Management’s Discussion and Analysis

Income Analysis
The market environment for the fiscal year, which ended 31 March 1999,
was favorable in both the U.S. and European markets. This was in strong
contrast to Japan, our core market, where the economy remained sluggish ina long-term downturn, and to the Southeast Asian market, where economic
recovery has been slow. Such market conditions severely affected our overallbusiness.
Despite such severe market conditions, our company actively pursued thedevelopment and introduction of new products into our markets, in order tomaintain the superiority of each business unit in its market. In the U.S. andEurope, where sales of forklifts and car air-conditioning compressors havebeen steadily growing, we aggressively implemented a promotional campaign
to expand our sales.
As a result, sales on a consolidated basis for the fiscal year ended March
1999, were ¥558,876 million, down 2.4% compared to the previous year,
despite steady growth in overseas sales. This decline was attributable to adecrease in the number of automobiles assembled, due to the sluggish
domestic demand for automobiles as well as to a market deterioration in thesales of textile machines in Southeast Asia, the division’s major market.
Operating income, on a consolidated basis for the fiscal year, was down by
24.2% to ¥24,814 million compared to the previous year. This was in spite ofcost reduction measures totaling as much as ¥6,000 million, taken to offset
various downward pressures on profits, such as a decline in sales and anincrease in depreciation expense (up 23.0% compared to the previous year, to¥34,379 million).
The increase in depreciation expense represented a large-scale investment,
to the amount of ¥122,400 million, made to expand business in each division
over a 2-year period starting from the previous year. This investment covered
expenses for production facilities for our new products such as “Vitz” (“Yaris”)
and “GENEO” (7 series), and those for renovation and expansion of
production lines for engines and car air-conditioning compressors. This haslaid an ample foundation for further growth in each business unit.
Accordingly, depreciation expense is expected to decline, after hitting its
peak, in the coming fiscal year. At the same time, the benefit of capital
expenditures is expected to emerge next year, thus contributing greatly to thegrowth in sales and profits, from the next fiscal year. SG&A expenses declined
8.1% compared to the previous year, ¥38,273 million.
As for non-operating profit and loss, we recorded a loss of ¥1,505 million
from the securities revaluation account, due to a downturn of the domestic
equity market. For revaluation of investment securities, we are adopting thelower-of-cost-or-market method to maintain prudent financial operations. By
disposing of part of our equity holdings we recorded a realized loss, on
securities sold, of ¥1,242 million. It is notable that an investment loss
attributable to start-up costs incurred in our new LCD business, ¥3,861 million,
was recorded under the equity method.
These factors above gave us a consolidated net income of ¥10,391 million,
with ROE at 3.4% and ROA at 1.7%.

Net Sales(¥ Billion)
600
500
400
300
200
100
0
1995

1996

1997

1998

1999

Overseas Sales(¥ Billion)

(%)

180

30

150

25

120

20

90

15

60

10

30

5

0

0
1995

1996

1997

1998

1999

Percentage of net sales (%)

Operating Income(¥ Billion)
35
30
25
20
15
10
5
0
1995

14

T O Y O D A
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1996

1997

1998

1999

Segment Analysis
Automobiles segment
The consolidated sales to outside customers in the Automobiles segment for
fiscal 1999 were ¥364,269 million. The Automobiles segment, the largest one
in terms of ratio in consolidated sales and accounting for 65.2%, consists ofthe following business: Automobile assembly and manufacturing of Engines,
Car air-conditioning compressors, Cast engine parts and Electronic carcomponents.
The Automobile assembly business, the largest in this segment, recorded
199,557 in unit sales, down 24.3% from the previous year, with sales of¥152,433 million. This decline was mainly due to a decrease in the number of
new cars for the domestic market, coupled with the staged production cut of
the “Starlet”. The “Starlet”, one of our major products to date, was terminatedin July 1999. However, our new car “Vitz” (“Yaris”) launched as the successorof the “Starlet” and in the market since January 1999, has enjoyed far moreorders than expected, and recorded unit sales of 34,349 during the first 3
months of production. It is expected that the “Vitz” will continue to enjoy
popularity, as well as further growth, in orders.
The Engines business, also one of the driving forces of this segment, saw
unit sales increase by 12.9% from the previous year to 383,635, with sales
amounting to ¥95,474 million. This resulted in a higher ratio, 17.1%, in
proportion to total consolidated sales. This increase was due to an
overwhelming increase of 90.1% compared with the previous year level in the
production of gasoline engines to 175,680 for fiscal 1999, offsetting a 15.9%
drop in the production of diesel engines to 207,955. The most important
contributing factor was the increased production of S-type gasoline engines,
the production of which started in January 1998. The production reached95,471 units for fiscal 1999, a dramatic increase from just 6,435 units for theprevious year. In June 1999, we launched the new product, direct injection
type diesel engines, at first in the European market, aiming to boost sales, andto initiate more efficient production of multiple types of gasoline engines of
medium volume, in our Flexible Production Line.
On the other hand, in the Car air-conditioning compressor business, both
unit sales and dollar sales reached, once again, record highs, standing at 9,785
thousand units, up 8.6% from the previous year level, with sales totaling¥107,223 million. This raises the ratio in total consolidated sales to 19.2%. We
estimate that unit sales account for approximately 28% of the global market,
the largest share in the world.
The most notable trend in car air-conditioning compressor demand is thecontinued expansion of the European market, where unit sales grew sharply
by 34.5% to 2,314 thousand units.
Although currently all car air-conditioning compressors for the European
market are exported from Japan, we have recently started construction of a
production plant in Germany, in accordance with the growth in demand.
Once completed, and following the start-of-production in April 2000, our “3point network” for production of compressors will be in place, withproduction bases in Japan, U.S.A. and Germany. Our excellent technologies
are well recognized, especially by German luxury car manufacturers such as
Mercedes-Benz, BMW and Audi. With this advantage as leverage, we plan tofurther promote sales throughout the European market by focusing on the
production of a series of variable displacement compressors, the developmentof smaller-sized compressors, and on aggressive entries into the passenger car
market.

