Why does TOYOTA Motor Corporation have no debt?

In this issue, we look at some of TOYOTA's history.

「機屋に貸せても、鍛冶屋には貸せない」

The above Japanese phrase is an insulting line that TOYOTA Motor Corporation was told by the Osaka Bank(now merged with Sumitomo Mitsui Financial Group, Inc. ). The meaning of the line will be discussed later, but this incident may have been the catalyst for TOYOTA Motor Corporation's debt-free management. (Currently, the company is debt-free except for the financial sector.)

Let me tell you a famous story among car enthusiasts, which you can find in TOYOTA GAZOO RACING (The official site of TOYOTA Group).

TOYOTA in a difficult situation

It may be hard to imagine from today's TOYOTA, but after World War II, there were times when TOYOTA was cash-strapped and needed to take out large loans. As a defeated nation, Japan was running out of funds for reconstruction, so the government printed large amounts of money and distributed it throughout the country. However, this led to malignant inflation, and monetary policy was tightened. 1949, the "Dodge Line" was implemented, bringing about the "Dodge Line Recession."

The postwar reconstruction economy caused malignant inflation, and the government was tightening monetary policy. The price of automobiles skyrocketed, leading to the introduction of controlled pricing, known as "marukoh," and the inability to raise the price of automobiles despite the rising cost of materials and labor led to a deterioration in cash flow.

https://gazoo.com/feature/gazoo-museum/car-history/14/03/10/ (English translation by webmaster)

In 1949, the so-called Dodge Line was implemented. Minister Joseph Dodge came to Japan to promote the nine principles of economic stability outlined by General MacArthur the previous year.

https://gazoo.com/feature/gazoo-museum/car-history/14/03/10/ (English translation by webmaster)

Inflation was contained, but a "Dodge Line Recession" raged in its place.
(omitted)
In December 1949, TOYOTA found itself 200 million yen short of funds.

https://gazoo.com/feature/gazoo-museum/car-history/14/03/10/ (English translation by webmaster)
Translator's note: 200 million yen (about $1.42 million, which would be about $60 million in today's value.　(Calculated by comparing the starting salary of a salaried worker in 1949 with the starting salary today.)

「機屋に貸せても、鍛冶屋には貸せない」

「機屋に貸せても、鍛冶屋には貸せない」

The above is Japanese, which means, "We can finance a company that makes looms, but we cannot finance a blacksmith."

"機屋(Hata-ya)" is a derogatory term for the textile industry, which was the center of the Tokai economy at the time, and refers to Toyota Industries Corporation, the origin of TOYOTA Motor Corporation. Toyota Industries Corporation is written in Japanese as "豊田自動織機," but the word "織機" refers to a loom, which remains in the company name. And "鍛冶屋" means a blacksmith and refers to TOYOTA Motor Corporation. This line, uttered by the Osaka Bank, is famous among Japanese car enthusiasts.

With the exception of Osaka Bank, a syndicate of 24 banks that had done business with TOYOTA, including metropolitan and regional banks, was formed, and bankruptcy was averted just in time.

https://gazoo.com/feature/gazoo-museum/car-history/14/03/10/ (English translation by webmaster)

When the Korean War broke out, orders for trucks from the U.S. military poured in. Business performance recovered V-shaped, and in March 1951, the company achieved a net profit of approximately 250 million yen (about US$1.75 million).

https://gazoo.com/feature/gazoo-museum/car-history/14/03/10/ (English translation by webmaster)

Although the company escaped bankruptcy, the line from the Osaka Bank is still burned into the Toyoda family's mind.

When push comes to shove, banks are unreliable

Following TOYOTA's refusal to extend a loan, rumors spread in the Tokai business community, especially in Nagoya, that the Osaka Bank could not be relied upon in an emergency. TOYOTA was adamant about not doing business with Osaka Bank (including Sumitomo Bank after the business merger).

* Since the merger with Sakura Bank, the successor to Mitsui Bank, Ltd., and the establishment of Sumitomo Mitsui Banking Corporation, business with TOYOTA has resumed.

What did TOYOTA learn?

What has TOYOTA learned from these histories? TOYOTA currently has no debt other than interest-bearing debt in the financial sector related to loans for car sales. In other words, the company is debt-free in automobile manufacturing and other sectors. The company also has 31 trillion yen (approx. US$220 billion) worth of liquid assets that can be converted into cash immediately and continue operations without problems, even in an unprecedented event. They also make daily efforts to reduce waste and avoid paying more than necessary costs. They then use the profits from these efforts to make the next investment. So, we can continue to invest in the next growth stage with only the profits earned by our company without having to get a loan from the bank.

Finally, a summary

In this issue, we have seen a part of TOYOTA's history.

TOYOTA Motor Corporation has not forgotten the experience of the business crisis more than 70 years ago and has maintained a solid management style. However, this may be why it has survived even in difficult situations like "the financial crisis of 2007–2008" and "COVID-19".

This management philosophy will continue to be followed in the future.

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