Toyota Makes New Efforts to Cut Costs and Boost Profits

Even the world’s largest car maker is looking for more efficient ways to do business. Toyota Motor Corporation is making a huge push to cut operation and production costs after its second straight year of losses. Japan’s No. 1 automaker is struggling to regain its footing as the yen has strengthened and government incentives in key markets have begun to dry up.

At a recent meeting, Toyota announced to suppliers that it needs their help to reach a new goal: cutting the amount they spend on auto parts by 30% over the next three years.

Toyota has implemented a program called RRCI, which stands for Ryohin (quality), Renka (low price), Costs and Innovation. The RRCI program will run concurrently with two other cost cutting programs already in place. The Value Innovation program was designed to lower costs for new models and has been in practice since 2005. Under the new plan, auto components are divided into dozens of different categories to reduce costs in each one.

The Value Analysis program was also implemented after Toyota was hit by financial troubles last year. Its focus is to reduce production costs of existing car models, mainly by ensuring materials are used more efficiently and production processes are simplified.

Cutting auto parts costs by 30% in three years is the latest effort by Toyota’s President, Akio Toyoda, to regain profitability over the next fiscal year. Their projected net loss for this fiscal year through March, however, is 200 billion yen ($2.19 billion), even though the company has made efforts to cut costs by 440 billion yen this year.

Growing markets such as China and India demand smaller cars, which yield much lower profits for global automakers, and the push for efficiency and cost cutting by automakers has grown in intensity worldwide. SMBC Friend Research Center analyst Shigeru Matsumura agrees, saying, Consumers are leaning toward low-priced smaller cars, so auto makers are under pressure to cut costs.

Toyota is still expecting to see growth in sales of smaller cars in Asia and Latin America, but expects a global sales decline of about 7% for the current fiscal year.

Other issues Toyota is dealing with include the distribution of Volkswagen AG’s vehicles to domestic dealers. Toyota will cease distribution of the vehicles by the end of 2010 while the German automaker reviews its worldwide sales structure. Toyota dealers have been selling the vehicles since 1992 and have accounted for almost half of the Volkswagens sold in Japan since 2008. Volkswagen also has its own sales network in Japan and the brand is currently the No. 1 imported automaker in the country.

A weaker yen has pushed Toyota stock higher, despite the announcements about cost cutting and an end to the Volkswagen partnership. During the second half of this fiscal year, many Japanese automakers were hit hard by the rise of the yen against the dollar, which reduced profits overseas.

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