Nov. 7 (Bloomberg) -- Toyota Motor Corp., rocked by a sales slump that led it to project the biggest annual earnings drop in at least 18 years, may win market share with its ability to fund car loans as cash-strapped U.S. competitors seek government aid.

Asia's largest carmaker, leading General Motors Corp. in global auto sales this year, yesterday said net income in the year ending March 31 may drop to 550 billion yen ($5.6 billion), down from an earlier target of 1.25 trillion yen.

Toyota's shares dropped 9 percent today after it reported an operating loss of 34.9 billion yen in North America for the second quarter. The carmaker, with its AAA credit rating, has turned to no-interest loans to spur sales, a measure GM, Ford Motor Co. and Chrysler LLC can no longer afford.

``In the U.S. you're looking at a market that's shrinking by a third,'' said Tim Gilbert, who helps manage about $287 billion in assets at Principal Global Investors in Des Moines, Iowa, including Toyota and Honda Motor Co. debt. ``Toyota is running a zero-percent loan campaign, because they, and Honda, are the only companies that can do it right now.''

GM, Ford and Chrysler chief executives met with Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi yesterday seeking aid to help survive the worst auto market in 25 years.

Government Aid

The U.S. automakers are seeking $50 billion, consisting of $25 billion for health-care spending and $25 billion for general liquidity that could be delivered in different ways, including short-term borrowing from the Federal Reserve, according to a person familiar with the matter.

U.S. market share for Toyota will likely continue to rise, said Stephen Usher, a San Diego-based equity analyst for Japaninvest Plc, who rates Toyota shares ``neutral''

``That's going to be cold comfort to Toyota,'' said Usher. ``It's not going to be a V-shaped recovery where sales plunge and rebound sharply. We're going to go into a hole and will stay there for some time.''

Toyota fell to 3,460 yen as of the close of trading in Tokyo. Toyota's American depositary receipts fell the most in 18 years yesterday.

Toyota Shock

``It's a Toyota shock,'' said Makoto Kikuchi, who manages $800 million as chief executive officer at Myojo Asset Management Japan Co. in Tokyo. ``There is a possibility that Japanese automakers will trim their forecasts again because their sales may not meet their expectations.''

The yen's 15 percent rise against the dollar and 33 percent gain against the euro this year have also squeezed profits at Toyota and other Japanese automakers.

Toyota based its forecasts on 103 yen to the dollar and 146 yen to the euro, compared with its previous estimate of 105 yen and 161 yen, respectively. Every 1 yen gain against the dollar and euro trims Toyota's annual operating profit by 40 billion yen and 6 billion yen.

``This is the worst I have seen,'' said Koji Endo, an auto analyst at Credit Suisse Securities (Japan) Ltd. in Tokyo. ``I can't rule out the possibility that Toyota will report an operating loss in the second half,'' if the yen remains at current levels against the dollar and euro.

Cutting Costs

Moody's Investors Service Inc. rates Toyota's long-term debt Aaa and Standard & Poor's puts it at AAA, the top ratings issued by the companies. Toyota is the sole automaker with the ratings.

The company set up an emergency committee, headed by President Katsuaki Watanabe, to focus on cutting costs and review the timing and scale of all new projects, Executive Vice President Mitsuo Kinoshita said yesterday. Still, ``we shouldn't reduce research and development spending just to boost near-term profits,'' he said.

Toyota, the world's largest seller of hybrid-electric cars, will bring out a new version of its Prius hatchback next year to win more consumers seeking fuel-efficient cars.

While U.S. sales for all Asia-based companies fell 27 percent in October, combined market share for Japanese and South Korean brands rose 3.3 percentage points to 44.4 percent, according to Autodata Corp.

``It is likely there will be fewer big competitors for Toyota after this crisis,'' said Chua Soon Hock, managing director of Asia Genesis Asset Management Pte, a Singapore-based hedge fund with $745 million under management. ``Toyota will emerge stronger and more profitable.''

To contact the reporter on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

Last Updated: November 7, 2008 01:22 EST