Toyota Motor Corp. is a fantastically successful car company, yet there are early warning signs to suggest the world's No. 1 auto maker has started down a road all too familiar to Detroit's troubled auto makers.
First the facts.
Toyota, with a market capitalization of just under $120-billion and with projected earnings for this year fat enough to buy General Motors at least four times, is not in any danger now and won't be for years and years to come.
That said, earlier this year. Toyota lowered its 2008 sales goal to 9.5 million from an initial 9.85 million; its global sales target for 2009 is 9.7 million vehicles, down 700,000 from a 2009 global sales goal of 10.4 million vehicles.
To help meet those sales goals, Toyota has turned to a tactic all too familiar to Detroit's auto makers: free money, or to be precise, 0 per cent financing. Toyota in the U.S. is doing this in response to sales which plunged 31.2 per cent last month.
Toyota in the U.S. is calling its program "Saved by Zero." It is possible in credit-crunched America because Toyota Financial Services is one of only two AAA-rated auto lenders in the U.S. (GE capital is the other).
Toyota's finance arm is flush with cash and it's spending it in a way that is reminiscent of General Motors' "Keep America Rolling" campaign – the sales blitz that came after 9/11.
Let's pause here and draw some distinctions between Toyota in the U.S. and in Canada. Last month Toyota Canada's combined Toyota/Lexus sales were up a whopping 14.9 per cent. This is the ninth consecutive record month for sales in Canada.
Sales here are healthy, although they have been helped by aggressive price cutting (in accordance with the rise in the Canadian dollar) and selective incentives.
Another point worth mentioning: Toyota Canada does not report to the U.S., unlike most other auto distributors in Canada. Its operations are run independently from its U.S. counterpart; Toyota Canada, in fact, reports to Japan.
Now it can be argued that Toyota in the U.S. is digging into the parent company's deep, deep pockets at a time of extraordinarily tight credit. That's true.
It is also true, as any car marketing executive will tell you, that once a company starts using the “crack” of ultra-cheap financing, it's tough to kick the habit. Detroit's auto makers pioneered cash-back incentives and cheap financing deals and, well, GM's market cap as of the close yesterday was US$3.69-billion and Ford's was US$5.19-billion. Cheap financing alone did not destroy all that shareholder value, but it certainly made a contribution.
Now here's more.
Detroit's auto makers also pioneered the practice of paying assembly line workers not to work – via the infamous “jobs bank.” Union-bashers will, of course, say the United Auto Workers is to blame here – that they negotiated sweetheart labour deals to the detriment of the companies involved.
Yes, but management signed those deals and management ultimately owns them.
In any case, that's beside the point. You do not need an MBA to see that paying workers not to work is a money-losing proposition.
But Toyota is doing just that. Toyota's southwestern Indiana plant, and another in San Antonio, Texas, both stopped making Tundra pickup trucks at the beginning of August, but because Toyota has pledged not to lay off full-time workers, all the employees are still drawing full pay.
Toyota is "facing a significant lack of production work for a significant number of workers," said Sean McAlinden, an economist at the Center for Automotive Research told Automotive News. In the report, McAlinden estimates the wage cost of paying idled assembly workers at $35-million a month.
Toyota should be commended for supporting its employees – especially given that all its assembly workers are non-union. Of course, cynics might suggest Toyota is keeping these workers on the payroll precisely because they are non-union and Toyota wants to keep them that way.
In any case, the Nikkei business daily reports that Toyota will likely record a 40 per cent plunge in annual profit in part because of these actions and also as a result of a global slowdown in car sales. Still, the Nikkei said Toyota's operating profit would likely be around US$12.8-billion.
The point worth making here is that Detroit's auto makers have been roundly and justifiably criticized for paying employees not to work. The Detroit Three have also been hammered for offering absurdly generous incentives to keep sales percolating in order to generate cash flow, even if those sales were not actually profitable.
Toyota now is doing some of those same things. Are these just extraordinary times, or is this the canary in the coal mine for Toyota?
