DBRS Confirms Toyota Motor Corporation

DBRS has today confirmed the ratings of Toyota Motor Corporation (Toyota or the Company), including the Company’s Issuer Rating at AAA. The trends are Stable. The confirmation reflects Toyota’s very strong business profile as effectively the world’s largest automotive manufacturer, (with the Company poised to overtake General Motors in the near future), with industry leading margins. The Company’s financial profile remains excellent, with the industrial operations having a very significant net cash position further bolstered by consistent free cash flow generation.

The Company maintains a dominant market share (46% in 2007) in its native Japanese market while continuing expansion in North America (e.g., new plants in Mississippi and Woodstock, Ontario). However, Toyota is endeavouring to further balance its regional growth and improve its geographic diversity through targeted expansion in emerging automotive markets such as Russia, Brazil, and China, (where thus far the Company has somewhat trailed its competitors). Additionally, the Company has taken steps to strengthen its product diversity; examples of this include the introduction of additional hybrid models across its line-up as well as the successful launch of the Tundra full-size pick-up last year.

Toyota’s success remains underpinned by enviable reputations for quality and technology, with its hybrid technology generating much favourable publicity given increasing environmental awareness. The Company’s biggest hurdle over the medium term revolves around its ability to successfully implement its increasing growth rate (particularly in the United States) while still preserving its leadership status in quality. Toyota has faced recent adversity with respect to certain models (e.g., Camry and Tundra) slipping in quality rankings. This notwithstanding, DBRS notes that the Company’s quality remains firmly entrenched among industry leaders, with both the Toyota and Lexus brands continuing to dominate such rankings.

A challenge to Toyota’s profitability involves the current decline in the vital North American market, exacerbated by the relative strengthening of the Japanese yen. Given the ongoing economic difficulties in the United States related to sub-prime exposure, further contraction in that automotive market is expected in 2008. Despite increasing local production, close to half of U.S. unit sales remain imported from Japan with a stronger yen adversely impacting profitability. (DBRS notes that the U.S. dollar recently dipped below 100 yen for the first time since 1995, with further currency volatility not unexpected.) Additionally, margins continue to be pressured by rising raw material costs.
Notwithstanding the above, DBRS expects Toyota to remain highly profitable. The Company remains among the most efficient of OEMs and continues to achieve productivity gains. Toyota’s Innovative and International Multipurpose Vehicle (IMV) project reinforces its leadership in lean and flexible production (including supply chain management), with the ability to respond promptly to demand fluctuations across various markets. In line with its expansion, Toyota has significantly augmented capital expenditures the past two fiscal years to levels of approximately ¥1.5 trillion, with this amount expected to persist over the medium term. DBRS notes that despite the elevated capex and R&D expenditures, the Company still generated significant free cash flow, easily maintaining its stellar financial profile. While the Company has recently been increasing shareholder initiatives in the form of higher dividends and share repurchases, DBRS expects the Company to maintain its financial profile and moderate such activities in the event of lower free cash flow, with such financial discipline further reinforcing the assigned ratings.

Note:
All figures are in Japanese yen unless otherwise noted.