TextileMachinery
3.4%

L&F
27.1%

Others
4.3%

Sales byBusiness
Segment

Automobiles
65.2%

Others2.7%

North America
14.0%

Sales byGeographical
Segment
Japan
83.3%

Automobile Sales(thousand units)
250

200

150

100

50

0
1995

1996

1997

1998

1999

Vitz
StarletSprinter CaribT O Y O D A
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In North America, we have expanded our sales to Japanese local production
factories such as TOYOTA and Honda, as well as Chrysler. In addition, we
have started the shipment of our compressors to General Motors and,accordingly, we plan to further increase our production during fiscal 2000.
In summary, the Automobiles segment, as a whole, had the operating
income of ¥17,397 million, down 7.3% from fiscal 1998. This decline was due
primarily a 23.5% increase in depreciation, attributable to a high level ofcapital investment, amounting to ¥26,518 million, aimed at increasing
production, in line with our future business expansion plan, as well as the
manufacturing of new products. We plan to recover these capital investment
costs as quickly as possible.

Car Air-Conditioning
Compressor Sales(million units)

(%)

10

30

8

25

6

20

4

2

Logistics & Forklifts segment
The second largest segment in terms of dollar sales is the Logistics &Forklifts segment.
Consolidated sales to outside customers stood at ¥151,370 million, down by
5.5% from the previous year level. The most important factor was theprolonged economic sluggishness in Japan, as was the case with theAutomobiles segment. Unit sales of industrial vehicles in Japan were 26,179,
down by 23.4% from the previous year. Global unit sales were 67,444, being
negatively affected by the still stagnant demand in Asian countries as well asin Japan. On the other hand, however, unit sales in both the North Americanand European markets demonstrated remarkable growth, with 22,220 units
sold in North America and 11,239 in Europe, up 36.0% and 28.3%
respectively, from the previous year. These were both new highs in thehistory of the Company.
During fiscal 1999 we launched the “GENEO”, the innovative new forklifts,
in September 1998 in the domestic market. The “GENEO” is the newgeneration engine-powered forklift with a load capacity from 1.0 to 5.0 tons,
developed with a computer operated, safety control system called “SAS”System of Active Safety - the first such safety system in the world. Thanks tothis launching, we were able to hold the No.1 share (38%) in the domestic
market, despite the weakened demand in the market. We are now aiming tosecure a share of more than 40% in the domestic market by launching other
innovative, battery-powered forklifts. In addition, we plan to start sales of the“GENEO” in both the North American and European markets during fiscal
2000. Our aim is to raise the global market share of TOYOTA forklifts fromthe current 14% to 25% by the end of 2005, by developing larger accountcustomers and launching battery-operated forklifts for indoor use in the North
American market, and through promotion of sales of battery-powered forklifts
for indoor use in the European market.
Sales in the Logistics business increased by 22.9% from the previous year to¥8,374 million.
For the L & F segment as a whole, operating income dropped by 33.6% to¥8,452 million. This decline was mainly attributable to a 22.0% increase to¥5,548 million from the previous year in depreciation, mostly associated withthe large capital investment in the production facilities for the “GENEO” andother new products, in addition to a decrease in sales. We are expecting oursales and profits to increase sharply during the next fiscal year and even wellbeyond, in view of an anticipated recovery on both the Japanese and Asianmarkets combined with the efficacy of the introduction of our new products.
Textile machinery segment
The Textile machinery segment has been included in “Other” in theprevious years. However, this segment will have its own, independent reportfrom fiscal 1999, since its importance has been growing. This segment’s
consolidated sales were ¥18,947 million with an operating loss of ¥3,455
million. This result is, we believe, attributable to the continued sluggishness of16

