Section 1. Global Financial Crisis

Item 3. Financial Losses

By early 2008, the housing bubble in the United States had burst, and in September of that year, Lehman Brothers, a major investment bank deeply involved in subprime loans, collapsed and filed in U.S. federal court for protection under Chapter 11 of the U.S. Federal Bankruptcy Code (similar to Japan's Civil Rehabilitation Act). The credit-market chaos originating in the United States soon expanded into a global financial crisis. The effects rippled out to affect share prices in numerous countries, and in March 2009 the Nikkei average stock price in Japan was 7,054 yen, a new record low since the collapse of the bubble economy in the early 1990s.

The impact on the automobile industry was severe. Due to more-strict screening of auto loans in the United States and other countries, as well as other factors, new-car markets rapidly cooled, particularly in developed countries. As the effects of the financial crisis spread to the real economy, TMC established the Emergency Profit Improvement Committee against Yen Surge with President Katsuaki Watanabe as its chairman in November 2008 and implemented a variety of measures to prop up earnings throughout fiscal years 2008 and 2009 (ended March 2009 and March 10, respectively).

It was the first time for the president or higher to be appointed chair of such a response-measure committee since the formation of a committee to formulate urgent responses to an appreciating yen, which was established in 1986 to respond to the rising value of the yen following the Plaza Accord. The Emergency Profit Improvement Committee against Yen Surge adopted measures to address the deterioration of earnings by focusing on reducing total expenses and maximizing revenues. With respect to reducing total expenses, the committee adopted measures to make sweeping cost cuts in all expense categories including general and administrative costs, marketing costs, and manufacturing costs, and, for new projects, the committee comprehensively examined production structures, including reviewing implementation timing and scale. With respect to maximizing revenues, the committee aimed to stimulate demand by introducing appealing products, such as new hybrid vehicles, and offering products tailored to specific demands.

The global economic slowdown following the financial crisis, however, vastly surpassed industry assumptions. When it announced financial results for the second quarter in November 2008, TMC sharply revised downward its initial forecasts to operating income of 600 billion yen and net income of 550 billion yen for fiscal year 2008 (ended March 2009). The earnings outlook deteriorated even further, and in December, the forecasts were again revised to a 150 billion yen operating loss and net income of 50 billion yen. Circumstances made it impossible for TMC to avoid its first operating loss since its foundation.

A third revision was made in February 2009, this time to an operating loss of 450 billion yen and a net loss of 350 billion yen. These repeated downward revisions of results forecasts and TMC's shift into the red were reported in the Japanese mass media as the "Toyota shock".

Emergency measures to improve earnings launched in autumn 2008 resulted in an improvement of approximately 130 billion yen by March of the following year through implementation of emergency value analysis (VA) activities and limits on investments in facilities, including postponement of the start of operation of Toyota Motor Manufacturing, Mississippi, Inc. Effects from the decline in sales volume and the drastic increase in the value of the yen, however, caused net revenues for fiscal year 2009 (ended March 2010) to plummet 21.9% from the previous fiscal year to 20.529 trillion yen, resulting in an operating loss of 461 billion yen and a net loss of 437 billion yen, in a switch from record earnings in the previous fiscal year to record losses.

Automakers saw their sales drop across the board in 2008 because of the contraction of the global new-car market. TMC's sales fell by 4% year-on-year to 8.972 million units, but in the United States, General Motors experienced a decline of 11% to 8.356 million units, putting Toyota in the number one position in global sales for the first time.

These adverse conditions in the automobile market intensified even further, however, and TMC sharply cut production in response to inventory adjustments starting in the autumn of 2008. TMC's consolidated global production in 2009 was down 22% to 7.23 million units, and TMC's unconsolidated domestic production fell 30% to 2.79 million units, dropping below the 3 million unit level for the first time since the 1970s.

In response to this production cutback of unprecedented scale, in addition to the existing "simultaneous annual holidays" (planned use of vacation time) that treated days on which lines do not operate as working days, TMC's plants in Japan instituted company holidays with pay of 80% of employees' base salaries. Overseas, TMC placed greater emphasis on saving jobs than layoffs and adopted work sharing, a system where each employee receives lower wages in conjunction with curtailed working hours. Fourteen overseas manufacturing affiliates (or about 40% of the total) implemented work sharing for more than 30,000 employees.

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