Newscasts a day ago breathlessly announced that Toyota Motors this year will be booking a profit, on an unconsolidated basis (Link -J), for the first time in five years. In a press conference, Toyota Senior Managing Officer Ijichi Takahiko attributed the booking of a profit to the Abe government's economic proposals, adding for effulgence's sake, "Ever since the new government took control, it feels as though Japan is filled with the spirit for economic revival." (Link)
What the above tells me is that Toyoda Akio is a dedicated car maker and an atrocious businessman, surrounded by toadies pretending to be businessmen.
An automobile manufacturer should be in the business of manufacturing automobiles for a profit. It should not be a currency play. If the company makes money based on the fall of the yen relative other currencies -- a shift in market sentiments that no one at the company has any control over -- then something is very wrong. Rather than crowing about a profit, the company should be burying the news, embarrassed at its good fortune.
Toyota Motors is a global company, or is at least portrayed as one. At a normal global manufacturing company, however, volatility in currencies is mostly zeroed out in either one of two ways:
1) in the short term by the use of derivatives
2) in the long term in a globalized supply chain and localized plants
Of course, extreme currency events cannot be entirely hedged. However, most of the shifts should be covered.
What Toyota executives seem to be admitting is that their corporation is neither financially sophisticated nor properly globalized (the company having a much higher percentage of its manufacturing base in Japan than its rivals). Indeed, they seem gleeful in this admission.
I have worried about Toyoda's management of Japan Inc.'s marquee corporation ever since he engineered the coup ousting Watanabe Katsuaki as president. The line Toyoda used to lever Watanabe out -- we have expanded too fast and lost sight of the business of making cars -- was absurd in light of the losses having been the result of the Great Recession. Toyoda's expedient excuse came back to haunt the company in the ludicrous lawsuits and U.S. Congressional hearings over mythical unintended acceleration problems, due, according to Toyoda's testimony, Toyota's having expanded too fast and lost sight of the business of making cars. (Link)
Now Toyota executives seem to be saying that if it were not for Abe Shinzo, they would not be able to run the company at a profit.
Tell me: am I too cynical, talking out of my hat or just plain stupid?
Later - Sorry about the typos. A bit of a wild morning this morning.
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13 comments:
I think you are being much too harsh on the issue of not having profit on the Japan operation of Toyota. These large companies are operationally multi-national and consolidated performance (to the extent any booked profit is real)is the significant measure. Head office operation can continue to appear to be not profitable while it is also the entity that carries the bulk of development and engineering. Having production continue domestically despite high costs is of value as customers prefer the domestic products
(for probably real and not perceived quality differences given the fussiness of the customer)and more importantly keeps production technology close and thus familiar to head office operations.
Fundamentally there is a difference, particularly in the Japanese manufacturing culture, that business is run first to keep the business going and not necessarily to keep capital happy. While no doubt real, the Yen being high does not have critical effect on the likes of Toyota (unless you're a supplier to them), and there is no doubt that they recognize the turn to domestic black as an accounting phenomenon.
I'm trying to make sense of YY's comment, but I don't get it. Sounds like a juggling act to me. I agree with Michael that announcing that your company has returned to profitability thanks to a large accounting trick sounds like an admission of weakness... but I guess that (just like Americans and their struggling car companies), the Japanese public and the press are eager to lap up anything that sounds like good news, while ignoring the big problems that don't have such easy solutions.
Every Japanese company that is revising forecast profit on basis of recent drop in Yen is referring to the domestic operation as distinct from global. As long as head office sells to its subsidiaries in other than Yen (usually USD) it is the head office that suffers or profits from Yen fluctuations. If you believe Toyota is in deep trouble or has been in the recent years, you are mistaken. Despite the huge recalls, ridiculous legal costs, and China going bad for Japanese autos, Toyota appears to be doing fine.
In general I don't think hedging is that simple a decision. Some Japanese companies will be hurting now because they hedged at the start of FY2012-13 at levels that oblige them to sell foreign currency below market price today. Hedging removes risk in the sense that future earnings will at least be certain, but they may not be optimal. Also, a CFO is always likely to get blamed if a hedge moves in the wrong direction, causing a paper loss against the market when the contracts expire, but rarely credited sufficiently for avoiding a catastrophe that--if it didn't transpire--always looks unlikely with hindsight
I think this may be more of a case of reading too deeply into the news.