T O Y O D A
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0
1995

1996

1997

1998

1999

Estimated global market share (%)

Industrial Vehicle Sales(thousand units)
70
60
50
40
30
20
10
0
1995

1996

1997

Japan
EuropeNorth America
Other

1998

1999

the Southeast Asian countries, which is one of our major markets. Although
this segment ended up with unfavorable results, we expect to restore it to ourprevious solid performance, given that our new product: “water jet loom”
acquired from Nissan Texsys Co. Ltd. under the business transfer agreement
entered in April 1999, has been added, creating thus almost full line-up of
products in fiscal 2000.
With about ¥4,000 million invested in the water jet loom businessacquisition cost, we hope our global market share will fairly expand.
For fiscal 2000, we plan to enhance profitability by improving productivity,
reducing costs, ensuring more sharing of parts and components andintegrating suppliers.
Financial Condition
The Company’s financial condition for the fiscal year 1999, ended March 31,
1999 is as follows.
In Assets, current assets decreased by 12.7% from the previous year to¥155,765 million. This was mainly due to a high-level capital investment of¥60,468 million, as was seen during fiscal 1998. This capital investment was
funded by cash (and cash equivalents, such as deposits) and newly issued
bonds, and mainly used to obtain production facilities for new products suchas the “Vitz” and the “GENEO”, and to expand production capacities.
According to our plan, capital investment reached its peak in fiscal 1998
and 1999, follow by a gradual decline from fiscal 2000. On the other hand,inventories increased ¥5,350 million, largely resulting from inclusion of 17
newly consolidated subsidiaries, including MACI (Michigan AutomotiveCompressor, Inc.) and Toyoda -Sulzer Mfg., Ltd.
As a result of this capital investment, property, plant and equipment
increased by 17.7% to ¥258,896 million. The difference between this balance
and the capital investment was accounted for as an actual depreciation of¥34,380 million.
In Liabilities, current liabilities decreased by 16.7% to ¥127,131 million, due
primarily to a decrease of ¥17,586 million in the “payables-other” (including
for the purchase of manufacturing tools, equipment and buildings). The longterm liabilities jumped 31.1% to ¥169,993 million, as a result of the Company’s
subsequent issue of the 4th and the 5th bonds without collateral, totaling¥40,000 million in proceeds, to help finance the huge amount of capital
investment. Minority interests also increased by ¥12,807 million for fiscal 1999,
as a result of an increase in the number of consolidated subsidiaries.
Shareholders’ equity decreased by 1.0% to ¥301,158 million as a result of
buy-back activities.
The total assets increased by 4.1% from the previous year end level to¥617,071 million, with the ratio of shareholders’ equity to total assets dropping
to 48.8% from 51.3% as of the end of the previous year.
Appraisal Profits in Holding Securities (Non-Consolidated)

Total Assets(¥ Billion)
600
500
400
300
200
100
0
1995

1997

1998

1999

Total Shareholders' Equity(¥ Billion)

(%)

300

60

250

50

200

40

150

30

100

20

50

10

0

0
1995

(¥ Billion)

1997

1996

1998

1996

1997

1998

1999

Equity Ratio (%)

1999

Book
Value

MarketValue

Appraisal
Profits

Book
Value

MarketValue

Appraisal
Profits

Book
Value

MarketValue

Appraisal
Profits

141.7

893.4

751.7

143.0

955.2

812.2

155.1

918.7

763.6

T O Y O D A
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Cash Flow Analysis
Management aims to maintain a sufficient amount of liquidity in order tomeet the needs of ad hoc business development, as well as to have funds
readily available for adaptation to the ever changing business environment.
During fiscal 1999, the Company’s cash and cash equivalent decreased by¥27,565 million, as compared to the beginning of the year, to ¥58,201 million.
On the whole, cash needed for manufacturing facilities for new products suchas the “Vitz” and the “GENEO” as well as production capacity enhancement ofcar air-conditioning compressors and engines, was partly financed by cashfrom operating activities as well as from financing activities, with the rest
coming from cash and cash equivalents.
Cash flow from operating activities resulted in an inflow of ¥26,427 million,
representing a decrease of ¥53,881 million from ¥80,308 million the previous
year. Though operating income before depreciation declined slightly, thisdecrease in cash flow from operating activities was mainly attributable to anincrease in payments resulting from the purchase of equipment during theprevious year, as well as a considerable decline in the amount of payables.
Cash from investing activities resulted in an outflow to the amount of¥82,266 million, mainly caused by payments amounting to ¥60,468 million, forthe new production facilities as indicated above.
Finally, cash flow from financing activities resulted in an inflow of ¥24,733
million, mainly from the issuance of straight bonds equivalent to ¥40,300
million.

