DBRS Confirms Toyota Motor Corporation at AA, Trend Negative

DBRS has today confirmed the long-term and short-term ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries at AA and R-1 (middle), respectively. The long-term ratings have been removed from Under Review with Negative Implications, where they were placed on February 11, 2010, citing DBRS’s concerns that the Company’s ongoing vehicle recalls would considerably undermine its long-term competitive position and brand image in the important U.S. market. While the extensive recalls resulted in lost sales and significant negative publicity, DBRS believes that the impact of the recalls is manageable. Furthermore, the U.S. government’s recent probe concluding that Toyota’s electronics were not at fault regarding unintended acceleration of Toyota vehicles would suggest that the worst of the U.S. challenges facing the Company have now passed. However, the trend on long-term ratings is Negative. DBRS notes that Toyota’s U.S. market share has not returned to the level prior to the recalls. Additionally, the Company’s profitability, while improved year over year, remains well below historical norms, significantly impeded by ongoing negative currency effects (i.e., Japanese yen-to-U.S. dollar exchange rate). While DBRS believes that the foreign exchange headwinds and challenges in the United States have peaked and should moderate going forward, it remains uncertain whether Toyota can significantly recapture its lost market share in the United States, with the Company becoming more dependent on strong growth prospects in emerging markets (particularly China) to bolster revenues and earnings going forward.

Toyota recently released its third-quarter fiscal 2011 (F2011, ending March 31, 2011) results. The Company’s consolidated operating income through the first nine months of F2011 totalled JPY 422 billion (vis-à-vis JPY 52 billion over the same prior-year period). Additionally, the Company increased its forecast for F2011 (the upwardly revised projection primarily incorporates higher expected sales in Japan, Russia and Asian countries; additional cost reductions; and ongoing recovery of Toyota’s financial services operations).

In North America, which remains the Company’s most important market, operating profit through the first nine months of F2011 has improved. However, Toyota continues to lag its competition amid the (albeit modest) recovery in the United States. DBRS notes that the Company lost market share in the United States as a function of vehicle recalls and the associated negative publicity (its U.S. light-vehicle market share declined to 15.2% in 2010 from 17.0% the prior year). DBRS believes that Toyota’s market share loss has peaked and should begin reversing itself, with the recent U.S. government probe absolving Toyota’s electronics providing a boost to the Company. However, Toyota continues to face many headwinds to significantly regain its lost share over the near to medium term. In addition to challenges associated with restoring the Company’s tarnished brand image, DBRS notes that the competitive landscape in the United States has changed significantly. Ford Motor Company and Hyundai Motor Company have achieved considerable market share gains amid strong product momentum. Additionally, General Motors Company appears poised to better defend its position in the United States, with Volkswagen AG also looking to significantly increase its presence in the country.

In Toyota’s native Japanese market, despite a dominant market position and slight sales growth (primarily through the first half of F2011, due significantly to the success of hybrid models, which benefitted from the country’s now-concluded incentive programs), this segment is not profitable given losses sourced from units produced in Japan and subsequently exported for sale (primarily to North America). DBRS notes that the Japanese yen continues to appreciate sharply against the U.S. dollar. The Company also continues to incur modest losses in Europe (which, in any event, has historically not represented a high proportion of industrial earnings).

However, DBRS notes that Toyota’s performance in Asia (excluding Japan) is trending sharply positively. Additionally, equity income, primarily of affiliated companies in Japan and China, is also significantly positive. Over the medium to long term, Toyota will increasingly look to Asia’s emerging markets to bolster its performance. Furthermore, the Company is also undertaking several measures to help mitigate the negative impact of the strong Japanese yen, including a more flexible domestic production system.

DBRS notes that Toyota’s strong business profile continues to support the current ratings. Toyota is the world’s largest automotive manufacturer. The Company remains among the most efficient of the original equipment manufacturers and continues to achieve productivity gains. Notwithstanding the recent vehicle recalls, DBRS notes that Toyota’s overall product portfolio remains very solid, with 17 models being rated “Most Reliable” and 28 models “Recommended” by Consumer Reports in the fall of 2010. The Company’s hybrid technology has generated much favourable publicity amid heightened environmental awareness among consumers and increasingly stringent emissions regulations, particularly in developed markets. Going forward, Toyota plans to significantly increase its number of hybrid models while further developing technologies for the next generation of environmentally friendly vehicles.

Furthermore, despite significantly lower earnings since F2008, DBRS notes that Toyota’s financial profile continues to be inordinately strong. As of March 31, 2010, the industrial operations had a net cash position (as calculated by DBRS) in excess of JPY 1.1 trillion (US$13 billion). Additionally, as of December 31, 2010, the Company had long-term marketable securities in the amount of approximately JPY 3.2 trillion (US$37 billion); DBRS notes that the majority of these are liquid and highly rated government bonds.

The trend on the AA Issuer Rating is Negative. In the event that Toyota significantly recaptures its lost U.S. market share and generates materially higher profitability, primarily through volume gains in North America and in Asia’s emerging markets, the trend on the long-term ratings could be changed to Stable. However, if Toyota’s U.S. market share loss continues unimpeded and the Company’s brand image does not appear to have recovered, with profitability remaining weak as a result, this would likely lead to a one-notch rating downgrade. Neither outcome would be expected to have an impact on the R-1 (middle) commercial paper rating and, as such, the short-term rating trend remains Stable.

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