It appears that the linked Bloomberg article is reaching in making a connection between a weaker yen to Toyota's new fortunes. Not only is Ijichi Takahiko's quote most certainly taken out of context, but the article tries to posit Toyota's revival on a cheaper yen when simultaneously admitting that Toyota is selling more cars, not only in the US but globally as well. It would be unfair to read this as suggesting Toyota's fortunes are due more to a cheaper yen and not to selling more cars.
In regards to the benefit of forex (and without getting into the deep deep discussion of consolidated vs unconsolidated, trade finance, etc), a quick look at Toyota's Q3 unconsolidated financials shows the benefit of "Effects in Changes in Exchange Rates" for Q3 was JPY 50 bn (to JPY 201 bn net income) and for the first 9 months was JPY -10 bn (to JPY 518 bn net income). While the Q3 impact is notable, it certainly does not account for the switch to profitability.
(now, Shisaku's quote of "booking a profit, on an unconsolidated basis, for the first time in five years" refers to operating income, not net income)
A massive multi-national like Toyota certainly has exchange rate considerations, but the results of this company appear more linked to improved business - increased car sales following two years of 1) massive US recalls and 2) losses sustained due to the Great Tohoku Earthquake - rather than exchange rate benefit.
There remains a real discussion surrounding the benefit of yen devaluation and how this helps the economy. On a global relative value, the value of Japanese equities is not changing. However, on a domestic and psychological level, I too have noticed "Japan is filled with the spirit for economic revival" (I would have translated that slightly differently). Rising spirits do translate into greater consumption and lead to a positive feedback loop.
Martin Wolf in today's FT has a rather balanced take on the weakening Yen and "Abenomics" in general:
http://www.businessspectator.com.au/bs.nsf/Article/Japan-Abe-economy-market-yen-BoJ-pd20130206-4N4NS?opendocument&src=rss
Mike -
Thank you for the Wolf link. I have said that whatever the FT is paying him, it is not enough.
adam -
I agree with the potential for increased consumption with rising equities prices and a more competitive yen rate (unless one is buying products from overseas, that is).
However, the immediate statistically verified increase has been in the support levels for the Abe Cabinet and the LDP. Since economic medicine is supposed to be bitter, the rise in the Abe government's popularity -- before it has actually done anything -- strikes a cautionary note.
YY -
I accept your point on the differences that arise when accounting switches between overseas divisions and affiliates and the head office.
However, your nuanced view is not the way Toyota seems to have played the profit tune at the press conference. Why the sycophancy to the new government, if the company is, as you say, doing fine?
DL -
I accept that incentives do run in the negative direction for CFOs given the task of guarding against disaster.
However, what prevents the company from having offsetting bets that cancel each other out, negating both the ups and downs of the currency markets, leaving company executives responsible only for the making and selling of cars?
MTC - I agree, we should certainly be cautious of markets moved by mere talk rather than action.
The WSJ notes that "measured in dollars, the [Japan] market is up just 5.3% over the past three months" which is analagous to the overall US public equities market.
http://online.wsj.com/article/SB10001424127887324906004578287723894629126.html#mod=djemITPA_t
On a global relative basis, LDP talk is still just chatter.
I can understand the reflexive attitude to the high Yen issue by industries, though for the larger multi-nationals the continued complaint sounds pretty hollow given their devolved production assets. High Yen issue goes back some 20-25 years and continues to yield rote responses.
Because there is no absolutely successful hedging formula (otherwise the smartest Mrs Watanabe would have owned the world by now). The occasion where exchange rate movement yields unplanned benefits causes the excessive joy of a corporate lotto win.
Why Abe faces so few critics and appears to get free pass/praise is irritatingly mystifying. (I'm sure you'd agree) Perched as I am in Oz, I can only get a feel, but it strikes me as more than a honey-moon and therefore quite a worry. Giving Abe more rope is not a good idea since the noose is around the economy's neck and not the PM's.
Toyota Camry has just been selected as 2013 Car of the Year in South Korea. This is partly due to currency play and partly (I assume) because the ones exported to South Korea are made in the US. Partly due to a lot of other factors too, such as quality, but that has never helped Toyota in South Korea in the past.
http://carscoop.blogspot.jp/2013/01/hyundai-in-shock-as-toyota-camry-wins.html
I personally don't believe much in a future for personal car ownership, as the state of the economy will not permit it (less likely to get loans to buy such frivolous items), and neither will fuel costs make the one-household-two-cars equation possible, plus we ought to not foul up the environment with more pollutants and CO2, and continue to heat up our planet by 2-4 C or more. It is interesting to note that the large car companies are already preparing for other ways to provide "mobility" to society in the future.
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