on GM and Ford since they rely on many of the same suppliers for their parts also.

3. Dealers have inventory on hand at this time. The chapter 11 reorganization will force many of the dealerships to close as Chrysler consolidates its operations. Those dealers that are forced out of business will also sell inventory at fire sales prices depressing new car sales for the other OEM's.

4. Fiat will take a 20% stake in the re-organized Chrysler. They will contribute technology and new fuel efficient models to boost Chryslers sales. But this process will take at least 2 -3 years in order to transfer designs from Europe and launch the vehicles in North America.

Bottom line I am skeptical about the chances for Chrysler to emerge from Chapter 11 within 30-60 days. I think the issues that must be resolved have been over simplified. All I see is more pain to the automotive supply base before things start to turn around.