News Flash: Toyota is Hemorrhaging

News Flash: Toyota is Hemorrhaging!

The widely admired Toyota, paragon of planning, quality, and foresight, the world’s largest automobile manufacturer, has reported an operating loss of $1.7 billion for 2008, its first such loss since 1934. Its sales in the United States have dropped by a third, with the Prius, the green environmental car of choice, plunging by 50%. Sales plummet and Toyota, yes Toyota, announces a loss. Honda, the equally great company, will report a profit for the year, but a substantial loss in the second half.

Toyota even stopped construction of a Mississippi assembly plant intended to build the Prius in the United States.

The much admired Toyota opened an assembly plant in Texas two years ago to build the Tundra, a full size pickup truck – clearly an unwise investment in hindsight. Toyota is renting storage space at the Port of Long Beach to store cars as they come off the boat, as are BMW and Mercedes.

Toyota’s President, Katsuaki Watanabe, responded to the stunning news in traditional American manner; he announced his resignation as president to become Chairman of the Board of Toyota. (Falling on one’s sword is apparently no longer acceptable in Japan!) We’re still waiting in America for the heads of the Big Three to resign, not to mention Robert Rubin and others involved in the financial debacle wrecking the global economy.

It seems that the importers are no better at predicting the American automobile market than the Big Three. Not all of Toyota’s products have been successes in the United States. Names, such as Tercel, Echo, and Previa, come to mind, but those failures are hidden by millions of Camry’s, Corollas, and Lexi. President Watanabe even apologized a few years ago for quality problems with Toyota. Mercedes similarly had quality issues.

The imports also suffer from global and American overcapacity.

The importers and the Big Three have been moving investment out of the United States into the expanding global market, especially in Brazil and China. All the major auto companies recognize that the American market is not a long term growth market.

And yet, no talk is heard of bailing out the Germans, Japanese or Koreans. They have sufficient capital reserves to weather out all but a great depression and should emerge stronger from this crisis than when they entered.

The problem for us though is that President Bush has simply kicked the $17.4 billion can down the road to the new Obama Administration. By March 31, 2009 President Obama has to decide what to do with Detroit.

The conditions imposed by President Bush are simply precatory. The manufacturers are required to show progress, whatever that means to the new administration.

President Obama can change these conditions, conclude they have been satisfied in principal, or cut off Detroit. His dilemma with the unpopular bailout is to save Detroit without appearing to give into the UAW. Anything short of a radical restructuring will result in a drawn out collapse of Chrysler and GM, and perhaps of Ford, at a substantial cost to taxpayers.

The problem is that nothing proposed in the short term will boost demand for cars in America, whether domestic or imported. Consumers, worried about the downward spiral in the economy, are either unwilling to invest in the substantial cost of a new car, or are unable to get credit. Demand has cratered quicker than the Dow Jones. No prognosticator's crystal ball is predicting a rapid turnaround for Detroit.

Presumably President Obama will be no more willing than President Bush to preside over the demise of Detroit. Then again, Winston Churchill once said “I have not become the King’s First Minister in order to preside over the liquidation of the British Empire.” But he did.