Toyota lifts profit outlook, mulls alternatives to China-made parts amid virus outbreak

Earnings

A 2020 Toyota Highlander goes down the line at the automaker’s plant in southern Indiana.

Toyota

Toyota Motor nudged up its annual operating profit forecast by 4.2% on favorable currency rates and better-than-expected sales, but added the impact of the new coronavirus was hard to gauge and had not yet been factored in.

Automakers have suspended output at many factories in China in line with government guidelines to prevent the spread of the virus which has led to some 560 deaths in the country.

The epidemic is likely to wreak havoc on China auto sales and production in the first quarter, and has disrupted the supply of parts for some carmakers with Hyundai Motor this week saying it would have to suspend production in South Korea.

“We are looking very closely at inventories of components which are made in China and used in other countries, including Japan, and at the possibility of alternative production,” Operating Officer Masayoshi Shirayanagi told a news conference.

S&P credit analyst Vittoria Ferraris has estimated “up to one-half” of vehicles and components that would normally be produced in China could be affected if shutdowns are extended further. Production at many plants across China, including Toyota’s, has currently been halted through to Feb. 9.

Toyota has said it plans to resume production on Feb. 10 although this could change if the situation worsens.

Japan’s biggest automaker said it now expects operating profit for the year to end-March to climb to 2.5 trillion yen ($22.7 billion), up from 2.47 trillion yen a year earlier and in line with market estimates.

The outlook is based on a new assumption for the Japanese currency to average around 108 yen to the U.S. dollar during the current business year versus 107 yen previously. It also expects to sell 10.73 million vehicles, slightly higher than a previous forecast for 10.7 million.

Third-quarter profit, however, declined 3.2% to 654.4 billion yen as the yen trended higher than expected during the period and due to softer vehicle sales, though the result was slightly higher than market expectations.

Sales in Asia tumbled 12.5% with demand slow in Indonesia and Thailand, while sales in North America, Toyota’s biggest market, slipped 1.8%.

Toyota also said it was seeking more discussion with the British government, which announced plans this week to ban the sale of new petrol, diesel and hybrid cars in the country from 2035. That is five years ahead of many other countries with similar targets in what has been seen as a victory for battery-electric cars.

“We don’t believe it’s possible to suddenly say ‘OK, let’s move to something like this and ban everything in one shot’. We should have steps to do this kind of thing,” Executive Vice President Didier Leroy said.

“It’s going to create big trouble for all carmakers in the world and even for customers in the UK.”

Toyota operates a plant in Derbyshire, central England and produced roughly 8% of the 1.52 million cars made in Britain in 2018. It also produces engines at a factory in Wales.

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