Toyota warns that raw material costs could eat into profits by 20%

Toyota 2023 Sequoia on display at the New York Auto Show, April 13, 2022.

Scott Mlyn | CNBC

Toyota Motor on Wednesday warned investors that “unprecedented” increases in material and logistics costs could eat into the company’s full-year profit by as much as 20%.

The Japanese automaker expects material costs to more than double to 1.45 trillion yen, or about $11.1 billion, in its fiscal year that began in April. Toyota said it plans to offset about 300 billion yen, about $2.3 billion, of those annual increases with “cost-cutting efforts.”

The global automotive industry has been struggling with supply chain problems for around a year and a half. A global semiconductor chip shortage has sporadically closed factories and led to significant reductions in vehicle volumes.

Toyota was better able to handle supply shortages in the early days of the chip shortage than some other automakers, but higher inflation, rising costs, and additional supply chain problems have added up.

Covid-19 is also still a problem. Toyota said Tuesday it would halt operations on 14 lines at eight domestic factories in May for up to six days due to lockdowns in China.

Toyota expects its operating profit for the current fiscal year to fall to 2.40 trillion yen (US$19.7 billion), compared with 3 trillion yen (US$22.9 billion) for the last fiscal year ended in March . It also forecast net income would fall 20% to 2.26 billion yen ($18.5 billion), despite expectations for record retail sales around the world during the period.

“This is very unprecedented,” Toyota CFO Kenta Kon said of raw material costs on Wednesday.

Kon said the company is working internally and with its suppliers to reduce costs as much as possible to avoid “simply raising the prices” of its vehicles to consumers. He said this could include using fewer raw materials or switching to cheaper parts.

“We we have a sense of crisis and we recognize that we must continue these efforts,” Kon said.

Toyota is the latest automaker to warn of rising costs. Tesla boss Elon Musk has blamed inflation for increasing the price of his electric vehicles. General Motors and Ford Motor have also warned of significant cost increases this year.

Ford said it broadly expects its pricing power, combined with an expected increase in production, to offset $4 billion of commodity headwinds. The automaker previously forecast those headwinds at $1.5 billion to $2 billion. Similarly, GM last month doubled its projected raw material costs to $5 billion in 2022. Toyota warns that raw material costs could eat into profits by 20%

Jane Marczewski

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