Toyota profits tumble, but for how long?
Toyota has fallen to the third biggest automaker in the world, as profits tumbled after the earthquake.
Toyota announced Wednesday that its quarterly profits tumbled 77 percent. The automaker was hit hard by Japan's massive earthquake, tsunami, and nuclear crisis.
It's a tough blow for the world's largest automaker. The company didn't reach that plateau by accident -- Toyota doesn't just make good cars and trucks, they also have a highly-efficient business model, called "The Toyota Way." One of the key principles is minimizing waste and over-production.
"One of the hallmarks of the Toyota production system has been what we call 'just in time manufacturing.'" explained Dave Cole, chairman of the Center for Automotive Research in Ann Arbor, MI.
"You have minimum inventory, you don't have boxes of parts ready to be installed, those parts are being made and shipped on a 'just in just in time' basis. And contrast that to sort of the old days, when you had large buffers of parts, that doesn't exist anymore," said Cole.
Assembly Line Break Down
This efficiency saves money, but also creates vulnerabilities. With the Japanese earthquake, tsunami, and nuclear crisis, Toyota plants couldn't get parts from northern Japan, and the international assembly line basically broke down.
Toyota business model is different than American and European carmakers, which utilize a less centralized system.
"The Japanese, to a far greater extent, believe in keeping their highest-value added kinds of production and R&D (research and development) close to headquarters, close to home, to prevent other people from copying it or from stealing it," said author Bill Holstein, who writes about autos and has a new book called "The Next American Economy."
This system served Toyota well, until recently. Auto analysts predict that Toyota will lose its position as the world's largest automaker this year, slipping to third behind General Motors and Volkswagen.
But don't look for Toyota to just fade away.
"Toyota will be expending a huge amount of energy and money to recover what they've lost. They have huge liquidity, huge wealth," said Holstein. "American competitors should not be at all giddy, or happy, or over-euphoric because clearly Toyota will be fighting back. The Japanese will not give up easily."
Wednesday, Toyota's President Akio Toyoda underscored that. He said worldwide production will be back at 70 percent by June. That's a much more optimistic prediction than last month's forecast, which didn't see those levels being reached until August.
Why Not to Bet Against Toyota
Still, Japan continues to experience energy shortages, so it will be difficult for the company to ramp up to full speed at its factories. But, Dave Cole said, he wouldn't bet against Toyota.
"Generally Toyota is pretty conservative when they say something. So they must have a feeling that they can manage this," said Cole. "You have to realize, in Japan there are really two power grids, north and south. And Toyota is much more heavily involved in the southern power grid, rather than the northern one where the earthquake and tsunami occurred, so I don't think they will have a problem getting back."
In the long run, Toyota could shift more manufacturing to North America to further diversify its manufacturing base. This would also be a lot cheaper for Toyota. Because of the higher value of the yen, it's just a better deal to build in America, than ship to America.