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Toyota cash mountain draws calls for plants

by Ma Jie and Masatsugu Horie

Bloomberg

Toyota Motor Corp. President Akio Toyoda, whose company has accumulated a cash pile of almost ¥4 trillion, is facing calls to put that money to better use.

The world’s largest carmaker is seeing profits surge as the yen weakens and demand rises in the U.S. and China.

Toyoda’s reluctance to spend has prompted the likes of Takaki Nakanishi, Institutional Investor magazine’s top-ranked Japanese auto analyst, to say Toyota should return more money to shareholders or increase capital investments.

Options include higher dividend payments, stock buybacks or building factories in markets such as North America and China, where capacity is strained.

“Capital efficiency is not improving as fast as the fundamental improvement of Toyota,” said Nakanishi, founder of Nakanishi Research Institute in Tokyo. “So I am not happy, but that’s how Toyota is.”

Toyota has said that it aims to pay 30 percent of net income as dividends — a lower payout ratio than at Honda Motor Co. last fiscal year — and that the company won’t build any new factories until 2015 as it focuses on improving efficiency at existing plants.

“Our fundamental approach to production is to build cars where the demand is,” said Toyota spokeswoman Shino Yamada. “Based on this idea, we are working to maximize the utilization and productivity of existing plants and facilities.”

Instead, Toyota plans to increase its “net cash” — available funds minus some liabilities — to ¥6 trillion, from ¥4.6 trillion at the end of last fiscal year.

Behind Toyota’s hesitation to spend are memories of tougher times, such as when it reported a record loss in the year that ended in March 2009, followed by millions of vehicle recalls related to unintended acceleration — adversities that Toyoda has partly blamed on overexpansion.

The company, which hasn’t announced any new car plants since January 2012, has the capacity to make about 9.5 million units annually, according to Issei Takahashi, an analyst at Credit Suisse Group in Tokyo. Still, production can exceed capacity through added shifts or working hours. Takahashi estimates capacity is tightest in North America, Toyota’s biggest market. Its plants are so stretched that Toyota produces some of its Camry sedans at a Fuji Heavy Industries factory.

By comparison, Volkswagen announced at last month’s Detroit auto show that it will spend more than $7 billion during the next five years in North America. The German firm seeks to boost sales of its namesake and Audi brands to 1 million vehicles by 2018, the year it has set as a goal to become the top-selling automaker in the world.

In China, Toyota forecasts that its sales will rise to more than 1.1 million vehicles in 2014, though the company has only disclosed plans to build up annual capacity in the country to 990,000 units in 2015. Toyota saw record sales in the world’s largest auto market last year as it recovered from the consumer backlash triggered in 2012 by the Senkaku dispute.

“They have to make a decision very quickly,” Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, said in reference to Toyota’s capacity in China. “If they don’t do it, they’ll lose market share. They can’t lose more market share.”

One risk of doing so is that like other Japanese carmakers, Toyota is vulnerable to geopolitical tensions, as illustrated by Prime Minister Shinzo Abe’s recent visit to Yasukuni Shrine. In 2012, Chinese consumers shunned Japanese products because of the dispute over the Senkaku Islands, sending Toyota sales down by 4.9 percent, while companies from General Motors Co. to Hyundai Motor Co. increased their deliveries.

“They can’t just walk away from China,” said Yoshihiro Okumura, general manager at Chiba-Gin Asset Management Co. in Tokyo. “GM, VW are not hampered by the political headwinds and increased capacity a lot. Toyota will have to be aggressive too.”

VW, which has said it plans to invest $19 billion in China through 2016, is building a new plant in the far western Xinjiang region along the old Silk Road. GM expects to invest at least $11 billion in China from 2013 to 2016, adding four assembly plants and raising capacity to 5 million vehicles.

In the luxury segment, Toyota’s Lexus is the only main brand that doesn’t make cars in China. Even smaller marques, including Cadillac, Volvo Cars, Infiniti and Acura are going to be manufactured in China.

For Satoshi Yuzaki, general manager of Takagi Securities Co., investments into future growth are often better than returning cash to shareholders.

“Is it better to return profits to investors, or keep an appropriate level of cash to invest for the future?” Yuzaki said. “I personally prefer them to invest wisely for projects that can guarantee their future growth.”

Toyota returned 20 percent of profit last fiscal year as dividend payments, compared with 28 percent at Nissan Motor Co. and 35 percent at Honda.

Still, Toyota’s payouts are rising as profits increase, with the company last paying an interim dividend of ¥65 a share, more than double what it paid a year earlier. The trend should continue as earnings keep rising, Credit Suisse’s Takahashi said. “They should return cash to investors no matter in what form,” he said.