Toyota's Got Bigger Problems Than the Recall

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Toyota recalBy Eric Volkman, The Motley Fool

Now is not the best time to be Toyota (TM). The company just announced a large-scale recall due to a potential fire hazard with its driver-side power window assembly. Unfortunately, this applies to approximately 7.4 million of its vehicles around the world -- more than one-third of which are in the United States.

This isn't the company's first mass recall in recent times. In 2009-2010 it was forced to issue a pair following revelations that certain models were at risk of unintended acceleration. Those twin recalls affected nearly 6.7 million cars.

On top of that, thanks largely to political circumstances outside of its control, the company is suffering from steep declines in one of its most important markets.

Chinese Walls

Right now in China, anything related to Japan -- and the products it peddles -- is off-the-charts out of favor. This is because the two countries are in dispute over the possession of a set of small, uninhabited, privately owned islands in the East China Sea (called Senkaku by the Japanese and Diaoyu by their rivals). Japan has reached a deal to buy these strategically placed but otherwise uninteresting chunks of land, stoking nationalist sentiment from a country it has been at odds with numerous times over the centuries.

This anger and ill will has taken the form of vandalism and sporadic acts of violence against high-profile, ubiquitous proxies for the country, like its cars (and in one unfortunate case, a driver of same).

No one wants to get attacked for driving the wrong vehicle, and there are many who won't consider buying a product originating from the country seen to be stealing pieces of their nation.

Toyota's China sales have dropped precipitously of late, sputtering at a queasy 49% lower year over year for the month of September. And it's not the only Japanese manufacturer suffering for its flag; Honda's (HMC) sales were off 41% in the same month.

This is going to affect Toyota's results. In 2011, the company delivered around 883,000 cars in China. This constituted a robust 44% of its total Asian unit sales (excluding its home market of Japan). Looking more distantly in the rearview mirror, that number was around 12% of total worldwide unit sales. China, in short, is a country that matters a lot to Toyota.

America's Not the Bad Guy This Time

To be fair, no one's really doing all that well in China at the moment.

The country's once-fiery growth has cooled, and its monetary officials are trying -- but so far not succeeding -- to prime the pumps. Construction, industrial output, and retail sales have all been relatively soft lately.

But the nearly 50% sales drops for Toyota and its fellow national champions are stark and scary, especially when compared to some of their global rivals:
  • September sales in China for Ford (F) (and its local joint ventures) leaped by 35% year over year. This wasn't just a knee-jerk flight to non-Japanese producers -- the American company posted an even better number (39%) this past August.
  • Even General Motors (GM) posted a modest year-over-year increase of 1.7% in September.
Like the recall, which is only a few years separated from a similar big-scale operational nightmare, Toyota's Chinese slump comes on the heels of a big problem the company hoped it had recovered from. This was the brutal one-two punch of the earthquake and tsunami that hit Japan in March 2011, badly affecting deliveries from local suppliers and thus affecting output from the company's 17 factories in the country. As if that weren't bad enough, the flooding in Thailand later in the year also put the crunch on operations.

Although Toyota still managed to grow Asian sales that year (by 5% annually), global sales dropped by 6%. That knocked the company from its position of No. 1 carmaker in the world; it was eclipsed by GM, which managed to ship nearly 8% more units that year.

Time for a Contrarian Buy?

And yet, Toyota's stock hasn't been battered as much as might be expected. At around $75, the shares trade more or less in the midpoint of their one-year range. They're down since the news broke of the Japanese government buying the islands, but only by around $7.

It's possible they haven't suffered more because Toyota's forecasts for 2012 remain rosy. Before the government decided to buy the islands and angry Chinese started assaulting the company's cars and drivers, Toyota anticipated solid 28% growth in global unit sales for the year. Even when making an extremely conservative estimate of a decline in China sales for the year (a clean 50% from 2011's numbers), that still pegs global sales at around 8.4 million units for a nice 22% rise over the previous year. Meanwhile, the shares currently trade at a forward P/E barely above 9.

Granted, at the moment few of the world's carmakers have to contend with such challenges in Asia's biggest market -- or wipe lots of egg from their faces because of a huge recall. The political crisis over the islands doesn't look as if it'll subside anytime soon. But hopefully for the company, the recall won't be too prolonged or expensive.

Motley Fool contributing writer Eric Volkman has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors.


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99 Comments

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Solex

People can't seem to stop Toyota bashing-what is it, the water?

October 24 2012 at 3:03 AM Report abuse rate up rate down Reply
Neville Ross

People can't seem to stop Toyota bashing-what is it, the water?

