DBRS Comments on Toyota’s Recalls and Production Shutdown

DBRS notes that Toyota Motor Corporation (Toyota or the Company) recently announced that it would be initiating a production shutdown at five of its North American plants, including the Cambridge and Woodstock plants in Ontario. The Company also indicated that it is suspending the sale of eight models in the North American market. These announcements follow product recalls in North America, Europe and China involving sticking accelerator pedals and floor mats that are possibly impeding the accelerator pedal mechanism. DBRS notes that while these are negative developments, the extent of the impact remains uncertain at this time. In the event that the sales or production suspensions continue for an extended period or it becomes evident that the Company has lost material market share as a result of these developments, negative rating action would possibly be considered.

Toyota initially announced a safety recall in November 2009 involving 4.3 million vehicles to repair floor mats that could jam accelerator pedals and cause unintended acceleration. The Company announced a further recall this week of 2.3 million vehicles in the United States (and approximately 270,000 in Canada) due to sticking accelerator pedals. The sticking accelerator pedals are a separate issue from the floor mat concern, although certain models have been recalled for both matters. The extensive product recalls prompted the announced production shutdown, which is currently scheduled for the week of February 1 to February 5, 2010, although DBRS notes that the shutdown could conceivably be subject to an extension. The Company has also most recently announced a further recall affecting another 1.1 million vehicles in United States, with Toyota also indicating that the recalls linked to the faulty accelerator pedals would spread to Europe and China. However, there are no production shutdowns planned in Europe as new parts have already been procured and are being used in production.

While the financial impact of these developments is presently uncertain, DBRS notes that the costs involved with the numerous safety recalls would, in all likelihood, be readily absorbed by the Company. However, the sales and production interruptions could well prove significant, depending on their ultimate duration. DBRS notes that the affected models represented approximately 53% of Toyota-branded U.S. sales in 2009. The Company recently announced its sales objectives for 2010, which target an increase of 6% of global unit sales relative to 2009 levels and a sales target in the United States of 2.19 million units, which would represent an increase of 11% year over year.

Toyota was significantly adversely affected by the recent economic and automotive downturns, which substantially lowered revenues as the Company was undertaking expansion investments, thereby increasing its cost structure. As a result, a consolidated operating loss of 461 billion yen was incurred in the fiscal year ending March 31, 2009 (the first loss for Toyota in more than 50 years). A further loss of 350 billion yen is presently forecast by the Company for the current fiscal year, although DBRS expects the Company to narrow the projected loss considerably (Toyota is scheduled to report third-quarter fiscal 2010 results on February 4, 2010). While industry sales currently remain at very weak levels relative to historical highs, it would appear that the automotive downturn has bottomed out and that a recovery is underway (namely, in the Company’s core U.S. market), albeit at a modest and protracted rate. Accordingly, Toyota is widely expected to revert to profitability in the next fiscal year.

However, the recent announcements could potentially serve to undermine the Company’s future earnings. In addition to lost revenues resulting from the sales and production interruptions, Toyota’s future sales could also be adversely affected by the associated negative goodwill and resulting damage to the brand’s reputation. Going forward, this could well result in lost market share, which would effectively dilute the Company’s recovery in line with that of the automotive industry. DBRS notes that Toyota has historically enjoyed an excellent reputation for product quality and reliability; its future status in this regard is highly dependent on the Company’s ability to mitigate the negative impact of the current developments.

DBRS will continue to monitor and assess the situation and will take appropriate action as more clarity transpires around these developments.

Notes:

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos & Auto Suppliers) rating.