NAGOYA -- Toyota Motor is using the coronavirus outbreak as a chance to reevaluate and trim excess fat under its signature kaizen efficiency drive, laying the ground for a strong recovery once sales start to rebound from the pandemic-induced slump.
"The automotive industry has an immense impact on the economy," President Akio Toyoda said May 12 when asked why the automaker decided to publish a full-year forecast when all of its Japanese rivals opted not to in light of the coronavirus outbreak.
"Because we are in these critical circumstances, we need to talk candidly about the situation as it is now, and show the criteria," he said. "By having set this criteria, my friends and I in this vastly extensive automotive industry will be able to make some sort of plan, some sort of preparations."
The automaker projects an 80% drop in operating profit to 500 billion yen ($4.74 billion) for the year ending March 2021. It is believed to have suffered a big hit in the April-June quarter, and some analysts think it may even have fallen into the red for those three months for the first time since 2009.
Still, it's not all doom and gloom for Toyota.
The automaker told group executives in mid-July that it might be able to upgrade its projections for full-year unit sales by several percentage points. It is unclear whether it will revise its official forecast when it announces April-June results Thursday, but the company is apparently on track to sell 3% to 4% more vehicles than the 8.9 million it had previously expected.
The boost came in part from China. Unit sales in the country, which are reflected a quarter late in consolidated results, plunged roughly 70% on the year in February and almost 20% in March. But the numbers edged up in April and have been increasing by 20% on the year since May, more than making up for the dent from the coronavirus earlier this year.
U.S. sales are also starting to recover since roughly halving on the year in April, falling just 19% in July. Toyota is launching a string of new models like the Venza SUV in the market to tap into this uptrend.
"More people will buy cars" so they can travel without exposing themselves to the virus, said Arifumi Yoshida at Citigroup Global Markets Japan. North American auto sales could expand to about 13.4 million a year from the current 12 million, according to Kota Yuzawa at Goldman Sachs Japan.
The question is how much can Toyota cut costs in the coronavirus era. The company expects operating profit to drop by about 1.9 trillion yen this fiscal year -- about 1.5 trillion yen from reduced sales, and another 430 billion yen from a stronger-than-expected yen. But the figure, unlike in previous years, does not account for the costs the automaker expects to shed this fiscal year.
Toyota's cost reduction has been on the decline. As the automaker pursues new technologies widely known as CASE -- connectivity, autonomous driving, sharing and electrification, it has turned to outside suppliers for software and electronic parts, making savings difficult. In fact, cost reduction reached 265 billion yen in fiscal 2019, and 250 billion yen the year before, far below the previously achieved 300 billion yen level.
Still, the unprecedented pandemic can present a unique opportunity. Toyota has the chance to examine every aspect of its operations. In addition to advancing existing efforts, such as the standardization of components and procurement under the Toyota New Global Architecture initiative, the automaker is doubling down on its philosophy of kaizen -- or continuous efficiency improvements.
For example, to speed up assembly, it inspects parts to make sure they do not come with unnecessary packing material. The automaker now handles some of the maintenance work for assembly equipment, which will reduce costs going forward. These efforts are expected to yield bigger savings once the auto market recovers. Based on predictions by several analysts, cost reduction will likely fall somewhere between 200 billion yen and 350 billion yen in the year ending March 2021.
Toyota posted an operating loss of 461 billion yen during the financial crisis in fiscal 2008 but reported a 468 billion yen profit in the year ended March 2011, the month a major earthquake hit Japan and led to the Fukushima nuclear disaster.
This time around, Toyota expects its results to outperform earnings in those previous crises and may even beat current estimates. While the circumstances are different, structural reforms undertaken since the Lehman crisis have undeniably made Toyota a more resilient company. Realizing a recovery at Toyota, which has a broad network of domestic suppliers, will prove a significant test of corporate Japan's cost competitiveness.