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Recall takes financial toll on Toyota

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Recall takes financial toll on Toyota

Alisa Priddle / The Detroit News

Detroit -- Toyota Motor Corp. had taken steps to turn a loss per vehicle into a profit when it issued a massive recall that will prove costly, members of the Society of Automotive Analysts said Wednesday.

And the financial toll from lost sales may force Toyota to increase incentives in the future just as the Detroit Big Three are gaining strength and reining in their use of the costly discounts, speakers in Detroit said.

The normally profitable Toyota saw a loss of $1,680 per vehicle in North America in 2008, said Laurie Harbour, president of Harbour Results Inc. in Berkley. But after cutting costs, Toyota was rewarded with a profit of $967 profit per vehicle in 2009 in North America. Globally that margin was only $108 per vehicle. The Japanese automaker will need cash in the months ahead as its deals with the fallout of the recall of 8.5 million vehicles worldwide. Toyota could easily lose 100,000 sales because of the recalls at almost $1,000 profit per vehicle, Harbour said, plus another $2 billion to $4 billion to repair those vehicles. Most of the costs will be felt this quarter.

Residuals on new Toyota vehicles will drop as much as $1,000 a vehicle in the future, Harbour forecasts, and the automaker is expected to lose a couple points of market share.

The other possible future drain is the need to offer discounts, said Anthony Pratt of the auto division of PricewaterhouseCoopers LLP in Detroit.

"Toyota may be more aggressive with incentives in the future to convince consumers to still consider Toyota," Pratt said.

Such a move would come as the Detroit Big Three have made strides to reduce their reliance on incentives, he said, with Ford Motor Co. pulling back the most aggressively.

"There is no better time for Toyota to go through this crisis for GM, Ford and Chrysler," Harbour said, noting General Motors Co. and Chrysler Group LLC have the advantage of clean balance sheets after shedding debt in bankruptcy, and Ford has executed a financial turnaround.

Ford has gone from worldwide losses of $965 per vehicle in 2008 to a loss of $62 per vehicle in 2009, Harbour said. The North American loss per vehicle remains high at $2,503, she said.

GM was losing $2,738 per vehicle in North America in 2008. Harbour said there is not enough data from the now-private company for an accurate 2009 figure, but the loss likely is less because corporate debt is less.

GM is "further ahead of the curve in cost reduction than Ford and far ahead of Chrysler," Harbour said. "GM had a revenue issue, without sales it had no money, but it had already done a lot of cost cutting." Cutting brands from eight to four also reduced overhead costs, and Harbour said GM's new products are stronger than Ford's.

"I think GM will be wildly profitable in North America in a very short time," Harbour said, and is well positioned to recover, something that cannot be said for Chrysler.

Chrysler lost $3,800 per vehicle in 2008 and while no data is available for 2009 the expectation is that has not changed substantially.

Pratt said the Big Three are concentrating more on fundamentals rather than chasing market share. As a result, they "probably will see their share erosion slow and then start to grow again."

The big question, Harbour said, is whether the Big Three will return to health and resume past bad behavior, forcing them to rely once again on incentives.

"It scares me when (GM Vice Chairman Bob) Lutz says let's go open another plant," Harbour said.

It also scares the supply base which also suffers from overcapacity and continues to face financing challenges, said Scott Ulnick, chairman and managing partner of Ducker Worldwide in Troy.

The Detroit automakers would be wise to follow the example of Honda Motor Co. which has been alone in continuing to make a profit per vehicle over the past two years and increasing the margin from $113 in North America in 2008 to $703. That is because Honda maintained an unyielding growth strategy and engineering focus, not launching products before their time or being influenced by outside forces to expand too rapidly the way Toyota has, Harbour said.



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