Toyota aims to offset ‘unprecedented’ raw material costs with efficiency

Toyota said raw material costs have surged and the company is working to improve supply chain and operations efficiency so it can avoid "simply raising prices" on its vehicles. Toyota's comments come after both GM and Ford cited challenges with inflation across multiple fronts.

Speaking on Toyota's fourth quarter earnings conference call, Toyota Chief Financial Officer Kenta Kon said the increase in raw material costs was "very unprecedented."

"We have to develop more products that offer higher value to the customers rather than just simply raising the prices," said Kon, who added that Toyota will boost efficiency to counter inflation.

Toyota isn't alone. Companies around the world are battling inflation, supply chain disruptions and sustainability issues. These companies are looking to efficiency improvements and better execution management to balance pricing and operating margins. Toyota expects a ¥1,450 billion hit to profits in fiscal 2023 from raw materials, energy and transportation costs.

In the auto industry, the supply chain issues are compounding. First, automakers wrestled with well-publicized shortages of semiconductors. China has shut down in key manufacturing areas over COVID-19. Now, raw material costs have surged as has labor.

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Toyota's Kon noted that the company has continuously improved and has lowered its break-even volume since 2009. Kon said that push to improve efficiency will continue. "We have a sense of crisis. And we do realize that we have to continue these efforts," said Kon.

Ford and GM made similar comments on their respective earnings conference calls. Ford CFO John Lawler said:

We anticipate other inflationary pressures to continue impacting a broad range of costs. We are aggressively looking at all opportunities to offset this reality, including aggressively ramping up our efforts on additional cost reductions. We're working all the angles.

Our real work that we need to do is to get after these inefficiencies and improve the productivity of our base business.

General Motors CEO Mary Barra said on the automaker's first quarter earnings conference call that supply chain costs were a big issue. "While the first quarter presented challenges for commodity and logistics costs, our teams are working effectively to manage these dynamics," said Barra.

What remains to be seen is how much inflation can automakers offset with efficiency gains. One thing is clear: Continual process improvements and execution management will be key.

Larry Dignan

Editor in Chief (former)

Larry Dignan is the former Editor in Chief of Celonis Media. Before joining Celonis, he was Editor in Chief of ZDNet and has covered the technology industry and transformation trends for more than two decades, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine.