Is Toyota Really in the Red?

Do any of you find it difficult to comprehend how Toyota is in the red? Just last year Toyota was bathing in billions of dollars of profit. How could things turn around so quickly, and is it true? Surely you can't go from earning billions to losing them?

Well the truth is you can, and it happened. Here are the main points; simplified.

Firstly, lets make Toyota's sales 100.

- In 2007, Toyota's cost of sales was 80. Take out overheads and R&D and its profits were 6.5 (ie. sales to profit ration of 6.5%)

- Where were the bulk of profits made? A: Mainly in the US, and definately not in Japan

- In 2008, Toyota's cost of sales rose to 89. Keep overheads and R&D constant, and what does that do to profits? A: 6.5- 9 = - 2.5

- What did Toyota report as its profit ration in 2008? A: - 2.2%; the difference between 2.5 and 2.2 being 0.3, which is the costs Toyota managed to cut in a frenzy towards the end of last year.

- So, why did cost of sales rise to be 9 more than in 2007? Well, bunch of reasons;

1. Rising cost of materials in 2008 (they did drop off later in the year)
2. Huge cost of making cars and holding stock in the US that couldn't be sold (and still isn't)
3. Huge drop in the exchange rate; Japanese yen strengthening against the dollar
4. Huge fixed cost of plants that couldn't be reduced, as sales in Japan, the US and the rest of world dropped dramastically

- In summary, Toyota was basically far too dependant on profits driven from their US businesses, and when the floor dropped out of the market in the US, out the window went all their profits.

So there you are, Toyota is now said to be operating at about 50% or less of its capacity. The share cost of holding onto that other 50% of capacity that isn't being used is HUGE, and is likely to drive Toyota into the red again this year.

There is talk about what Toyota will do with "NUMMI" the plant they shared with GM, now that GM have pulled out. Will they hold onto it? Well, I don't think they can; they have far too much capacity and fixed costs, so NUMMI is going to get the boot.

Finally, and something that dispells a bit of a myth; Toyota has a bunch of debt to finance. We all hear about Toyota and its rich cash reserves, but if you take a close look at their balance sheet, the car financing they do at Toyota Finance leaves them with a very large amount of debt on their books!

But, they are still a great company!!