October 24 2012 at 3:03 AM Report abuse rate up rate down Reply
polsky85

Well let's see...in the garage currently are: 1982 Olds, 91k miles runs great, 1998 Cavalier, 124k miles no burning or leaking oil, a/c still works, 2002 Cavalier with 67k miles, runs awesome, 2005 ford freestyle, 90k miles, has needed brakes & tires PERIOD. Those folks that say American cars are junk are about 30 years out of date. Buying an American car is probably one of the most patriotic things the average joe can do for his/her country. A pity about 50% of them choose not to. But hey it's only money, and we are ONLY sending $2 trillion of an annual $11 trillion GDP overseas for imported cars and oil, just imagine how many jobs that would create in the USA.

October 16 2012 at 8:57 AM Report abuse -1 rate up rate down Reply
technoir4

I drive a 2002 Honda Civic that just turned 307,000 miles, and purrs like a kitten, compression is still great and doesn't smoke or leak anything. We also have 2006 Crysler POS with 89,000 and it already leaks oil from the pan, pings really bad when its hot out, passenger side window rattles when you hit bumps, the AC has conked out 3 times, and have had the tranny rebuilt already...and we purchased both cars brand new......so you tell me buy American? yea right.......Never again!!!
I'm in marketing and my job puts tons of miles on my car per year, so I need something reliable!

October 16 2012 at 7:16 AM Report abuse +1 rate up rate down Reply
toosmart4u

Think Toyota is great, over 14 million vehicles recalled in the past few years. Makes them #1 in Recalls. A.G. you are right, we must buy American. I know I do. It is hard but can be done thanks to these computers. We do a great job creating jobs, but they are overseas. Romney will be a great one to ship out more jobs. He has the experience.

October 16 2012 at 7:05 AM Report abuse +1 rate up rate down Reply
A.G. SESKIS

This wouldnt be a problem,...or any real concern to the U.S.A.,...IF the co.`s of the Great U.S.A. would plain and simple,....QUIT out sourcing our jobs to CHINA / JAPAN !!!
What gets me,...is the idiots of THIS Country would rather support child / slave labor, ..than spending a few cents more to support our own country.
Just baffles me why the problems between China and Japan ,..should even be an issue for the U.S.A.
We have the materials to build everything ,..but we ship them to China / Japan,...and ship products back to support them 2 Economies,..and you dont think ALL that shipping costs money???
Who benefits ??? Certainly NOT the U.S.A. !!
Wake up people ,...start buying U.S.A. !!
QUIT BEING CHEAP AZZEZ AND SUPPORT YOUR OWN DAMN ECONOMY !!!!
Thanks,
Have a nice day,...when your job is sent overseas. Idiots.

October 16 2012 at 6:24 AM Report abuse rate up rate down Reply
itsmegp46

The US was building junk cars 35-40 years ago. I know, I bought them. The Japanese indirectly taught the US auto industry how to build better cars via competition. Chrysler K cars, GM X cars? What pieces of junk those cars were. Now I have a 1989 Bonneville and a 1997 Bonneville with 220,000 and 197,000 thousand miles respectively on them. Still going strong. Used to be, I had to change the exhaust system every 30 or 35 thousand miles for example. Now the system goes 140,000 miles. A little competition did wonders.

October 15 2012 at 10:48 PM Report abuse +1 rate up rate down Reply
1 reply to itsmegp46's comment
stvhndyman

I think perhaps the real reason for you exhaust systems longer life is due to the fact that we no longer use leaded gas. The lead in older gasoline was what "rotted out" exhaust systems.

October 16 2012 at 3:47 AM Report abuse rate up rate down Reply
1 reply to stvhndyman's comment
JOSEPH

Maybe it's because they now use Stainless Steel exhaust systems?

October 16 2012 at 6:25 AM Report abuse rate up rate down
bbblehead

Yup. There isn't anything more patriotic in these hard economic times than buying a foreign namplated auto. These people that think foreign autos are soooo much better than American autos crack me up. So what if a Toyota is built here? You pay a couple autoworkers pennies to build it (they can be built in less than 18 hours) then you get a loan and send the big money out of the American economy weakening it to a foreign bank and economy strengthening it then wonder why things are bad here. That's just foolish. American car companies would hire more workers to meet the demand and the foreigners would go away. Common sense. Get a grip. Americans make fine autos...PERIOD!! BUY AMERICAN!!

October 15 2012 at 10:31 PM Report abuse -1 rate up rate down Reply
corbetttkc

I have had two Toyota Camrys. I absolutely love both of them. I have driven Fords, Dodges, Nissan, and Chevy's. Usually replaced every three years, I have found the best to be Toyota.

October 15 2012 at 9:50 PM Report abuse +2 rate up rate down Reply
Condley

Let's trade them both California for the islands and a country/island to be named later. And they can have all the moochers in California as a bonus! That will get rid of 30% of our nations welfare and almost 100% of our nations nut cases.

October 15 2012 at 9:40 PM Report abuse +1 rate up rate down Reply