The bad news is just beginning for Toyota (TM). The eight million vehicles the company has recalled, the shut down production of eight of its most popular cars, and potential brake defects with its hybrid Prius will cause large numbers of liability suits, significant losses in sales, and a substantial drop in revenue and earnings in this fiscal year and next. Toyota’s current year ends March 31.

The effects of the defect problems will almost certainly cost Toyota 500,000 unit sales worldwide over the next twelve months. Toyota sold 7.8 million cars in 2009, down 13% from the 9 million it sold in 2008. The world’s No.1 car company lost 16% of its sales in its largest market, the US, in January. The recalls were announced late enough in the month so that they would have only affected sales for a few days. Now that the Transportation Secretary has suggested and retracted a statement that people should not drive Toyotas, sales could easily drop 20% in February. Toyota sold 1.8 million cars in the US last year. If sales stay down by a fifth for the balance of the year, the car company would lose 360,000 vehicle sales in America in 2010.

Toyota’s second largest market is Japan, where it sold 1.35 million cars last year. Toyota’s product problems in its home market now include a request by the government to look into brake problems on the Prius. The concern about product safety in Japan could certainly cut its sales by 10%, or 135,000 vehicles, as local companies including Nissan and Honda (HMC) fight to pick up sales and Korean, European, and US firms scramble to get more inventory into the market to take advantage of Toyota’s situation.

Toyota sold 700,000 vehicles in China, probably the most competitive vehicle sales market in the world, in 2009. GM and VW are the dominant brands in China and local companies are improving product quality and production levels to push up sales in their own country. Toyota revenue could be badly damaged if the Chinese government elects to force recalls or a suspension of Toyota products.

So, Toyota’s sales losses in its three largest markets could be well into the hundreds of thousands of units this year.

Most large global car companies cut large portions of their work forces in 2008 and 2009. The hardest hit firms like GM cut tens of thousands of workers. Toyota faces a large enough drop in unit sales and revenue that it will be forced to fire a substantial number of its factory and white-collar staff. The firm now employees 320,000 people. Toyota may not come close to the kind of cuts GM had to make over the last two years, but it will almost certainly have to shop 10% to 15% of its staff to keep costs in line with falling revenue.  In its last full fiscal, Toyota has sales of 20,529 million yen and lost 437 yen. Toyota’s revenue for the next twelve months may drop to the 17,000 million yen to 18,000 million yen level. That drop in revenue and the costs of the recalls and accrued liabilities will drive Toyota deep into the red.

Akio Toyoda, the grandson of Toyota’s founder, took the CEO’s job in June 2009 after the board decided it needed new management to help the firm recover its reputation for quality, production efficiency and cost control. The recalls make Toyoda’s short tenure a complete failure. As a decedent of the company’s founder, he will be under relentless pressure to step down as an apology for the company’s failures.

A year or two from now, Toyota will have downsized enough to be the size the Honda and Ford are today.

Douglas A. McIntyre

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