Toyota Braces for Plunging Profits

Toyota Motor Corporation has experienced record profits for three straight years. However, Toyota’s president, Akio Toyoda, informed the media that the company must brace for a big profit plunge. This dim outlook for potential profits is predicted to hit all of the Japanese car companies, such as Mazda, Nissan, Honda, and Subaru. This is mainly due to the fact that the Japanese yen appreciated 6% compared to the U.S. dollar last fiscal year and is expected to continue this appreciation into the next fiscal year, which ends on March 31 of 2017. This is not only decreasing the demand for Japanese car exports, but it is decreasing the exports of American-made cars manufactured in Japan.

Much of the reason that Japanese manufacturers have experienced so much success in the recent years is because of an “exchange rate tail wind”, as Toyoda worded it. Foreign exchange rates are swinging back towards a spectrum that is not favorable for the Japanese automakers. These automakers, in response to this change in the foreign exchange rate, are continuing to localize the production of their cars by building more of them in the markets where they are sold. Toyota expects such a large decrease in their profits because they only 72% of their vehicles that are sold in the U.S. are made in North America, as opposed to Honda’s 97% and Nissan’s 81%. Honda is attempting to create an “optimal balance of imports and exports” in order to increase their “resilience against fluctuating exchange rates” according to its Executive Vice President, Tetsuo Iwamura. Toyota’s higher import rate has them projecting a 40% plunge in its profits for this year. If Toyota is not able to move more of their manufacturing centers to North America in order to avoid having to export with an appreciated yen, this prediction will certainly come true.

4 comments to Toyota Braces for Plunging Profits

  • Barrett Snyder

    Seems as though this is a negative and positive for car companies when exporting or importing vehicles for different markets across the world. In times of favorable exchange rates, a source of increased profit and in times of unfavorable exchange rates, a source of loss. As mentioned above, the obvious answer is to produce more vehicles in the market in which they are sold. While this is easy to talk about in theory, much harder to accomplish while already posting plunging profits and potential losses. In this climate it’s easy to assume Toyota is lacking free capital to use to undertake expansions overseas. It might be more productive to ride it out until profits are recovered and the exchange rate is more favorable, perhaps the best time to plan for the tough times.

  • adamsm19

    Why does Toyota only produce 72 percent of their American vehicles in North America whereas Honda produces 97 percent? That quote you included from Tetsuo Iwamura is interesting because it would suggest that Honda would be producing some cars in Asia and some in North America to protect against exchange rate fluctuations. Instead, Honda has done just the opposite. Perhaps Toyota has made a calculated decision that favorable exchange rates could make it beneficial to continue to produce some American cars in Japan. Regardless, it seems likely that producing more cars locally will decrease costs for the automaker.

  • manleya18

    This is something we discussed in Principles of Macroeconomics; it’s really interesting to see it happening in real life. Before taking this class, it never would have occurred to me that auto companies produce outside of their own countries for any other reason than to ease transportation costs. However, clearly the fluctuating exchange rates can have a huge financial impact on such a large scale.

  • platte16

    At Metalsa, it was mentioned that plants in the US have more automation than a country country such as Mexico. By moving manufacturing to the US, would you expect more automation in Toyota plants? The cost of labor is higher in the US prompting many companies to train laborers to repair machinery or focus on engineering and employ less manpower in the plant. I would be interest to see if the supply of labor already with the education to repair machinery is also higher in the US?