Posted on 09 Mar 2010
The financial impact on Toyota Motor Corp. from its global recall could total more than $5 billion over the next year, due to increased incentive campaigns, litigation costs and marketing efforts by the embattled car maker, analysts say.
The critical question facing the world's leading car maker is how long the fallout from the recall will affect sales in North America, its largest market. After a slow start, Toyota is biting back at its critics and has launched an aggressive sales campaign in the U.S., featuring a 0% interest five-year loan offer, competitive lease prices and free maintenance across 80% of its vehicle line-up.
Despite the onslaught of negative media coverage from late January, Toyota's marketshare in the U.S. only slipped to 12.7% in February from just above 14% the previous month. "The fact that Toyota slipped by only 130 basis points from January to February was pretty impressive," said Kurt Sanger, autos analyst at Deutsche Bank in Tokyo. "How much they can rebound and at what cost will be critical going forward."
Toyota is still set to report a net profit for the fiscal year ending March 31 of 80 billion yen, or about $886 million, reversing a net loss of 437 billion yen the previous year, its first loss in 59 years.
"As there is less than a month left for this fiscal year, the impact won't be significant. But it will severely weigh from the next fiscal year. It is hard to say if Toyota will be able to post a profit easily in the next fiscal year," said Tatsuya Mizuno, analyst at Mizuno Credit Advisory.
Toyota itself has factored in a recall cost of 180 billion yen for the current fiscal year, the only public estimates the company has given of the toll from the current firestorm surrounding the manufacturer. But analysts say total costs going forward will be much higher. A Toyota spokesperson Tuesday declined to comment on analysts' estimates of its costs from April 1, 2010.
J.P. Morgan estimates that Toyota's total, one-time recall related costs could total 400 billion yen, plus an additional 100 billion yen for settling litigation-related costs. Kohei Takahashi, J.P. Morgan's autos analyst, has slashed his operating profit target for Toyota to 540 billion yen from a previous estimate of 760 billion yen, for the fiscal year ending March 31, 2011.
Deutsche Bank estimates the recalls will impact its operating profit by 290 billion yen.
Toyota's toughest mission is to continue to woo new customers to its brand, and to change the minds of those sitting on the fence. According to CNW Market Research, an automotive marketing research company, 7% of consumers previously intending to buy a Toyota will not do so now.
"It's the people that are sitting on the fence that Toyota is trying to convince," said Christopher Richter, autos analyst at CLSA Asia-Pacific Markets. "Toyota still has a significant core audience, but a smaller percentage of people are still moved by safety concerns."
The company also has to continue its pace of sales to avoid an inventory build-up or idling its plants in the U.S. "Toyota had been facing excess production capacity...even before the recall problem occurred. If its sales drop, this capacity problem will increase its fixed-costs," said Mr. Mizuno.
Toyota is aiming to convince its skeptics by launching a wide array of incentives, with Deutsche Bank estimating that Toyota's average incentives will increase to $2,500 in the first half of the fiscal year starting April 1 from $1,450 in the year ending March 31. Still, Toyota's incentives are still below the current three-month industry average of $2,650.
The Japanese car maker has sweetened lease deals on many models by increasing the "residual values"—the projected value of the car at the end of the lease contract—and dropping finance rates. New Camrys are on sale for as little as $179 a month. The Lexus luxury division is promoting discounted lease offers as well, which vary by region and dealer. In China, Toyota is also offering a combination of sales incentives, including zero-percent loans, free insurance and fuel and roadside service.
With more than $29 billion in cash on its balance sheet and very low levels of borrowing, Toyota has a comfortable cushion to absorb the blows, and doesn't stand out as a credit risk. However, ratings agency Fitch has placed the company's 'A+' rating on negative watch. Fitch said the recall and sales suspension casts a negative light on Toyota's reputation for quality. A reduction in a company's credit rating can make it more expensive for it to raise money in the debt market.
Toyota and its president, Akio Toyoda, have embarked on a media offensive, after being criticized for its slow response to the burgeoning crisis. Mr. Toyoda last week aimed to rally the troops by speaking in front of thousands of Toyota dealers, suppliers and management. On Monday, he met with Yukio Hatoyama, Japan's prime minister, to discuss his testimony before U.S. Congress and his visit to China.