Monday, December 22, 2008

Sign of the Economic Apocalypse #1: Toyota in the red

By Michael J.W. Stickings

Well, it's time to kick off a new series here at The Reaction. As you may know, we already do Signs of the Apocalypse, (we're up to #61) mostly cultural indicators of imminent doom, but with the economy where it is, and worsening, it seems appropriate to turn our attention to the coming Economic Apocalypse. And not just in the U.S. This series will have a global reach. (Carl, our resident economics guru, been doing SOTEAs for some time, though he hasn't been calling them that.)

So... here we go...


It ain't just the Big Three that are in trouble. According to The New York Times, Toyota, a far more successful automaker, is sinking into the red for the first time in seven decades:

TOKYO — Toyota Motor, the Japanese auto giant, said Monday that it expected its first operating loss in 70 years, underscoring how the economic crisis was spreading across the global auto industry.

On Monday, Toyota said it expected an operating loss in its auto operations of 150 billion yen, or $1.7 billion, for the fiscal year ending March 31. That would be the company’s first annual operating loss since 1938, a year after the company was founded, and a huge reversal from the 2.3 trillion yen, or $28 billion, in operating profit earned last year.

Analysts said Toyota’s downward revision, its second in two months, showed that the worst financial crisis since the Depression was threatening not just the Big Three but also even relatively healthy automakers in Japan, South Korea and Europe. Many other companies will also soon be reporting losses.

A friend and I were recently discussing whether, if looking for a new car, we'd consider buying an American one. (He drives a Japanese one, I drive a German one.) We both said no -- even though the quality of Big Three cars seems to be better now than in quite some time.

I drove a Chevy in high school and college, then had a Ford later on -- our family GM cars were great, while the Ford was mediocre -- so it's not like I have any sort of antipathy to American cars. But with all the other choices available, from VWs and Hondas to Volvos and Infinitis and Lexi and beyond, why go American? My friend and I may be behind the curve, assuming that American cars have in fact improved in quality, but our first instinct is to look elsewhere. And not just because of quality, but because of the Big Three's current, er, problems.

And yet here's Toyota, arguably one of the world's finest car companies -- I've never had one, but I have friends who do, and they love them -- losing money. Now, Toyota is clearly in a much stronger position than most of its rivals, including the Big Three:

Toyota said it still expected to report a small net profit, helped by interest and dividend income as well as tax-related savings of 50 billion yen, or $560 million.

With some $18.5 billion in cash, and relatively little debt, Toyota is still in far better shape to weather the downturn than General Motors and Chrysler, which on Friday received $17.4 billion in emergency loans from Washington.

Still, its loss signals a much deeper problem not just in the auto industry but, more broadly, throughout the global economy. If Toyota is struggling, after all, so must all the other car companies, and so must other manufacturers in other industries, and so must all of us consumers, who evidently aren't buying enough Toyotas. (And when you're having trouble paying your bills and putting food on the table, or when you've been laid off, or when you fear you may just be let go, your priority likely isn't a new car.)

Maybe we never should have been buying that many Toyotas in the first place, or maybe we shouldn't have been racking up massive amounts of debt, or maybe all these manufacturers, as undeniably successful as some of them have been, need to rethink their products and how they do business, and maybe we all need to adjust to the new reality, the new paradigm, whatever it may be, whatever it may entail, that lies ahead at the end of this meltdown, but, right now, the Economic Apocalypse seems to be at hand.

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