Toyota's Profit Tumbles 42%, Hit by Rising Costs and Supply Shortages

Toyota Motor Corp's profit fell a worse-than-expected 42% in the first quarter as the Japanese automaker was squeezed between supply constraints and rising costs.

Operating profit for the three months ended June 30 fell to 578.66 billion yen ($4.3 billion) from 997.4 billion yen in the same period a year earlier, Toyota said on Thursday, capping a challenging period. It has repeatedly lowered its monthly production targets due to global chip shortages and COVID-19 restrictions on factories in China. The magnitude of the earnings decline, which analysts surveyed by Refinitiv had forecast a 15% drop, was far beyond expectations and seemed to surprise investors. Shares of Toyota, the world's largest automaker by sales, fell 3%, widening losses. "This is extremely bad," said Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) Securities analyst Koichi Sugimoto. Sugimoto said that while production cuts have already been flagged by the automaker, some higher costs have come to the fore. The automaker said rising material prices cost it 315 billion yen. Despite the poor quarter, the automaker stuck to its full-year operating profit forecast and its plan to produce 9.7 million vehicles this fiscal year. A Toyota spokeswoman said the car company will be able to supply chips that have hampered production and expects staff shortages at some local factories due to COVID-19 outbreaks to be resolved. Production will pick up towards the second half of the fiscal year, the spokesman said. Analyst Sugimoto said supply issues looked likely to improve thanks to the easing of both the global chip shortage and the COVID-19 situation in China. Like other automakers, Toyota is grappling with high costs and worries that global inflation could curb consumer demand. Toyota raised its full-year net profit outlook by 4% to 2.36 trillion yen, helped by weakness in the yen, which means sales in overseas currencies have become more valuable. Still, the support from the weaker yen was not enough to fully offset the impact of rising material costs, said Seiji Sugiura, senior analyst at Tokai Tokyo Research Institute. Toyota expects full-year material costs to rise 17% from its previous forecast to 1.7 trillion yen - much of that due to higher steel and aluminum prices. Toyota's current production woes mark a departure from its initial success in overcoming supply chain problems in the early stages of the pandemic.