Toyota Motor is stepping up cost reductions to shore up its money chest, as it looks to ramp up investment in new technologies, but cautioned a stronger yen would chip away at its operating profit and higher annual sales.
Toyota's plans to spend a record 1.08 trillion yen, or about $10 billion, on R&D this year comes at a time when carmakers worldwide are sharpening their focus on electrification and automation to stay competitive amid rising demand for vehicles powered by cleaner technologies.
As a buffer against currency moves and to ensure there are funds for R&D, Toyota "will prioritize sticking to its roots - the Toyota production system and cost cuts," President Akio Toyoda said, referring to a strategy to coordinate with suppliers to make cars when needed, minimizing inventories.
A recently introduced production system based on more standardized parts that can be used across different models will also continue to help deliver cost cuts, he added.
Cost reductions are expected to contribute around 130 billion yen to operating profit this year, after adding 165 billion yen to Toyota's earnings last year.
"We've become a leaner, trimmer company ... and in the past year we've developed our remaining fat into muscle, so that we're in a strong position to be more competitive," Toyoda said.
Japan's top carmaker posted a 20 percent jump in operating profit to 2.4 trillion yen for the year to March 2018, outpacing rivals Volkswagen AG <VOWGtp.DE> and Daimler AG <DAIGn.DE> for a fifth straight year to be the world's most profitable automaker.
Despite cost cuts and record-high global sales, Toyota expects operating profit of 2.3 trillion yen for the year to March 2019 — better than analysts' estimates but 4.2 percent lower than a year ago due to a firmer yen rate of around 105 to the dollar, versus 111 yen in the previous year.
A firmer yen eats into profits repatriated from abroad and raises the cost of exported vehicles and parts, making Japanese products less competitive overseas and denting margins.
Toyota's warning comes on the heels of similar projections by other Japanese automakers, such as Honda Motor and Mazda Motor. The only outlier so far is Mitsubishi Motors, which sees a rise in operating profit despite a stronger yen.
Toyota is targeting total group sales of a record 10.5 million vehicles globally in the year to March, versus 10.44 million last year, led by strength in Asia.
It expects sales in Asia to rise 8.2 percent to 1.67 million units, while it sees sales in North America, its biggest market, dropping slightly to 2.8 million units.
In North America, Toyota and its domestic rivals are grappling with intense competition and falling demand for sedans, a mainstay of Japanese automakers in the region, amid an overall slowdown in the world's second-biggest auto market.
North America remains "challenging", senior managing officer Masayoshi Shirayanagi said, adding the company planned to keep vehicle discounts, a major cost to the company, at current levels or lower them this year.
Shares in Toyota reversed early losses to close up 3.8 percent on Wednesday, buoyed partly by a company plan to buy back shares worth up to 300 billion yen.