“The Nikkei, apparently a newspaper in Japan’s Wednesday edition is out already. They are saying Toyota will slash global production by 10% or one million vehicles as early as this fiscal year to raise utilization at underused plants. They will slash by 10% or one million vehicles. Shares are higher by 1.5%.” — CNBC’s Power Lunch 8/25/2009
Toyota Motors (TM) has announced they will be cutting production by 10% in anticipation of a slacking demand following the “Cash for Clunkers” program. The program has been wildly popular as the first $1 billion appropriated for the rebates was used in just over a week, and then the next $2 billion allotted only last a few weeks longer. All in all, the initial estimates state that through Monday a total of 625,000 vehicles were purchased for a $2.58 billion in vouchers. The deadline for dealerships to submit their applications has been extended to 8pm EDT Tuesday, as many dealers have had staff working late into the night to complete the necessary paperwork.
The Car Allowance Rebate System (CARS) aka Cash for Clunkers program had dual purposes. The first goal was to excite demand from the U.S. consumer, and hopefully help the struggling auto industry catch a break. The other stated reason would be to replace so-called gas guzzlers on the road with more fuel efficient vehicles. Toyota easily fit the bill for fuel efficiency and the most popular car sold through the program has been the Toyota Corolla. Toyota claimed three of the top five vehicles for sales through the program, which undoubtedly will help them show their first increase in auto sales in the last 13 months.
With the program ending, dealers and automakers are left with one big question: Now what? It is clear that the government’s efforts have borrowed demand from the future for use today. The government rebates did not create demand, instead they incentivized buyers to act more quickly than they otherwise would’ve. Now, most everyone who had thought about buying a car in the near future must have at least considered taking advantage of the program. There will be fewer sales over at least the next few months as a result.
Toyota is the first we have seen announce production cuts, although we would not be surprised to see others follow suit. Toyota, which currently has production capacity of 10 million vehicles per year, will be reducing that capacity to 9 million as soon as this fiscal year. Furthermore, production volume is still excepted to fall well short of capacity, about 6.7 million vehicles this year. There is simply no need to restock inventory as quickly when Economics 101 teaches us that sales are undoubtedly going to suffer. Plant closures, shortened work weeks, and more layoffs are the obvious implications of such a slowdown.
From an equity perspective, we have a Fairly Valued stance on TM at the current price level. We cannot blame them for slowing down their production capabilities, it only makes sense. However, we have a hard time seeing a catalyst for sales improvement through the end of the year. Toyota got probably the most benefit of any automaker from Cash for Clunkers, and time will tell how much it impacts demand going forward. From an equity investor standpoint, there are some significant challenges in the months ahead that makes investing in them a bit too risky.