18

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Capital Investment by Purpose(Non-Consolidated)(¥ Billion)
60
50
40
30
20
10
0
1995

1996

1997

1998

1999

New Products
Rationalization
R&D
PlantsCapital Investment by Segment andDepreciation(¥ Billion)
60

Computer Year 2000 Problem

50

We view the Year 2000 Problem as an important managerial matter, interms of maintenance of continuity in business and of relationships withcustomers and counterparts in various transactions. Currently, preparatory
measures are under way throughout the Company, including those for ourcompany-wide information systems, facilities, and products. Facing thisproblem, we first began to address this problem in 1996 with studies anddeliberations focussing on the Information Systems Department. In order todeal with the problem from a company-wide perspective, we established acommittee called “Task-Force Committee for Year 2000 Problem” in January
1999. The Committee plans the schedule of countermeasures ensures the
progress of the schedule as measures are executed, and regularly makes
reports to the Company’s Board of Directors. The committee works to monitor
the progress of overall countermeasures that include not only our subsidiaries
and affiliates but also our counterparts such as customers and suppliers. At
this point in time, according to the countermeasure schedule for our in-house
information systems, 90% of program modifications and testing was completed
by the end of March 1999 and the rest will be completed by October 1999.
We also plan a series of thorough tests with our major counterparts, to makea more detailed assessment of our status. For facilities and products, we arecontinuously studying and taking appropriate countermeasures based on thestudies in accordance with the schedule. For the in-house information
systems, it is impossible to clearly identify the exact amount spent so far onthese countermeasures since we have been making necessary modifications
during any system redevelopment or improvements. However, we estimate
the amount we have paid to outside contractors to be about ¥300 million, of
which ¥200 million was debited by the end of fiscal 1999. There are additionalcountermeasure expenses that have been incurred in other areas, but we donot believe that even with these expenses, the total cost for countermeasuresagainst the Year 2000 Problem will have significant impact on our business
operations or financial performance. We are working hard to make thecountermeasures as thorough as possible. However, we are also working onplanning for alternative countermeasures to deal with any emergencies that

40
30
20
10
0
1995

1996

1997

1998

1999

Automobiles
L&F
Other
Depreciation
Segment information not available
for 1995.

may occur, and on a structural organization to cope with the possible
problems.
Environment Management
We consider protection of the Earth, our environment, one of the important
areas of corporate activities, and are tackling it in an organized way. We
obtained the ISO 14001 certificate – an international standard for environment
management – in each of the major factories of the Company by the end of
fiscal 1999, and plan to obtain it in all the factories by the end of fiscal 2000.
We plan to obtain this certificate in each of our subsidiaries and affiliates
during the next few years. We are actively working on the reduction of CO 2,
for the purpose of the waste reduction and the prevention of global warming.
Towards the reduction of CO 2, our efforts consist of installation of cogeneration systems in each factory and company-wide activities for savingenergy. These have already produced visible effects. We are also actively
working to develop new products designed with environmental
considerations, such as direct injection type engines and car air conditioning
compressors with less burdens on engines. In this way we will push forward
environment considerations, in which the environment friendly concept issought not only in the process from development to production of new
products, but also in the whole life cycle of products. In addition, we will
enhance our understanding of the results of these activities through adoptionof a new accounting method for handling environment-related problems.
Pension Problem
Problem of Pension handling of the reserve account for retirement andseverance benefits is explained in the Financial Section. A tentative
computation of the company benefit obligations based on the IAS accounting
for Retirement Benefit Costs reveals a shortage of about ¥20,000 million in thereserve as of the end of December 1998. This shortage consists of ¥10,000
million, which is the unfunded portion of the prior service costs in theretirement pension plan and the amount attributed to the difference (the loss
from interest margin) between the return on investment of the plan (5.5%)
and the actual yield, and a shortage of ¥10,000 million in the reserve for theretirement severance plan. We will work out the best solution to theseshortages making sure there will not be a significant impact on our financial
performance or cash flow by taking into consideration the following
measures: investment in marketable securities owned by the Company(realization of the gain, sales, and contribution to trusts, etc.),
amendment/modification of the retirement pension plan, such as adoption ofa defined contribution plan (Japanese version of 401(k)), and investment
returns by reviewing the investing practices of the pension asset (selection of
investment managers, portfolio management, etc.).

T O Y O D A
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