Toyota top supplier says bottom line hit already factored in

Denso Corp., Toyota Motor Corp.’s top supplier, says production at the automaker should recover swiftly, leaving Denso on track to beat its own profit forecast for the current fiscal year.

Denso will likely take a profit hit of about 20 billion yen ($182 million) to 30 billion yen in September due to Toyota’s production cuts, Chief Financial Officer Yasushi Matsui said. But that loss is more than covered by the 75 billion yen in potential losses Denso had earlier worked into forecasts for the fiscal year ending March, he said.

“There are automakers that can’t up their production after stumbling, but if Toyota says it will recover, it really will," Matsui said in an interview at the company’s headquarters south of Tokyo on Friday. For Denso, which issued a relatively conservative profit outlook for the current fiscal year of 440 billion yen last month, “it’s likely we’ll exceed this," Matsui said.

Toyota on Thursday said supply-chain snarls caused by Covid-related disruptions in Southeast Asia, particularly Vietnam and Malaysia, as well as the ongoing chips shortage would cut output by around 40% next month, a reduction of about 360,000 cars. Some 27 lines in all of its 14 plants in Japan will be impacted, affecting production of models from the RAV4 to Corolla, Prius, Camry and Lexus RX. “Especially in Southeast Asia, the spread of Covid and lockdowns are impacting our local suppliers," Toyota’s Purchasing Group Chief Officer Kazunari Kumakura said.

The Japanese automaker also has a large production base in Thailand, where Covid cases have just blown past 1 million. Thailand this week launched a pilot program to test, vaccinate and isolate factory workers to limit Covid-related disruptions to its export-driven manufacturing industry.

The news took investors by surprise -- shares in Toyota slumped as much as 4.7% on Thursday, the most since March 2020 -- even though Toyota kept its annual operating profit outlook steady earlier this month, maintaining its forecast for 2.5 trillion yen for the fiscal year through March, versus analysts’ average projection for 2.95 trillion yen. Stock in Denso decreased 4.3% on Thursday and tumbled another as much as 9.7% on Friday, its biggest intraday drop since March last year, before erasing some of those losses to close down 8.8%.

Toyota fell again on Friday, although by a smaller amount to close 4.1% lower, and at least one analyst expressed confidence the world’s No. 1 carmaker, renowned for its generally good supply-chain management, can weather the upset. “Toyota seems to be expecting things to get back to normal in October" even though there’s a possibility the disruption won’t end in September, Koji Endo, an analyst at SBI Securities Co., said.

“It’s a great time to buy the stock as prices have fallen," he said. “Generally, output reductions caused by the supply side, not the demand side, won’t impact stock prices in the long run, or if they do, they recover quickly."

The reaction in credit markets was relatively subdued with the spread on Toyota’s $1 billion dollar-denominated notes due 2026 widening to 41 basis points on Friday, the highest since early May. The cost to insure Toyota’s yen debt rose by 1 basis point Thursday, according to CMA data.

Denso, the world’s second-largest parts and systems provider in terms of sales, said while there are continued risks such as the spread of Covid in Southeast Asia, it has a strong stockpile of inventory it deems risky. Looking ahead at the months from October through November, Denso isn’t planning to shut any of its plants due to parts shortages, Matsui said.