TOKYO – Unthinkable even six months ago, Toyota Motor Corp. finds itself sliding ever deeper into an economic black hole along with the rest of the global industry’s stricken auto makers.

“We are facing an unprecedented emergency,” outgoing Toyota President Katsuaki Watanabe warned last December. “This is a crisis unlike the crises of the past.”

Since then, the plight of Japan’s No.1 auto maker steadily has worsened.

After multiple revised forecasts, all downward, management now expects a 17.8% drop in consolidated global sales to 7.32 million vehicles, including small-car maker Daihatsu Motor Co. Ltd. and truck producer Hino Motors Co. Ltd.

Toyota now faces an operating loss of ¥450 billion ($4.6 billion) for fiscal-2009, ending March 31, three times what was foreseen in December and only the second negative result since the company was founded in 1937.

Yet, company executives boldly forecast that sales of 7 million units for the next fiscal year, which is about 25% below capacity, still will yield an operating profit. This will be accomplished, they say, “by expanding and strengthening our various cost-reduction activities, both in-house and with suppliers.”

Analysts are skeptical, especially when matched with an expected sales decline next year to as much as 35% for the entire global industry.

“A 10% decline in Toyota sales next year is likely, and with an exchange rate at ¥90:$1, I don’t think it will be possible for the company to make a profit,” says Kota Yuzawa, an industry expert with Goldman Sachs Japan.

“We expect an operating loss of ¥450 billion,” he says, adding, “If the yen weakens to ¥100:$1, Toyota could possibly make a profit.”

Chris Richter, a senior analyst with CLSA Asia-Pacific Markets in Tokyo, is more dire, forecasting an operating loss “in excess of ¥1 trillion ($10 billion)” for Toyota in the next fiscal year.

“Toyota’s strong balance sheet will help them ride out the crisis perhaps better than competitors,” he says. “But in the current environment, it’s hard to imagine how any auto maker can be profitable.”

Toyota has been hit hard and hurt badly by a combination of calamities. Chief among them is Japan’s strong currency, up 25% in value from ¥120:$1 two years ago and showing no signs of losing strength. This is more than a bruising, because for every one yen change up or down in the dollar/yen exchange rate, operating profits shift by ¥40 billion ($407 million) for Toyota.

“The current crisis has exposed foreign exchange for what it really is, not an annoyance as Japanese auto makers previously believed but a major, strategic Achilles’ heel,” Richter says.

If it wasn’t for the company’s sensitivity to exchange rates, Toyota would not be losing money this year.”

Exports, accounting for roughly 60% of domestic production, are another sensitive area. The auto maker estimates sales will drop 20.7% this fiscal year to 2,140,000 units, and analysts anticipate a further decline of 10%-18% next fiscal year.

“Exports are murderously expensive for Toyota because of the strong yen,” says Michael Wynn-Williams, a senior analyst with IHS Global Insight. “The company needs to get out of them as much as they can.”

As with many of the world’s leading auto makers, Toyota miscalculated growth, expanding too quickly, leaving it especially vulnerable to the current economic downturn.

CSM Worldwide estimates the global industry has the capacity to build 90 million vehicles annually but produced only 66 million in 2008 and will make even less this year.

“Toyota’s expansion was based on a global auto market that doesn’t exist anymore,” Richter says. “For at least a number of years, global demand is not going to be anything like what (Toyota) planned for and where they based their production.”

Adds Yuzawa: “In the last three years, Toyota invested around ¥4.5 trillion ($46 billion) and made ¥6.4 trillion ($6.57 billion) in operating profits. Their operating margin was 8%-9%, probably the highest in the industry, so most of their decisions in that fast-growing period were right.”

During the period, most auto makers, including Toyota, experienced more than 5% annual growth, he says, noting the historic annual growth rate of about 3.5% for the industry changed for the better. “But late last year, (Toyota) realized it would have to scale back capacity because the faster rate was not sustainable.”

Yet another blow to Toyota’s fortunes has been the precipitous deterioration in the Japanese economy, one of the worst hit by the global crisis.

The domestic market still accounts for more than one-quarter of the auto maker’s global sales. But the country’s gross domestic product shrank in the last October-December period at an annual rate of 12.7%, the largest quarterly drop since 1974.

