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Japan Analysts See Long Road to Toyota Recovery in U.S.

“The damage in this case has been explicit and meaningful, not only to the company’s earnings, but its reputation and image,” says Koji Endo of Advanced Research Japan.

After closely examining Toyota Motor Corp.’s cuts, scrapes and bruises from millions of recalls in the U.S., industry analysts in Tokyo conclude the auto maker’s injuries are severe but not permanent.

“Recalls are not rare,” says Koji Endo, managing director- Advanced Research Japan. “Last year in the United States, 15 million vehicles were recalled. But the damage in this case has been explicit and meaningful, not only to the company’s earnings but its reputation and image.”

Toyota has recalled more than 6 million vehicles in the U.S. and about 8.5 million worldwide in the last several months, primarily to address acceleration-related issues. The U.S. National Highway Traffic Safety Admin. says 52 deaths have been connected to reports of sudden acceleration in Toyota vehicles since 2002.

Toyota President and CEO Akio Toyoda, testifying before a Congressional panel in Washington on Feb. 24, promised to set up an “automotive center of quality excellence” in the U.S. led by an American named to the position of “product safety executive.”

He also apologized to the family of a California police officer who was killed, along with his wife, daughter and brother-in-law, when a Lexus ES 350 he was driving sped out of control and crashed on a highway. Relatives of the family are suing Toyota for defects they say caused the accident.

Endo expects the negative impact will be about ¥100 billion ($1.1 billion) to fix the recalled vehicles and ¥70 billion ($786 million) in lost sales, for a total of ¥170 billion ($1.9 billion).

“There’s a good chance sales losses may be bigger than the 100,000 units Toyota anticipates (for February and March, the last two months of this fiscal year),” he says, “and nobody knows what will happen in the next fiscal year.”

The cost estimates vary, but all are large. Kurt Sanger, an industry expert with Deutsche Bank AG in Tokyo, calculates the recalls and production stoppage in early February cost Toyota ¥130 billion ($1.4 billion).

Chris Richter, a senior analyst with CLSA Asia-Pacific Markets in Tokyo, estimates the cost of recall repairs at about ¥178 billion ($2 billion) and says there are scenarios about possible damage to the brand of between ¥178 billion-¥356 billion ($4 billion).

Nonetheless, says Sanger, “Toyota’s balance sheet remains extremely strong,” and that may be an understatement, given the company’s ¥1.9 trillion ($20 billion) in reserves and a book value of ¥9.8 trillion ($110 billion).

But near-term operating profits have taken a hit.

“This fiscal year, I expect Toyota to have an operating loss of ¥20 billion ($224.4 million), instead of the ¥150 billion ($1.6 billion) operating profit I foresaw before the recalls,” Endo says. Richter is more upbeat, calling for operating profits of ¥12 billion ($133 million) for the current fiscal year ending March 31, ¥173 billion ($1.92 billion) in the next fiscal year and ¥680 billion ($7.5 billion) in the fiscal year ending in March 2012.

Sanger optimistically expects operating profits of ¥30 billion ($333 million), ¥390 billion ($4.3 billion) and ¥750 billion ($8.3 billion) in the three fiscal years.

By comparison, Toyota reported operating profits of ¥2.27 trillion ($25.2 billion) in 2008.

More serious and difficult to calculate is long-term collateral damage, the blow to the auto maker’s reputation for quality and reliability that has long justified a price premium.

North America, particularly the U.S., is the center of attention these days, not only because of Toyota’s safety problems, but also as the auto maker’s biggest market, accounting for roughly 33% of total global sales and, by one calculation 40% of operating profits in a normal year.

