Forex Headwinds Threaten Toyota Profits By 35%

Toyota Plant

Toyota is left vulnerable to exchange rates as it exports nearly half of its cars abroad.

Toyota Motor Corp’s net profit is expected to fall more than 35 percent, higher than analysts expected, due to the rise of the yen in foreign exchange markets. The company’s three-years of record profits were driven partly by a weaker yen and a slowdown in the growth of China and other emerging markets.

Sales in North America, Toyota’s key market increased in the last quarter, but sales in Japan, Europe and the rest of Asia weredown.

“Strong North American sales and foreign exchanges gains were dual profit drivers for Japan’s auto industry this past year . . . but the tide has changed,” said SMBC Friend Research Center analyst Shigeru Matsumura.

The Japanese automaker reported Wednesday that year end profit for March 2017 is expected to fall from 2.31 trillion yen the year before to 1.5 trillion yen ($13.81 billion). This goes against expectations of 28 analysts which estimated a 2.25 trillion yen average, according to Thomson Reuters.

As the world’s most valuable automaker, Toyota is going to face a significant challenge in investing in new products and technologies due to lower profits. The industry is facing increasing competition especially in the areas of autonomous driverless systems and alternative-energy vehicles.

“We have benefited from an exchange rate tailwind that has helped raise our earnings above the level of our true capabilities,” Toyota President Akio Toyoda said in a press statement after the release of the earnings report. “Our earnings over the past several years have been boosted by exchange rates. But we recognize that this trend has changed significantly,” he added.

The company said that it was expecting the yen to trade with the dollar at 105 yen, but figures jumped up to 120 yen which puts a loss of 935 billion yen in operating profits due to foreign exchange losses.

Toyota is facing more challenges as the yen suddenly surges. The company is largely exposed to the currency’s volatility because it exports nearly half of its products. As little as a 1 yen move in the foreign exchange rates can affect the car maker by as much as 40 billion yen.

The Japanese automotive maker has yet to comment on any specific measures the company will take to counter the stronger yen, but says that growth investments will continue.

Executive Vice President Takahiko Ijichi said that there are no “clever schemes” or “magic wands” to solve forex headwinds.

Operating profit forecasts, not including China, have been reduced by 40 percent to 1.7 trillion yen this year. This figure excludes profit impacts from production stoppages due to the deadly earthquake that occurred in southwest Japan, according to the company.

Volkswagen has overtaken Toyota as the top-selling auto maker in the first quarter this year. Toyota said that global sales are expected to go up by 10.15 million vehicles by the end of the fiscal year compared to last year’s 10.094 million.

Toyota announced that it will buy back up to $4.6 billion worth of its shares to offset the loss in the company’s value in 2016.

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