Is Toyota Ready to Recover?

Toyota Motor Corp. (TM - Analyst Report) has decided to trim its production capacity in Japan by 10% to 3.1 million units by 2014 in order to cut its domestic output. However, the company debarred itself for downsizing its workforce in the country as a part of the plan.

Last week, the automaker has pacified its shareholders by mentioning that it has recovered from the effects of disastrous 2011 due to the earthquake in Japan and severe floods in Thailand.

In the fiscal year ended March 31, 2012, the company posted a 30.5% decline in profits to ¥283.56 billion ($3.7 billion) or ¥90.20 ($1.17) per share and a 2% fall in consolidated revenues to ¥18.58 trillion ($241.59 billion) due to the above-mentioned disasters and appreciating yen.

However, the company still faces some serious headwinds. Firstly, the issue of strengthening yen still prevails. The Japanese daily Nikkei has already indicated that Toyota’s overall domestic capacity is expected to fall to about 3.6 million units in 2012 compared with 3.9 million units before the global financial crisis in 2008. Toyota aims to maintain annual domestic production at about 3 million vehicles, which is a 500,000 units decline from the current level.

Second are the looming power shortages in the country caused by the meltdowns at Fukushima Daiichi nuclear power plant after the earthquake. Currently, Japan’s power generators are mainly run by imported gas and fuel as all the nuclear reactors have been shut down for routine safety checks due to the meltdown issue.

The utility has already asked Toyota to bring down the power consumption by 5%. So what led Toyota to make such an optimistic statement of recovery despite the headwinds?

As far as resolving the issue of strong yen is concerned, the company has decided to sell half of its targeted domestic production in Japan and export the rest. The Japan Automobile Manufacturers Association has predicted a 19% rise in vehicle demand to 5 million vehicles in 2012 in stark contrast to a 15% fall to 4.2 million vehicles in 2011.

Toyota intends to revive sales by launching new models and redesigning its existing lineups. The company lost its No.1 position to General Motors Co. (GM - Analyst Report) and Ford Motor Co. (F - Analyst Report) in terms of sales volumes in the U.S. As a result, the company plans to increase its dependence on the non-U.S. markets, especially the high growth emerging markets.

It aims to generate 50% of global sales from the emerging markets by 2015, up from 45% presently. These would also help the automaker face burgeoning automakers in the markets such as Korea’s Hyundai Motor Co. (HYMLF) and Germany’s Volkswagen AG (VLKAY).

In this regard, we can recall the fiscal 2013 sales guidance provided during its fiscal 2012 earnings release. The company has projected consolidated vehicles sales to increase 1.35 million units to 8.70 million units in the year. Consequently, the company expects higher consolidated revenues of ¥22.00 trillion, operating income of ¥1.00 trillion yen and profits of ¥760.0 billion for the fiscal year compared with fiscal 2012.

Toyota has also taken steps to deal with the power crisis in Japan. It has adopted several power saving measures including installation of LED lightings and plans to boost power generation on its own.