It was as inevitable as the violent ending to a traditional samurai movie – ever since Fitch cut its assessment in November, S&P lowered its outlook to negative in December and Moody’s launched its ratings review.
Toyota, that proud Japanese corporate icon, which in 2008 surpassed GM to gain the title of world’s biggest carmaker, on Friday lost its AAA rating from Moody’s, which cut its Aaa senior unsecured long-term rating on the company to Aa1 and warned that further downgrades could follow.
And to cap the perfect day from corporate hell, Toyota was forced to warn Friday that its expected loss for the financial year to March would be three times larger than it had previously forecast.
Like its overseas rivals, struggling in the grip of the worst industry slump in decades, Toyota promised further cost-cutting measures, though it ruled out permanent factory closures or “involuntary” job cuts for full-time staff, reports the FT.
But the carmaker is understood to be slashing its contract workforce in Japan by more than a third to 3,000 by March from 9,000-plus a year earlier, and cutting many of its plants back to single shifts or shutting them down temporarily.
A word here on the easiest, quickest, corporate cost-cutting measure: “eliminating part-time and contract jobs”, which always sounds far less serious than cutting permanent staff jobs. This is particularly the case in Japan – although the consequences are likely to be more far-reaching than in the West, because under changes to Japanese labour laws over the past decade, between a quarter and a third of the country’s entire workforce is on short-term contracts, often classified as “part-time”.
Clearly Toyota has had a truly horrible few months. The carmaker now projects an operating loss of Y450bn ($5bn), against a forecast issued only in December of Y150bn. As recently as November it had expected to earn a Y600bn profit — a reflection of the swift collapse of global demand in recent months.
Moody’s downgrade is not just a setback for corporate Japan, which just lost its only Aaa-rated company (Toyota gained its top-notch rating in 2003) and is suffering something of a corporate implosion, as the uber-bears believe. Toyota also happened to be Asia’s only non-financial, non-government borrower with an Aaa rating, according to Bloomberg.
And unlike the travails of US carmakers, Toyota’s woes are not just about plummeting demand for cars. Nor are they about corporate inefficiency, Toyota long being regarded as a savvy and well-run company.
The problem is also about the double-whammy facing all Japanese manufacturers — now struggling not only with a global downturn in demand for their goods (Japanese exports fell an extraordinary 35 per cent in December) but also with the extraordinary strength of the yen, which has risen close to 30 per cent against the euro and nearly 24 per cent against the dollar in the last year. Just look at the jobs and costs slashing being undertaken by the big tech companies right now.
Despite the increasingly global nature of their manufacturing operations, much of them now in low-cost locations in Asia and other emerging economies, all the big Japanese manufacturers maintain headquarters and sizeable manufacturing operations in Japan, where they face immense political pressure not to close plants and cut jobs.
Moody’s downgrade – its first on Toyota since 1998 - will affect $19bn in long-term debt and came in response to what the ratings agency described as “the significantly impaired state of profitability at Toyota, due in turn to the severe nature of market conditions surrounding the global auto industry.”
The agency also warned it may downgrade its ratings on Honda and Nissan, Japan’s second- and third-largest automakers. Honda is currently on Moody’s fourth-highest rating and Nissan on its seventh highest, notes Bloomberg.
But if you’re going to feel sorry for any CEO of a Japanese company, then spare a special thought for Akio Toyoda, 52-year-old grandson of Toyota’s founder, who was named last month as the company’s next president and chief executive to “lead the company through the global car industry crisis”. As the FT noted in a recent profile, he will take over in June, and has some tough decisions ahead – err, if there’s a company left by then.
Related links:
Toyota loses top credit rating as car demand plummets - Bloomberg
Land of the rising sun: Closer to the precipice — FT Alphaville
More about the yen — FT Alphaville
Founder’s grandson to head Toyota – FT