Is Toyota In Serious Trouble?
I have tremendous admiration and respect for the culture and management at Toyota. They represent true operational management genius. And, the linchpin of their success is investment in their greatest asset - their associates. In a world of disposable employees, they represent great corporate dignity and honor.
That said, with all of the talk of American auto industry trouble, it is naively assumed by many that foreign auto makers are without trouble. No capital-intensive industry is in sound financial shape when global sales plummet to current levels. As we have discussed often, the cash burn rate is astronomical in this industry when output no longer supports the cash flow requirements to maintain the massive fixed cost apparatus. I really don't think most people truly appreciate the capital required to run these companies. I know Cerberus didn't.
We first highlighted our dislike of Toyota's stock at its very peak. As I type this its stock is down about sixty percent and shows no signs of bottoming. Now, credit rating agencies are warning they may downgrade Toyota's credit rating. As we wrote before, auto sales in Japan are at thirty year lows. Now with Toyota sales crashing in the U.S., uncertainty around the impact of potential American supplier failures, a completely dysfunctional global credit market and the crash in emerging markets, Toyota could be facing the greatest challenges in its history.
While bankruptcy is a remote possibility at this point, economic storms of this magnitude are nearly impossible to plan for. Great management aside, Toyota has a substantial debt load and could easily see its cash burn rate increase well beyond anything ever seen. A protracted global downturn or significant economic crisis has the potential to sew seeds never before imagined.
That said, with all of the talk of American auto industry trouble, it is naively assumed by many that foreign auto makers are without trouble. No capital-intensive industry is in sound financial shape when global sales plummet to current levels. As we have discussed often, the cash burn rate is astronomical in this industry when output no longer supports the cash flow requirements to maintain the massive fixed cost apparatus. I really don't think most people truly appreciate the capital required to run these companies. I know Cerberus didn't.
We first highlighted our dislike of Toyota's stock at its very peak. As I type this its stock is down about sixty percent and shows no signs of bottoming. Now, credit rating agencies are warning they may downgrade Toyota's credit rating. As we wrote before, auto sales in Japan are at thirty year lows. Now with Toyota sales crashing in the U.S., uncertainty around the impact of potential American supplier failures, a completely dysfunctional global credit market and the crash in emerging markets, Toyota could be facing the greatest challenges in its history.
While bankruptcy is a remote possibility at this point, economic storms of this magnitude are nearly impossible to plan for. Great management aside, Toyota has a substantial debt load and could easily see its cash burn rate increase well beyond anything ever seen. A protracted global downturn or significant economic crisis has the potential to sew seeds never before imagined.
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