How Toyota Plans to Beat the Downturn

A Japanese auto giant Toyota Motor employee polishes the company's luxury sedan Century at the company's showroom in Tokyo. Toyota has slashed its 2009 global sales target due to slowing demand

After taking over as Toyota (TM) president in June 2005, Katsuaki Watanabe regularly warned of the dangers of complacency creeping in at the Japanese automaker (BusinessWeek, 3/5/07). But until recently, it was a tough message to get across. The company was doing too well: In the year through March 2008, Toyota sold 8.9 million vehicles, an increase of 32% over five years, while its net profits rose 53%, to $17 billion. This year it will likely overtake GM (GM) to become the world's largest carmaker.

These days, though, Watanabe need only point to Toyota's stock price to keep employees' feet on the ground. Since the beginning of the year, Toyota's shares have fallen 37%. While roughly in line with Japan's benchmark stock index, the performance isn't much better than troubled GM, whose stock is down 39%. And Toyota's recent sales, though not nearly as bad the Big Three's, hardly instill confidence. Through September, sales were down 10% in the U.S. and were sluggish in Europe. In Japan, where Toyota's market share is more than 40%, car sales will likely fall short of last year's figures, which was the company's worst in more than two decades. Even in China, where the automaker aims to increase sales 40% this year, the numbers aren't looking as promising as Toyota's top brass had hoped.

Some analysts are sounding the alarm. In an Oct. 10 note to investors, NikkoCitigroup auto analyst Noriyuki Matsushima predicted "a sudden and substantial earnings decline" for Toyota. "We believe Toyota needs to draft a new strategy that changes its existing course and includes initiatives to secure appropriate sales volumes," he wrote. Lowering his projections for the current fiscal year, Matsushima expects Toyota to post operating earnings of $11 billion, a 50% decline compared with the year that ended Mar. 31, and $5 billion less than the company's projection.

Cash Hoard Supports 0% Financing Offer

Time for investors to bail out? Not exactly. Even if Toyota's earnings drop by half this year, the company's operating profits are still likely to exceed $10 billion. And with a solid balance sheet, more than $20 billion in cash, and a slew of new car initiatives, Toyota is better placed than most automakers to weather economic uncertainty. "Once [Toyota executives] have made the decision to do something, they can get on and do it without having to arrange financing," says Andrew Phillips, an analyst at KBC Securities in Tokyo.

For now Toyota's problems seem minor compared with the Big Three's (BusinessWeek.com, 10/7/08)—and it's moving to keep it that way. Toyota's bulging coffers will help it most in the U.S. There, it's using the cash—$3 billion at its U.S. financing unit, as of the end of June—to plug falling sales. Facing an increasingly severe slowdown and growing inventory, Toyota on Oct. 3 began offering for one month interest-free financing on 11 models, including the Corolla, Camry, and Tundra full-size pickup. The risk, say critics, is that 0% financing could undermine car-resale values and hurt the brand if the company decides to extend the offer.

Toyota is also taking radical steps at its North American factories. After opening a plant for big Tundra pickup trucks in San Antonio in 2006, the company has since curtailed production. It also has suspended production at three U.S. plants for three months in August to retool them so there's more emphasis on smaller, fuel-efficient models.