Toyota (TM) is based in Japan, and the company sold 73% of its production outside of Japan. Currency has a significant impact on Toyota’s earnings.
The above chart is from Toyota’s slide deck for the fiscal year ended March 31, 2014, earnings call. As you can see, in the slide, the effects of foreign exchange (or FOREX) added 900 million yen, or $8.8 billion, to Toyota’s operating income. As the slide above shows, the majority of the addition was due to depreciation of the yen versus the dollar, but yen depreciation to the euro and other currencies also added to Toyota’s fiscal year ended March 2014 earnings. The mechanic of this effect is that the products sell in dollars or euros or pounds and the profit exchanges to yen throughout the year.
The chart above presents the value of the Japanese yen versus the U.S. dollar and the euro. During the period from March 31, 2013, to March 31, 2014, the yen depreciated against both currencies, from 99 to 103 for the the U.S. dollar and the 128 to 142 against the euro. The range over that period is important too, as the peak and the trough over time was 98 to 105 versus the dollar. This is a 7% difference. Against the yen, it varied from 128 to 145—or a 13% difference. The net income margin for the industry is approximately 7%, so a 7% change or a 13% change in the currencies has a significant impact. The impact of the U.S dollar is greater, as nearly 30% of Toyota’s sales are in North America.
Historically, Toyota maintained manufacturing in Japan to keep the supply lines short and the quality high. It added manufacturing in the U.S. in the early 1980s to quell tariff threats as it gained share in the U.S. Toyota is increasingly moving production outside of Japan to better match revenue and expenses. According to Toyota’s most recent annual filing, 75% of Toyota’s sales outside of Japan were produced outside of Japan. This is up from 71% in 2011. Plus, 59% of Toyota’s cars sold are produced in the U.S. In Europe, 59% of automobiles sold are locally produced. As the depreciating yen benefitted Toyota in the most recent year, it’s a movement that can cut both ways. Toyota’s is making progress to reduce this risk.
Before we move away from this topic, I wanted to note the first chart in this article and point out that Toyota has to search for billions of dollars of cost savings to offset labor and material cost increases. Even with Toyota’s famous engineering, the leader can’t always offset cost increases. The other partial offset is marketing spending, which could be advertising or rebates on vehicles to increase unit sales.
As we reflect on this global industry, each participant—including General Motors (GM), Ford (F), and Volkswagen (VOW) and all automobile manufacturers in the exchange-traded fund CARZ—must address currency movements and cost competitiveness.