Section 5. Repeated Difficulties and Trials

Item 2. Ordeals Continue

Struggling with the Historically High Yen

People in the Japanese automotive industry began to refer to the environment following the Great East Japan Earthquake as "six great hardships." At this time, a sixth hardship, the power shortage caused by the nuclear power plant accident, was added to the other already existing five hardships of yen appreciation, stringent environmental and labor regulations, a higher corporate tax rate, and delay in the implementation of trade liberalization treaties.

The Japanese yen, which had appreciated to the level of more than 80 yen to the U.S. dollar by the summer of 2010, rose further to 76.25 yen to the U.S. dollar by mid-March 2011 immediately following the Great East Japan Earthquake, breaking the postwar record set 16 years earlier in 1995. Subsequently, the yen rose even further to more than 75 yen to the U.S. dollar by August, solidly establishing a historically high yen. This hyper-appreciated yen not only negatively impacted the short-term financial results but also severely accelerated the hollowing of Japanese manufacturing industries as a result of production transfer to outside Japan.

While TMC reported a loss for fiscal year 2008 (ended March 2009) following the financial crisis, it managed to report operating income of 147.5 billion yen and net income of 209.4 billion yen for fiscal year 2009 (ended March 2010) on a consolidated basis. This was a great turnaround since TMC had projected a loss of 850 billion yen in operating income at the beginning of the fiscal year.

This was an extremely challenging period for TMC, exacerbated by the surfacing of quality problems in the U.S. market. However, TMC responded by accelerating the implementation of its emergency profitability improvement plan, which had been commenced in November 2008, and managed to beat its original fiscal year 2009 goal of an 800 billion yen improvement by twofold to report a total improvement of 1.69 trillion yen. Of this, cost reductions came to 520 billion yen, the highest ever for any fiscal year. During a May 2010 press conference to announce the financial results, President Toyoda said that fiscal year 2010 would be a year of new beginnings for Toyota and that he hoped to steer the company onto a new growth curve. He mentioned next-generation environment-friendly vehicles to be developed through further improvements in hybrid technologies, emerging nations such as China and India as the two focal areas, and his goal of achieving sustained growth through optimum allocation of management resources.

In the following fiscal year 2010 (ended March 2011), TMC reported a huge gain in profitability in its consolidated financial results, with its operating income growing by 3.2 times to 468.2 billion yen and its net income nearly doubling to 408.1 billion yen. However, the surging yen reduced profit by 290 billion yen on an operating profit/loss basis, surpassing the profit-improving effects of cost reduction measures implemented during the fiscal year. The effects of the Great East Japan Earthquake, which occurred in the last month of the fiscal year, also began to appear, reducing profit on an operating income/loss basis by 110 billion yen.

For fiscal year 2011 (ended March 2012), which brought the double punch of natural disasters including the Great East Japan Earthquake and the appreciating yen repeatedly hitting record highs, showed huge decreases, with operating income down by 24% from the previous year to 355.6 billion yen and net income down by 31% to 283.5 billion yen. Operating income declined 250 billion yen due to foreign exchange fluctuations alone and consolidated sales volume remained at the same level due to reduced production. This was truly a year of direct hits from the appreciating yen and natural disasters.

Thus, the surging yen severely impacted Japanese companies' profitability and forced them to adopt policies that led to the hollowing of domestic manufacturing industries, such as production transfers by the automotive industry and expanded procurement of foreign-made parts. Through its global production restructuring plan, announced in May 2010, TMC stated its intention to focus on vehicle production in Japan centered on efforts to develop new technologies and new production methods, and also to convert to a flexible manufacturing structure by promoting mixed-model production lines, for example.

Additionally, in order to secure employment and contribute to the local economy, TMC clarified its policy of protecting monozukuri in Japan and set 3 million vehicles annually as the level of production to be maintained in Japan. In the aftermath of the great earthquake disaster of 2011 and the surging yen, reporters at press conferences held that year frequently asked about Toyota's plan to cope with these factors. President Toyoda affirmed that, as a company that was born and raised in Japan, TMC wishes to help sustain the country's industrial foundation and employment. He repeatedly committed to do everything in his power to keep monozukuri alive in Japan and maintain a 3-million vehicle production level there.

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