Special Coverage

Toyota's Safety Crisis

Goldman Sachs Japan analysts see a familiar bright light at the end of the dark tunnel Toyota Motor Corp. is now in.

Near-term, understandably, their outlook for the world’s largest auto maker has been revised downward in the wake of crippling multi-million vehicle recalls, a 1-week production stop in the U.S., lost sales and yet another blow to a badly bruised reputation – the recall of nearly 500,000 Prius and other hybrid-electric models for braking problems.

A new GSJ report calls for operating losses of ¥150 billion ($1.7 billion) in the fiscal year ending this March, instead of the breakeven originally forecast. It projects operating profits in the following fiscal year of ¥550 billion ($6.1 billion), down from an earlier estimate of ¥730 billion ($8.1 billion).

In the fiscal year ending March 2012, GSJ forecasts operating profits of ¥780 billion ($8.7 billion), down from ¥940 billion ($10.4 billion) previously.

Two years ago, Toyota reported operating profits of ¥2.27 trillion ($25.2 billion).

The new numbers assume costs of ¥100 billion ($1.1 billion) directly related to the recalls, and ¥50 billion ($555 million) as a result of the production halt and sluggish sales.

Not included are the residual-value losses from the drop in resale value of Toyota vehicles. A 5% decline is calculated to generate additional losses of ¥20 billion-¥30 billion ($222 million-$333 million).

The GSJ analysts examined three large recalls in the past involving Ford Motor Co./Firestone in 2001, Honda Motor Co. Ltd. in 2004 and Mercedes Benz in 2005. They found “the share prices of the companies involved dropped sharply immediately after they announced recalls but then returned to pre-recall levels about three to six months later, if the auto maker’s response was deemed effective and appropriate.”

The analysts believe Toyota sales will begin to rebound “in several months” but think recovery will be slow and measured, especially in the U.S., where the auto maker’s market share is expected to drop to 15% by the fiscal year ending in 2012, from 18.2% in December 2009.

What will help cushion the blow and hasten the recovery of market share are full model changes scheduled for the Camry and Corolla between October 2010 and March 2012.

Among the additional risks cited in the GSJ report are the possible discovery of more problems unrelated to the braking, further large-scale recalls, several class-action lawsuits already under way and significant damage to the Toyota brand.

Toyota Global Vehicle Sales Forecast
2008 2009 2010 2011 2012
Japan 2,188 1,945 2,209 2,100 1,964
North America 2,958 2,212 2,020 2,334 2,568
Europe 1,284 1,062 931 874 836
Others 2,483 2,348 2,115 2,431 2,557
Total 8,913 7,567 7,275 7,739 7,925
Note: Sales are unit sales. Years are fiscal years ending in March. Actual data supplied by Toyota. Forecast data from Goldman Sachs Research.

The report’s authors note “rapid growth in production volume from first-half 2000 under Toyota’s Global Master Plan might have had some negative impact on product quality.” They believe this was offset in part by the auto maker’s “Customer First” initiative announced in 2007 that improved initial vehicle quality. But they emphasize “improving long-term quality would take time.”

“Toyota has been cutting back production since second-half 2008,” the report says, and “the new production levels should allow it to devote ample man-hours and personnel to product quality. We do not think the production environment is likely to engender further problems.”

Given the company’s ample balance sheet, focus on quality and strong management commitments to the recall, they are confident Toyota can overcome current problems and bounce back.

But recovery inevitably will be a product of place and time.