Toyota’s Global Vehicles Sales Forecast
2008A 2009A 2010E 2011E 2012E
Japan 2,188 1,945 2,178 2,233 2,233
North America 2,958 2,212 2,127 1,893 2,116
Europe 1,284 1,062 896 721 839
Asia 957 905 928 1,010 1,130
Other 1,527 1,443 1,088 1,267 1,426
Total 8,914 7,567 7,218 7,124 7,744
Note: In 000s. Source: Toyota Motor Corp. and CLSA Asia-Pacific Markets

Says Endo: “The main risk is the mid- to long-term impact on Toyota’s image, brands and sales volume in the United States. Toyota now has about 17% of the U.S. market, and there’s a good chance that might drop to 15%, 14% or 13%.”

Richter calls a drop in market share and the inability to price products “a gift that keeps on giving” and says “a 5% decline in Toyota pricing may be appropriate.” To regain U.S. market share, Sanger believes Toyota will be more aggressive in pricing. He assumes the auto maker’s average incentives will rise from $1,450 per vehicle this fiscal year to $2,500 in the first-half and $2,250 in the second-half of the next fiscal year, before settling at $2,000 in fiscal 2012.

What surprised Tokyo analysts after the recalls were demanded by NHTSA as Toyota’s lack of damage control.

Says Endo: “Every auto maker has recalls, and in the past Toyota was very good at risk control and risk management. This time I was puzzled by how often things were mishandled. As a result, the situation has become unnecessarily bleak.”

Toyota executives were astoundingly slow to react, says Richter. “They lost several precious weeks pretending there weren’t any issues, before getting in front of them. President Toyoda’s testimony before that Congressional committee didn’t persuade anybody.

“It was a non-event news wise,” he says, “but for Toyota, at this stage, no news is good news.

“It’s evident they didn’t have any game plan for this kind of issue but may have had too much hubris,” he adds. “Hubris may be at the root of the whole problem.”

Richter and Sanger both believe comparisons of Toyota’s troubles today with those experienced by Audi AG and Suzuki Motor Corp. in the late 1980s are not valid, because at that time both auto makers were not big players in the U.S. market.

Audi’s share in 1985 was 0.5% and Suzuki’s in 1986 was 0.3%, whereas Toyota has been in the U.S. since 1958, with annual sales of nearly 3 million units in 2008.

Toyota’s problems in the U.S. reportedly are not a big issue in Japan, where close to 200,000 Prius hybrids have been recalled to upgrade antilock-braking system software. Despite the recall, the Prius remains Japan’s best-selling vehicle, leading rankings for the ninth straight month in February.

Sanger reports little impact in the 10-member Association of Southeast Asian Nations, given Toyota’s dominance in those markets.

He sees the auto maker simply “in-line,” instead of outperforming, in Europe, where Toyota recalls could reach up to 1.8 million units. In a separate recall, 52,903 third-generation Prius hybrids reportedly have been called back for inconsistent braking.

“The main negative impact has been in the United States,” Endo says. “Toyota will continue to do well in emerging markets.”

However, Richter sees a potential problem in China, where foreign brands are preferred because they have status and the recalls may lower Toyota’s status image for Chinese buyers. Toyota reportedly has called back 75,552 RAV4 cross/utility vehicles there for sticky accelerator pedals.

“The flip side of that argument is General Motors Co., which had its best year ever in China after going bankrupt, “ he says. “So it’s questionable how much bad news abroad affects Chinese customer perceptions.”

Looking ahead, Sanger cites downside risks for Toyota that include an unfavorable exchange rate of ¥90:$1 continuing, slow recovery of the U.S. market and potential legal or regulatory fallout from the recalls.

Richter believes the credible accusations of malfeasance against Toyota officials could lead to criminal procedures, which would be very damaging for Toyota. “Some people still wonder about the company’s electronics, and additional problems would create very negative vibes,” he adds.

Endo says there is a rumor Toyota may have to recall the Corolla because of defects in the electronic power steering system. But “at this point, the worst is probably over.”

Uncertainty shrouds the most critical question, namely how long it will take Toyota to restore consumer trust and regain lost ground in the U.S. its biggest, most important market.

“Looking back at past embarrassing recalls, it takes years, if ever, for most companies to regain trust,” Richter concludes.

TAGS: Vehicles
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