DBRS Confirms Toyota Motor Corporation at AA (low) & R-1 (middle), Trend Remains Stable

DBRS has today confirmed the long and short-term ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries at AA (low) and R-1 (middle), respectively. The ratings continue to incorporate the Company’s very strong business profile as the leading global automobile manufacturer with highly efficient operations and a product line well positioned to benefit from the structural change in demand toward smaller and more fuel-efficient vehicles. The trends on the ratings remain Stable. Toyota has recovered well from numerous substantial challenges in recent years, including an extensive recall crisis and the Great East Japan Earthquake and subsequent flooding in Thailand, which resulted in sizable production interruptions for the Company. The Company has re-emerged as the world’s largest automotive original equipment manufacturer (OEM) by sales volumes in both 2012 and 2013, with Toyota’s financial performance also trending toward historical norms. Going forward, global industry conditions remain mostly favourable, with Toyota’s future earnings performance likely also benefitting from the progressive weakening of the Japanese yen, the relative strength of which has previously been a major headwind.

Toyota’s results in fiscal 2013 (F2013, ending March 31, 2013) were much improved year over year, with the operating earnings of the Company’s industrial operations attaining their highest level since F2008. The stronger financial results essentially incorporate the recovery of Toyota’s production capabilities. Higher automotive revenues were also a function of generally favourable global industry conditions, with the exception of Europe, to which the Company’s exposure is significantly less compared with other regions. Significantly, this included Toyota’s two major automotive markets, the United States and Japan, which together typically account for more than half of the Company’s total vehicle sales. In the United States, industry volumes increased year over year in line with the nation’s ongoing automotive recovery. Toyota unit sales were sharply higher, in line with the industry upturn but also bolstered by material gains in market share. The market share gains reflect the substantial recovery of the Company’s production capabilities and associated improved availability of Toyota vehicles. They also reflect the impressive resilience of the Toyota and Lexus brands, which continue to benefit from very strong consumer loyalty, as evidenced by the Company’s leading results in recent surveys regarding brand sentiment and vehicle reliability. In Japan, Toyota benefits from its dominant position, with the Company consistently achieving market share levels well above 40%; the Company’s domestic sales through F2013 were significantly higher year over year, benefitting from increased economic activity in the country (following the previous natural disasters) as well as from government incentives that were in effect through the first half of the fiscal year.

Through the first half of F2014, notwithstanding a nominal year-over-year decline in unit sales, volumes remained at solid levels, with the Company achieving further increases in the important U.S. market. Moreover, DBRS notes that Toyota’s earnings benefitted further from the Company’s ongoing cost reduction activities and in particular from substantially positive foreign exchange effects in line with the recent weakening of the Japanese yen.

As noted above, Toyota remains highly sensitive to the value the yen. DBRS notes that the Company’s Japanese-based production, relative to its global total, is significantly higher than that of other Japanese-based OEMs, although such production primarily consists of high technology/value-added models including hybrid vehicles as well as various Lexus products. The Company is continuing to take measures to help mitigate its sensitivity to such effects, including a more flexible domestic production system and increased sourcing from lower-cost countries. Going forward, however, the yen is likely to be positive to Toyota’s future earnings given the weakening of the currency in line with the current Japanese government’s economic policies.

DBRS expects the Company’s results to continue improving through F2014 and over the medium term, as global industry conditions are expected to remain on balance and generally favourable. In the United States, growth is expected to persist in 2014, albeit at a more moderate rate than in recent years, with annual industry volumes likely exceeding 16 million units. Regarding Toyota’s Japanese market, demand over the medium to long term will likely diminish in line with progressively changing demographic trends in the country that are undermining vehicle ownership; however, DBRS points out that the decline in demand is expected to be moderate and protracted. While conditions in Europe are forecast to remain challenging, the region’s automotive industry has likely bottomed out, with Toyota’s exposure in any event being relatively low. Conversely, Toyota is expected to benefit from its increasing presence in Asia’s emerging markets, notably China, which is already the world’s largest automotive market and subject to ongoing growth. DBRS notes that a rise in anti-Japanese sentiment in Chine, stemming most recently from a territorial dispute over a series of islands in the region, has considerably subsided. Moreover, Toyota appears well positioned to achieve market share gains in China through its forthcoming product introductions, which will be concentrated on the small-car segments that will likely be bolstered by China’s tightening emissions regulations.

Similarly, DBRS notes that Toyota’s performance will also likely benefit from the Company’s relatively fresh product cadence. Recent significant product introductions included redesigns of the Lexus IS models in addition to the Toyota Corolla and Tundra. Forthcoming model introductions this year include a complete redesign of the Toyota Highlander, with the Toyota Camry being subject to a mid-cycle freshening.

The Company also continues to be the worldwide leader by a sizable margin in hybrid vehicles, which have served to provide Toyota with considerable positive publicity and brand awareness. Moreover, since their introduction and despite modest initial sales levels, hybrid models have accumulated impressive total global sales of approximately six million units, with hybrids now representing close to 15% of the Company’s annual vehicle sales. Moreover, DBRS notes that Toyota is also actively developing other powertrain technologies and is slated to launch a fuel cell vehicle in 2015. As such, while internal combustion engines will continue to represent the significant majority of industry sales over the near to medium term, Toyota would appear to be very well positioned going forward with respect to the automotive sector’s progressive development of alternative powertrains, regardless of which new technology will be ultimately widely accepted by the general market.

The Stable trend on the ratings incorporates DBRS’s expectation that Toyota will maintain its very strong financial and business profiles, with the Company benefiting from its increasing presence in Asia’s emerging markets, which are expected to represent the majority of global industry going forward, and its competitive position remaining well defended by its continuously strong product cadence.

Notes:
The applicable methodology is Rating Companies in the Automotive Manufacturing Industry, which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.