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Shock: Toyota loses money

Thanks: Bob Nardelli says Chrysler can now continue to restructure.

Toyota to post its first loss in 70 years as US Big Three survive via bridging loans

23 Dec 2008

TOYOTA Motor Company (TMC) yesterday announced it will lose money from its core car-making business for the first time in 70 years in this fiscal year.

Traditionally one of the world’s most profitable car-makers, Toyota was on target to overtake General Motors as also the world’s largest this year, so its surprise loss warning is an indication of the severity of the global economic downturn.

TMC president Katsuaki Watanabe, told a press conference in Nagoya on Monday (December 22) that while the Toyota group would still make a small net profit in its fiscal year ending on March 31, 2009, a “far faster, wider and deeper than expected” sales decline in November in both North America and emerging markets would see Toyota’s car-making operations post its first ever operating loss this year.

“The change in the world economy is of a magnitude that comes once every hundred years,” said Mr Watanabe.

Toyota yesterday forecast a 2009 fiscal year loss of ¥150 billion ($A2.4 billion) in its group operating (car-making) revenue – down from the ¥2.3 trillion ($A37 billion) in operating profit it reported last fiscal year.

Despite the unprofitabilioty in its car-making business, Toyota said it still expects to make a group net profit in same period of ¥50 billion ($A810 million).

The result follows a sharp decline in vehicle sales globally and an increase in the value of the Japanese yen by about 25 per cent since mid-year, making Japanese-made products more expensive elsewhere.

Toyota’s US vehicle sales plummeted 33.9 per cent in November – even more so than the 31.6 decline posted by Honda, which as Japan’s second largest car-maker also cut its current fiscal year profit forecast by two-thirds.

Of course, the sales contraction and operating losses experienced by both Japanese car-makers is miniscule compared to the 41 per cent sales decline posted in November by General Motors, which along with Chrysler on Friday (December 19) together received what amounted to a $US17.4 billion ($A24.9 billion) bridging loan from the US Administration.

While Toyota’s downturn follows eight consecutive years of record profits and still leaves the company with $US18.5 billion ($A27 billion) in cash reserves, Chrysler and GM will face months of crippling restructuring after receiving enough cash just to operate into 2009.

In effect, Washington requires GM and Chrysler to demonstrate an ability to become viable by March 31, which will not be easy in a US car industry that at its lowest ebb in 25 years and shows no sign of recovery.

80 center imageFrom left: SA premier Mike Rann, GM Holden chief Mark Reuss, prime minister Kevin Rudd and industry minister Kim Carr in Adelaide yesterday. Friday’s agreement requires both companies to undergo many of the drastic measures that would have occurred under a Chapter 11 bankruptcy scenario. It requires the new government debt to be prioritised ahead of all other debts, prohibits both companies from issuing dividends, puts limits on executive remuneration and makes all transactions over $US100 million subject to government approval.

Ford continues to seek a $US9 billion ($A13.2 billion) line of credit from the US government, as well as US5 billion ($A7.3 billion) from the Energy Department program, but again said it may not require short-term government assistance.

“But all of us at Ford appreciate the prudent step the administration has taken to address the near-term liquidity issues of GM and Chrysler,” said Ford Motor Company president Alan Mullaly on Friday.

GM chief executive Rick Wagoner said the Bush administration deal would allow the company to accelerate its restructuring plan.

“We know we have a lot of work ahead of us,” said Mr Wagoner, adding that one of GM’s priorities was to ensure the success of the finance division co-owned by GM and private equity firm Cerberus, GMAC, which will close its Australian doors on December 31.

For its part, Chrysler LLC today released an open letter to its employees and other stakeholders by chief executive Bob Nardelli, who thanked the government for its trust in his company.

“We have received news that US Treasury Secretary Henry Paulson will provide $4 billion of initial funding to Chrysler LLC from the TARP (Troubled Assets Relief Program) as a loan to help bridge the current financial crisis. We appreciate the Administration’s confidence in Chrysler.

“As outlined in our submission to Congress, we intend to be accountable for this loan, including meeting the specific requirements set forth by the government, and will continue to implement our plan for long-term viability. The receipt of this loan means Chrysler can continue to pursue its vision to build the fuel-efficient, high-quality cars and trucks people want to buy, will enjoy driving and will want to buy again,” said Mr Nardelli’s letter.

Speaking in response to questions about what effect GM’s US fortunes might have on GM Holden in Australia, Holden chief Mark Reuss yesterday said his company operated as a separate entity from GM, but remained inextricably linked to it.

“Well what is happening with GM right now in the US, well obviously over the last 24 or 48 hours, has been a good sign from the previous administration under Bush and it’s going to help us get to the transition into the new government and the new policy with the Obama administration,” said Mr Reuss during a press conference to announce that Holden will manufacture a new small car with $179 million of government funding alongside the Commodore in Adelaide from 2010.

“We have treated, and I have treated running this Australian icon, independent of what happens with General Motors in the United States and we’ve put together the project with the government here and the investment with our Holden resources here.

“But we’re part of a parent company and… (that) means using the resources that are available both on a cash basis but also on an investment basis in this case, to create this opportunity with the government and Holden here.

“So, you know, we’re part of a parent company,” he said.

Mr Reuss said he hoped the Australian car industry to improve by the third or fourth quarter of 2009, but would not rule out further production shutdowns to meet reduced market demand. He said the monitoring of sales and production rates was continuing on a “week-by-week basis”.

“Next year’s operational plan has really only been confirmed for the first quarter and we announced those schedules here about a month ago.

“We’re trying to do this as close to the time of when the market actually changes to the time we plan our production schedules.

“So we’re doing this almost on a week-by-week basis, looking at the market and the selling rates through our dealerships and that’s the way it’ll continue to operate, because again we’re trying to really manage the output of the plant to the current market.

“I would say that in the third to fourth quarter of this year we’re looking at, you know, somewhat of some positive signals coming back into the market place,” said Mr Reuss.

Read more:

Big Three on the brink

The General on its knees

Big three embrace Obama

Even harder times hit the US

Big Three meltdown

The Road to Recovery podcast series

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