Toyota Motors Affected By Force Majeure

Toyota stock, explosion, Aisin Advics

The automaker giant has to suspend its production due to an explosion in the factory of a supplier

Toyota Motors announced last Tuesday about the suspension of production at few factories in Japan and indicated that several more factories would face the suspension of production the next day as well. The decision followed the explosion at a factory which was under the ownership of one of the automaker’s suppliers which halted the components’ supply for the Japanese giant.

On Monday, an explosion was reported at Aisin Advics’ –an auto industry supplier –factory. Apart from stopping the production of brake parts for the automaker giant, the explosion critically injured four people.

Following the incident, the automaker giant announced that it had abandoned shifts on few lines at its assembly plant in Takaoka, in addition to some of its support factories. Also, on Wednesday, production at Japanese automaker giant’s Motomachi assembly plant was also cancelled. It is still unknown which products will be affected by the sudden stoppage of the components. In the Takaoka factory, automaker’s RAV4 SUV and compact Corolla are built. The factory also supports the production of new-for-2016 among other vehicles. The factory at Motomachi produces prestigious and popular vehicles such as Japanese market Crown sedan, hydrogen fuel cell Mirai, and the Lexus GS sedan. Also, a specified limit of the suspension has not been decided by the company however the automaker titan’s spokesperson had reported to Reuters that the factory will be back in operation within few days.

For the third time in the current year the top automaker had faced the stoppage in its production due to force majeure. Back in January, an explosion in Aichi Steel, the company’s plant has to suffer from the shortage of steel. Consequently, the assembling plants of Toyota –where finished vehicles are built –have had shortage of parts. Later in February, the automaker’s entire assembly plants in Japan were shot down for six days to buy the time for parts-making plants to catch up. Financially, Toyota has to comprise over the production of 81,000 units. The company filled in the gap later by having extra shifts.

A short time later, in April, the massive earthquake sent almost all of the company’s factories in Japan to the idle state as the catastrophe damaged Aisin Seiki factory which created a parts stoppage. Although the factories were reopened by the end of April however it dropped the month’s production by 16.6% in comparison with same month last year.

What’s concerning for the investors however is not the production delay of the company but the excessive cost it has to bear. There is no doubt in the automaker’s capability of making up the production shortage by conducting overtime shifts however, simultaneously, Toyota’s costs of overtime payment and extra costs of logistic charges and the like will slightly take away some chunk out of company’s margins.

The company’s margins are already under pressure as the Japanese yen couldn’t have decent gain in value against the strong US dollar. Just a year ago, a US dollar earned in the US was worth 125 yen however as of now a dollar is equivalent to 110 yen. For Toyota and the like companies whose foreign income is disclosed in the home currency, strong dollar will not have favorable impact. For the current fiscal year, the company has been prepared to see a blow on its results. Likewise, such production disruption will add more pain to the company’s current state.

At such times, Toyota should come up with competitive strategies to prevent the bottom line from having adverse effects.

As of now, at the market which closed on Wednesday, Toyota Motors Corp.’s stock stood at a price of $103.35.

 

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