Recession Worries Weigh On Toyota

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Another quarter, another set of big, big numbers from Toyota (TM), the world's most profitable automaker. For the three months through Dec. 31 Toyota posted operating profits of $5.6 billion, a rise of 4.7% compared to the same three months in 2006. Sales increased 9.2% to $62.7 billion. Consolidated vehicle sales, meanwhile, increased 126,000 to 2.281 million vehicles. "We posted our highest-ever quarterly results for the third quarter in both revenue and profit, despite the severe business environment," crowed Takeshi Suzuki, a senior managing director at the company, at a press conference in Tokyo.



Putting the numbers into context, Toyota's quarterly operating earnings are 45% higher than those at Honda (HMC) and Nissan (NSANY), Japan's next two biggest carmakers, combined. That's no mean feat given that Japan's No. 2 and No. 3 automakers both posted healthy results themselves last week [BusinessWeek.com, 2/1/08].



Yet, while Toyota's finances are the envy of carmakers the world over, the auto giant isn't immune to slowing sales in the world's mature auto markets and the strengthening of the Japanese yen, which has risen from more than 120 yen to the dollar a year ago to around 107 yen today. One ominous sign: Toyota bested analyst forecasts for the quarter but didn't adjust its full-year forecast accordingly. Instead the company kept its full-year forecast of operating earnings of $21.5 billion from sales of $238.5 billion, increases of 2.7% and 6.5%, respectively, for the financial year ending in March. Although that could just be a symptom of Toyota management's trademark conservatism, given the threat of recession in the U.S., it also could imply that the company expects operating and net earnings to fall during the current quarter.



Sluggish Growth in the U.S.

Certainly there are already troubling signs in the latest quarterly numbers. Despite its record figures Toyota's growth was sluggish at best in the U.S., Japan, and Europe. In North America quarterly sales slipped 8,000 units to 756,000, despite strong sales of gas-sipping Prius hybrids and Tundra full-size pickups. In the case of the Tundras, though, Suzuki admitted that Toyota has resorted to increasing spending on customer incentives to move the trucks. While that's bad for profits, it's necessary in the current economic environment. "For Tundra and others, we had to use incentives to promote sales," he said.



On a more positive note, Suzuki pointed out that 2007 was the 12th consecutive record year for U.S. sales in an otherwise shrinking market. He also played down the impact of subprime borrowers on Toyota's financing arm, noting that its bad loan ratio, while rising, was just 0.7%, and that in the longer term the U.S. market remains a growth opportunity. "We aim to maintain growth of our North American business as a profit base," he said.



In Japan the market continued its downward slide last year, reaching a two-decade low. Toyota's sales for the quarter were unchanged from a year earlier at 541,000 vehicles, despite Toyota and Lexus accounting for a startling 47.7% of the passenger car market, a record high.



In Europe, October-to-December sales only grew by 2,000 -- to 308,000 vehicles -- as solid demand in Russia and Eastern Europe was offset by sluggish business in Germany and other markets.



Boost from Emerging Markets

Thankfully for Toyota, efforts to increase sales in the world's fast-growing markets are minimizing the pain of wobbling sales in established markets. In China, for instance, it sold around 500,000 vehicles in 2007, a rise of 62% over 2006, and is targeting 700,000 this year [BusinessWeek.com, 1/18/08].



What's more, many of those sales will be highly profitable Camrys -- built at its Guangzhou plant and marketed as a luxury model in China [BusinessWeek.com, 1/24/08] -- and high-margin Lexus imports. That also partly explains why Toyota's $4.3 billion net earnings, which include profits from its Chinese joint ventures, are increasing faster than its operating earnings, which do not.



For the quarter, sales in Asia [not including the China joint ventures] increased by 37,000 -- to 241,000 vehicles -- as demand in Thailand and Indonesia rose sharply. And in South and Central America, Africa, and Oceania, sales increased 28%, to 435,000 vehicles.



Nevertheless, the challenge for Toyota will be maintaining its industry-beating profitability as its growth becomes more diversified. That, say analysts, will become more difficult as competition rises in markets like China and Russia, whether from established auto giants or Indian or Chinese newcomers. "So far, Toyota's performance is so impressive," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "But [longer term], the emerging markets may not necessarily yield the great profits it enjoyed in the U.S. before." Still, if recent history is any guide, few would bet against Toyota pulling it off.