EXCESS CAPACITY, YEN STAND IN WAY OF TOYOTA RECOVERY

Sharp reductions in costs and rebounding demand for automobiles enabled Toyota Motor Corp. (TSE:7203) to post its first net profit in four quarters for the July-September period Thursday. But it is still too early to expect a full business recovery.

"We are making steady progress in cutting production and fixed costs," Executive Vice President Yoichiro Ichimaru said.

The automaker had planned cost reductions totaling 900 billion yen (US$9.9 billion) in the current year ending March 31, 2010, as an emergency measure against the severe business slump. But in the April-September half alone, it made roughly 700 billion yen in cost cuts.

The turnaround in auto demand also helped Toyota improve its bottom line.

The Prius hybrid enjoyed strong sales in Japan, while car sales in China and other Asian markets grew. As a result, Toyota's consolidated auto sales, which include Daihatsu Motor Co. (TSE:7262) and Hino Motors Ltd. (TSE:7205), came to 3 .13 million units in the first half, beating its projection by 100,000.

Even so, Toyota still has far too much output capacity. It forecasts that group sales will reach 7.03 million units in the current fiscal year. Subtracted from the group's total annual production capacity of roughly 10 million units, this indicates excess capacity of around 3 million units -- the equivalent of total output capacity at Nissan Motor Co. (TSE:7201).

Toyota plans to idle some production lines around the world to shrink its output capacity by around 1 million units. But this will not change the fact that overcapacity is weighing on the automaker.

Currency fluctuations are another major uncertainty for Toyota's earnings .

Each 1 yen swing in the yen-dollar exchange rate has a roughly 25 billion yen impact on Toyota's annual profits. The firm sees a stronger yen depressing profits by 420 billion yen in the current fiscal year. This figure assumes that the yen will average 90 to the dollar and 130 to the euro in second half, so the actual impact would be even worse were the yen to strengthen.

Toyota has reported an operating loss of 136.8 billion yen for the April-September half and brightened its full-year projection to a 350 billion yen operating loss from the previously estimated 750 billion yen.

Based on this upgrade, the company sees its operating loss widening from the first half to about 213.1 billion yen in the October-March half.

Costs associated with the shutdown of a U.S. joint venture with the former General Motors Corp. are cited as a major reason Toyota is projecting a larger operating loss in the second half.

With Ichimaru admitting that the forecasts may be a little too conservative, many investors appear to believe that the actual results will be better. But this may hinge on the progress in streamlining efforts and on exchange rates.

(Nikkei) cg

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