DBRS Confirms Toyota Motor Corporation at AA (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the long- and short-term ratings of Toyota Motor Corporation (Toyota or the Company) and its rated subsidiaries at AA (low) and R-1 (middle), respectively, with Stable trends. The ratings incorporate Toyota’s very strong business risk assessment (BRA) as a leading global automobile manufacturer with highly efficient operations. The Company’s financial risk assessment (FRA) is also extremely solid, with abundant liquidity comprised largely of substantial holdings of long-term, highly rated government bonds.

Toyota’s profitability and cash flow generation have persisted at solid levels, although earnings remain considerably affected by foreign exchange (FX) developments. The Company is more exposed to fluctuations in the Japanese yen relative to major national peers, as Japan represents more than 45% of its global production. Geographically, Toyota’s earnings in North America have softened (due significantly to higher marketing activities/sales incentives and, more recently, raw material cost headwinds), with the Company being more dependent on car sales compared with the regional industry average and thereby adversely affected by the growing popularity of utility vehicles/light trucks. Toyota is seeking to improve its North American profitability through various measures, including targeted efficiencies, planned model introductions and increased local production that should alleviate the Company’s current demand-supply gap in the light truck segment, although Toyota will remain active in the car segments.

Regarding alternative powertrains, hybrids remain core (with Toyota continuing to eye fuel cell vehicles as a potential ultimate solution) although Toyota has also placed additional focus on electric vehicles. While such activities, in addition to mobility-as-a-service and autonomous vehicle development, reduce profitability, the Company is targeting to effectively offset these by ongoing cost reductions that have consistently averaged JPY 300 billion annually. Future efficiencies are bolstered by Toyota’s increasing roll-out of its Toyota New Global Architecture platform, which is expected to represent more than half of the Company’s production over the near term.

As with all original equipment manufacturers, Toyota faces challenges associated with trade/tariff uncertainties. DBRS considers these to be well manageable with the Company not affected by trade disputes between the United States and China, its U.K. automotive manufacturing operations being modest compared with its global scale and only minor impacts currently anticipated from the forthcoming United States-Mexico-Canada Agreement.

The Stable trends incorporate DBRS’s expectation that the Company will maintain its strong BRA and FRA profiles as global industry volumes (notwithstanding recent declines in China and anticipated moderation in the United States) are estimated to remain at solid levels. While Toyota faces ongoing capital outlays in the form of increasing technological requirements in addition to shareholder returns, these can be well-absorbed by the Company’s strong cash flow generation and liquidity. As such, barring a material substantive event, DBRS does not anticipate any change in the ratings over the near term.
Notes:

All figures are in Japanese yen unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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