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Toyota to treble profit this year, trim costs

05/09/2012 | 07:21am US/Eastern
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Toyota Motor Corp (>> Toyota Motor Corp.) expects to treble its operating profit this year to more than $12.5 billion - still less than half what it earned before the global financial crisis - as Japan's top automaker recovers lost ground in markets from the United States to China.

Toyota Motor Corp (>> Toyota Motor Corp.) expects to treble its operating profit this year to more than $12.5 billion - still less than half what it earned before the global financial crisis - as Japan's top automaker recovers lost ground in markets from the United States to China.

Operating profit jumped more than five-fold in January-March to $3 billion, with all production centers back up and running after last year's earthquake, tsunami and Thai floods disrupted supply chains and cost Toyota around 400,000 cars in lost output - roughly 9 weeks' worth of U.S. sales.

With robust top-line growth a given in the current year - the company predicts operating profit of 1 trillion yen ($12.54 billion), in line with market forecasts - Toyota is looking to squeeze further cost cuts in a battle to offset a strong yen. Executives say they have gone back to a war on waste - or "muda" - a key component of its vaunted production system.

At a briefing on Wednesday, Chief Financial Officer Satoshi Ozawa noted the "huge contribution from all the (cost-cutting) efforts we've been making."

Toyota President Akio Toyoda, the 56-year-old grandson of the automaker's founder, said everyone in the company had worked towards improving profitability, and "the focus on making good cars has translated into sales volumes and profits. That in turn is leading to investments for even better cars," he said.

With U.S. dealerships humming again, Toyoda and his aides have sketched out a strategy aimed at stripping costs from everything - from production lines in Japan to Mississippi to the years of design and engineering that go into making new cars and parts.

The goal is to push up profit margins even as Toyota rides a wave of recovering demand while tapping into its tradition of incremental improvement - or "kaizen" - the corporate creed that once made it the world's most feared and studied manufacturer.

Toyota expects operating margins to improve this year to 4.5 percent from 1.9 percent in the year just ended. That gets it closer to a target of a minimum 5 percent margin before 2015, but is still short of Nissan Motor Co's (>> Nissan Motor) 7.1 percent margin and 6.5 percent at Honda Motor Co (>> Honda Motor), the Japanese automaker that was slowest to recover from last year's lost output. South Korean rival Hyundai Motor's (>> Hyundai Motor Co) operating margin tops 10 percent.

Toyota said sales in emerging markets were in line with its plans, including in China where January-April sales were heading for a full-year target of 1 million vehicles.

"As we seek growth in emerging markets, a big challenge for us in a market like China, for example, is how to speed up product launches and come up with the right products for the market," Toyoda said.

HOME PRODUCTION

Despite the pain of building cars at home with the dollar far below the 85 yen breakeven level in Japan, Toyota has committed to build at least 3 million vehicles a year at its domestic factories - roughly triple the output at local rivals Nissan and Honda. Among the hurdles Toyota faces in Japan are the strong yen, costly labour regulations, high corporate taxes and an energy policy deadlock that has shut all Japan's nuclear reactors and driven up costs.

As most of the Japanese factories are fully depreciated, closing them and investing in new plant overseas would be even more costly, say some analysts and industry experts.

"Toyota has been criticized for having so much production in Japan where the strong yen is such a big disadvantage, but that's a matter of honor and commitment to keep a certain number of jobs in Japan, not the result of a bad business decision," said Jeffrey Liker, a professor at University of Michigan and expert on Toyota's lean manufacturing system.

"The problem from Toyota's point of view is then defined on reducing costs through other means."

Toyota last month unveiled a new scheme aimed at slashing development costs by more than a fifth, in part by using more shared components. This allows automakers to cut procurement costs on the bits customers don't see or necessarily appreciate, such as the metal brackets that hold seats in place.

Toyota was once considered a benchmark in this, but rivals now look to follow Volkswagen's (>> Volkswagen AG) lead in using a wide range of shared parts in both its luxury Audi and mass-market Volkswagen brands.

The Japanese firm is also renewing efforts to step up its manufacturing efficiencies - something executives concede fell by the wayside when the company raced to add factory lines to meet soaring demand before the global financial crisis brought growth to a shuddering halt.

In the United States, where its reputation for quality with vehicles like the Camry was once unassailable, Toyota is under pressure from Hyundai and the recovering Detroit automakers. Its U.S. sales jumped 12 percent last month - though that's still nearly a fifth below April 2008 before the financial crisis.

"Toyota's recovery will make the overall auto industry's competitive landscape tougher this year," said Song Sang-hoon, analyst at Kyobo Securities in Seoul. "For Toyota, the big risk factors will be how much the yen could strengthen and the outlook for the U.S. market. It has competitive models from the Camry to the Prius and the Corolla, and how that trio of flagship models can perform will decide its recovery pace."

Toyota forecast current year net profit of 760 billion yen, its best in five years.

Toyota shares, valued at more than $134 billion, have gained more than a third since the broad market trough in late-November, outperforming Nissan, Honda, General Motors (>> General Motors Company), Ford (>> Ford Motor Company) and VW, but lagging BMW (>> Bayerische Motoren Werke AG). The main Topix share index <.TOPX> is up by a tenth over the same period.

Toyota closed flat on Wednesday ahead of the earnings in a broader Topix market that fell 1.4 percent.

(Additional reporting by James Topham and Kevin Krolicki in TOKYO and Miyoung Kim in SEOUL; Editing by Ian Geoghegan)

By Chang-Ran Kim

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