Toyota and Honda plan cost cuts to finance technology R&D

Two top Japanese automakers said they planned to tighten their belts in the years ahead to free up cash to develop electric cars and ride-sharing services, underscoring the hard task ahead as traditional automakers face a rapidly changing industry.

Toyota Motor Corporation, the country’s top automaker, said that higher costs to develop new technologies like connected cars was ramping up pressure to generate savings wherever possible, while Honda Motor said it would strip down its vehicle lineup to cut production costs.

“We still weren’t able to improve our costs enough last year,” Toyota CFO Koji Kobayashi told reporters, adding that mounting investment required for new technologies and other R&D costs was making cost-cutting efforts more challenging.

“We need to work to find new ways to reduce costs this year,” he said, adding that penny pinching would apply to all aspects of the business, from producing lower-cost prototypes to limiting the number of pencils employees use at any given time.

Honda CEO Takahiro Hachigo said Japan’s No. 3 automaker would cut the number of car model variations to a third of current offerings by 2025, reducing global production costs by 10 per cent and redirecting those savings toward advanced research and development.

“We recognise that the number of models and variations at the trim and option level have increased and our efficiency has declined,” he told reporters at a briefing.

Toyota expects cost reduction efforts will help to lift operating profit by 3.3 per cent to 2.55 trillion yen ($23.20 billion) in the year to March 2020. In the year just ended, Toyota posted an operating profit of 2.47 trillion yen.

The profit outlook for one of the world’s biggest car makers was slightly lower than the 2.61 trillion yen average of 23 analyst estimates compiled by Refinitiv. Toyota also announced a 300 billion yen share buyback.

Honda forecast cost reductions would help boost operating profit by 6 per cent to 770 billion yen in the year to March. That is less than the 834 billion yen average of 22 analyst estimates compiled by Refinitiv.

Profit fell 13 per cent to 726 billion yen in the year ended March due to currency fluctuations and costs related to Honda’s plan to shutter production plants in the UK and Turkey in 2021.

Toyota expects to sell a record 10.74 million vehicles globally in the current year, up 1.3 per cent on the year and lifted by higher sales in Asia as it continues to grow sales in China despite an overall slowdown in the world’s biggest auto market.

But sales in North America are expected to struggle for another year due to weak U.S. demand for its marquee sedan models such as the Corolla and the Camry as drivers continue to shift to larger, higher-margin trucks and SUVs. Toyota expects sales in the region to slide 1.6 per cent.

Kobayashi said Toyota wanted to raise its operating margin in North America to 8 per cent in 2020, in line with the global margin, from around 1 per cent, but acknowledged it was not confident of meeting the target.

To do so, the automaker would need to further ramp up its sales ratio of SUVs and trucks from around 60 per cent of total vehicle sales in 2018 and slash discounting, he said.

Toyota, Honda and their rivals are facing stiff competition as ride-sharing technology and the race to develop self-driving cars has caused rapid - and costly - disruption to the auto industry.

These new technologies have opened the industry to tech firms and other players, forcing traditional automakers to rethink their strategy of selling gasoline-powered passenger cars to individual drivers, a business model which has been essentially unchallenged for the past century.

“From here on will be an age in which the difference between victory and defeat will be decided by the last one mile, which will be our contact point with customers,” Toyota President Akio Toyoda told reporters.

“Merely depending on the business model of the past will not lead to the future.”

Toyota Motor forecast lower growth in operating profit for the current year on an expected drop in revenue and weaker vehicle sales in Japan and North America, underscoring the hard task ahead as it gears up to face a rapidly shifting industry.

Japan’s largest automaker said it expects profit to rise 3.3 per cent to 2.55 trillion yen ($23.20 billion) in the year to March 2020, slightly lower than the 2.61 trillion yen average of 23 analyst estimates compiled by Refinitiv and compared to last year’s 20 per cent jump.

While it forecast global group retail sales at a record 10.74 million vehicles for the current year, compared with 10.6 million in the previous year, Japan sales were seen down 1.2 per cent and North American sales down 1.6 per cent.

Reuters