Toyota Motor Corp. , struggling to recover from March's earthquake and tsunami amid growing competition from global rivals, faces a new obstacle: an appreciating Japanese yen.
The world's largest auto maker, which boosted its full-year profit forecast on Tuesday, is seeing margins on its exports eroded by the high-flying currency even as it makes major strides to normalize production.
The yen has soared 12 per cent against the U.S. dollar in the past year, a further blow to Toyota's American sales, which have been hit hard by parts shortages as well as the stumbling U.S. economy.
As its home currency soars, Toyota could move more production outside Japan, but the company is unlikely to consider such a move.
"They seem very loath to do that because of the traditional roles of Japanese manufacturing and trying to keep people employed, especially now that they've had such horrible crises," said Aaron Bragman, a senior analyst with IHS Automotive in Detroit.
"Pulling production out now would look very bad for any of these Japanese manufacturers because they need to try and get people back to work and get the economy back up and moving again. So it is very difficult for them, despite these yen pressures, for them to do that."
Toyota manufactures about 40 per cent of its vehicles in Japan, with much of that production earmarked for exports.
Currency headwinds could prove particularly problematic in the United States, Toyota's single-biggest market, as the yen gains ground against the battered U.S. dollar. Not only is the U.S. economy slowing, Toyota said its July U.S. sales sank by almost 23 per cent on a year-over-year basis as it scrambled to deal with lingering parts shortages caused by the earthquake.
While Toyota already produces many of its compact and mid-sized models in North America, its luxury Lexus vehicles and hybrid vehicles like the Prius are mostly exported from Japan. "So, a lot of the hottest models, in terms of the fuel efficiency … are coming from Japan," Mr. Bragman said.
Toyota senior managing officer Takahiko Ijichi told journalists that with the U.S. dollar around ¥15 weaker than it was early last year, a $20,000 car sold in the United States would give Toyota $3,000 less in gross profit.
Consequently, Toyota is now forecasting a U.S. dollar rate of ¥80 instead of ¥82 this year. The company's new assumptions also peg the euro at ¥116 instead of ¥115.
He suggested the auto maker plans to blunt the yen's strength by buying more parts overseas.
Toyota also plans to lure U.S. customers back to its showrooms with more attractive incentives, new model launches and bigger sales to fleet customers. "By next March, we expect to gain back the market share we had before the quake," Mr. Ijichi said.
Last week, Bank of Nova Scotia economist Carlos Gomes predicted that overall car sales in the U.S. would pick up steam by September as various auto makers dangle fatter incentives. "During the first half of 2011, auto incentives in the United States fell to only 8.8 per cent of the average selling price, down from an average of 10.3 per cent over the past five years," he wrote in his report.
Tougher competition is also limiting Toyota's ability to raise prices in some other markets, as rival auto makers from Asia, Europe and the U.S. battle to poach Toyota's market share. "One of the biggest challenges globally is coming from [South Korea's] Hyundai Kia, which is providing an alternative import brand to not just Toyota, but also Honda, and coming up with products that make a lot of the Toyota products look rather staid," Mr. Bragman noted.
Moreover, he added, Germany's Volkswagen AG has designs on Toyota's title as the world's largest auto maker, while U.S. auto makers such as GM and Ford are now competing with much cleaner balance sheets and improved products.
Earlier in the day, Toyota reported a first-quarter operating loss of ¥108-billion ($1.4-billion) versus a ¥211.7-billion profit a year earlier. Its final profit, meanwhile, fell to ¥1.1-billion from ¥190.4-billion as revenue tumbled 29 per cent to ¥3.44-trillion.
The company, though, also offered investors some morsels of good news as it raised its annual profit forecast to ¥390-billion and suggested that normal production would resume in September – about two months ahead of schedule.
Through overtime and extra shifts, Toyota plans to build 7.72 million vehicles this business year, or 330,000 more than it had flagged in June. Reuters, meanwhile, reported that Toyota is looking to boost global production by 24 per cent to a record 8.9 million vehicles in 2012.
With files from Reuters and AP