Is It Smart to Spend Billions on the Future?

(Bloomberg Opinion) -- Big, futuristic investment bets on the post-coronavirus period still feel too early. Yet Toyota Motor Corp. seems to be confident that the dollars will matter.

That stands out in a world where most rivals can barely think about cash flows for the next six months, let alone investments a year from now. While guiding toward an 80% drop in operating profits for its 2021 fiscal year, Toyota says it plans to drop capital expenditures by around 3% and keep that spending at 1.35 trillion yen ($12.6 billion), while lowering research and development only 1%. As a portion of net revenues, R&D would rise to 4.6% to about 1.35 trillion yen, up from 3.7%, which is the average since 2017.

Toyota is doing what it hasn’t during previous crises that damaged supply chains and businesses around the world. In a speech during this week’s earnings call, President Akio Toyoda recalled the four difficult years after the financial crisis, made worse in 2011 by a devastating earthquake and tsunami in Japan and flooding in Thailand. The company cut costs and investments and grew substantially leaner, but “lost necessary muscle.” Toyoda said that “because we stopped everything to stop the bleeding, including investing in the future, we ended up needing some time to strengthen our company composition.”

In the past couple of years, Toyota has splashed out billions on the future of cars. The investments range from $1 billion in Southeast Asia’s largest ride-hailing service, Grab Holdings Inc., the largest by an automaker, to $500 million in Uber Technologies Inc. It also has set up a joint venture with Softbank Corp. Meanwhile, the Toyota Research Institute and its Advanced Development offshoot have tried to go big into fields like artificial intelligence.

So far, it’s hard to say what the exact returns have been, and it will stay that way while Covid-19 has people locked down and driving less. As long as the pandemic and its economic devastation mean lost jobs and tighter purse strings, will consumers really be ready to spend on electric cars or fancy gadgets? It seems more likely that they’ll push off upgrades for later. No one is in the mood to spend, except, well, Toyota.

Sure, outlays now, in theory, set the company up to get ahead of the industry. But Toyota hasn’t necessarily shown technology prowess in the past, so it’s hard to say whether it will be able to going forward. The automaker could very well catch the future wave just right, or mistime it terribly.Corporate liquidity has become a prized commodity globally. To bolster its already-strong balance sheet, Toyota said it has signed up for a 1.25 trillion yen loan, a prudent move. But how does that square off against the planned spending, which is almost as much as in previous years? Even before the pandemic, pressure to keep up with increased connectivity and autonomy was weighing on carmakers’ balance sheets. Moody’s Investors Service noted after downgrading Toyota in April that accommodating new investments means companies “are required to save costs elsewhere.”

There seem to be two Toyotas, as I have noted previously. One is focused on cost-cutting and operating within the confines of a struggling world market, and the other is trying to spend into the future. The first enables the second. Two years ago, Toyoda said that the company would hone the power of cost reduction “to strengthen earning power and expand our investments in new technology and new fields."

Slimming down, especially now, is difficult. It’s unclear how Toyota classifies all of these investments, and whether they fall under R&D outlays, but costs as a portion of net sales have been edging up on a quarterly basis, despite tight control. Meanwhile, the Covid-19 production line challenges – when to stop, when to open – remain and require spending. With sales and the core business undergoing deep change, it’s hard to justify large expenditures for unknown returns. Investors may have the same problem.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

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