Cost-cutting now is an even bigger priority, and Toyota aims to reduce fixed costs by 10% in the next fiscal year in every way possible. Plans to build new plants or expand production capacity have been cancelled or postponed. Some factories are shutting down temporarily to ease inventories, while the work week has been shortened at others.

Additional moves include a hiring freeze, the layoff of temporary workers, employee buyout offers, cuts in management and workers pay, as well as the reduction or elimination of bonuses. Additionally, Toyota reportedly is asking Japanese steel producers to slash prices up to 30%.

A “Special Small Vehicle Cost Reduction” team has been formed. Although few details have been revealed, the group will address such things as model size, number of parts used and level of quality required. Team ideas and findings could help pare the production costs of larger vehicles, as well.

Wynn-Williams says much more is required. “(Toyota) will have to strip a lot of cost out of models now in the pipeline and slim down their product range. There are too many variants. They need to strengthen research and development overseas, particularly in the U.S. and China, customize products for these large markets and produce more (there).”

For the mid-term, the auto maker says in a statement, plans are to “enhance the development of hybrid and compact vehicles, which we believe are the key to our future growth.”

But Wynn-Williams suspects, near-term at least, the need for new technology could be less than forecast, contending hybrid sales may be lower. “The technology is expensive,” he says. “People still don’t have much money to spare, so conditions call for simple, low-priced cars.”

Richter says new models are not the solution to the problem. “Toyota is well-represented in every market segment,” he says. “But it’s hard to imagine how the Yaris or Scion models, imported from Japan, can be profitable in North America. Ultimately, such budget models must be made in North America.”

Not that North America necessarily is a sanctuary. Toyota’s San Antonio, TX, light-truck plant operated at only 17% of capacity in last year’s October-December quarter. “(The plant) is a huge financial burden,” Yuzawa says. “Investing more money to make production lines more flexible may be better than waiting for pickup demand to return.”

Industry experts agree the auto maker’s dependence on exports has become a burden.

“Toyota has never fully globalized operations and depends far too much on domestic facilities, exporting too much and doing too much R&D in Japan,” Wynn-Williams says. “The company is cutting costs rather than seizing the new opportunities available.”

Richter agrees. “In recent years, the importance of exports to their domestic operations has expanded enormously. Today, when capacity utilization is low globally, Toyota should take a hard look at (its) business model and shift more domestic production overseas, closing Japanese plants if necessary.”

Longer term, Wynn-Williams says failing to reduce the dominant role of Japan “will make it very difficult for Toyota to hold onto market share in some of the world’s major markets like North America, as domestic auto makers defend their markets.”

“The global automotive market is shrinking and becoming much more competitive,” he says. “It’s like a pond of alligators where the water level is dropping, and the alligators, with less and less food, are becoming much more aggressive.”

Analysts estimate Toyota has burned through ¥1.2 trillion ($12.2 billion) since last April, when reserves and easily convertible securities totaled ¥4.2 trillion, ($42.7 billion). The company still has reserves of ¥3 trillion ($31 billion) and probably is the world’s strongest, as well as largest, auto maker.

Thus, experts expect Toyota to climb out of its financial black hole and be back on track in two years.

Yuzawa foresees breakeven or perhaps a profit for Toyota by the end of fiscal 2010, even though “the pace of recovery will be slower than that of other car makers.”

Richter tempers his forecast, convinced there should be enough recovery in global profits for Toyota to get close to breakeven by then. But he does not see a return to peak fiscal 2008 earnings even by fiscal 2013.

Relative to competitors, however, “Toyota will likely emerge stronger, probably with a greater market share, because it has stronger resources to draw on and a strong management team,” he says.

But Wynn-Williams has a different take. “Toyota will not be that much weaker, but weaker,” he says. “The era of big profits is over. Market share in the U.S. will drift down, and there will be a need to bulk up sales in emerging markets.”

Still, Toyota’s future is by no means bleak. CLSA Asia-Pacific Markets projects consolidated operating profit of ¥208 billion ($2.1 billion) in 2012 and ¥628 billion ($6.4 billion) in 2013.