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Global Economics

Toyota Posts Record-Breaking Results

Earnings and sales are up, and full-year profits are forecast to hit $14.9 billion thanks to strong sales in China and Europe

The ongoing struggle this year between Toyota (TM) and General Motors (GM) to be the world's biggest automaker took another turn in the three months through Sept. 30. GM, on top of the world for over 70 years, regained its ascendancy after trailing Toyota during the first half of the year by selling just 10,000 more vehicles than its Japanese rival.

Yet when it comes to profitability, Toyota today once again showed why it's in a league of its own. At a press conference at Tokyo's Royal Park Hotel, the Japanese powerhouse delivered yet another set of record-breaking results.

For the six months ended Sept. 30, Toyota posted operating earnings of $11.2 billion, a record and a rise of 16.3% on a year earlier. Sales increased 13.4%, to $114 billion, which means Toyota's half-year operating margin came in at 9.8%, just a fraction short of its long-term target of 10%. Net earnings rose 21%, to $8.3 billion, and retail sales increased 241,000, to 4.7 million for the period.

Raising Sales Projections

"The consolidated financial summary shows record semiannual results in every line," Takeshi Suzuki, a senior managing director at the company, told reporters. "This is a result of the implementation of a growth strategy across all lines of products and regions."

Toyota also increased its full-year operating and net profit forecasts by $440 million, to $20.2 billion and $14.9 billion, respectively, and raised its unit sales projection for the fiscal year by 40,000 units. This calendar year, Toyota projects retail sales of 9.34 million units. In 2006, Toyota increased sales 8%, to 8.8 million, while GM fell 1%, to 9.09 million vehicles.

Toyota's red-hot performance comes as GM is poised to include a $39 billion noncash charge in its results for the quarter ended Sept. 30. The huge writedown reflects the risk that a slower-than-hoped-for recovery at The General could prevent it from claiming expected future tax credits.

Chinese Luxury Buyers

Toyota has no such problems. Rising earnings are in spite of industry slowdowns in both of its biggest markets: North America and Japan. Fast-growing sales in other parts of Asia—particularly China—and Russia have compensated.

In Asia, unit sales leaped 70,000, to 452,000 units for the six months. Growth in China, where Toyota looks set to easily beat an earlier annual target of 430,000 units for the year, is also boosting earnings. One factor: Wealthy Chinese buyers are happy to pay for high-margin models. For example, Lexus sales are rising quickly despite high import duties, while Chinese buyers of locally made Camry sedans are prepared to pay for profit-making extras. "Asia is emerging as one of the key growth drivers," Suzuki added.

In Europe, new-model sales—including for the remodeled Corolla—for the period helped increase sales to 635,000 from 589,000 a year earlier, while strong demand in Russia for upmarket models aided the bottom line. "Toyota is able to tap growth opportunities no matter where they are," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "Slowing demand [in some markets] is completely offset with sales in Europe and Asia."

U.S. Numbers Down

For all that, Toyota's stock price has disappointed of late, falling 19% this year. And, while clearly resilient, weak auto markets in North America and Japan also remain a concern for management.

A slowdown in the U.S., which is expected to post its worst year for car sales in almost a decade, is undoubtedly a headache for Toyota. After a long period of growth, its sales account for 16% of the U.S. car market, and it makes over half of its profits in North America. But U.S. sales fell for three months in a row through September (albeit recovering in October), and Suzuki admits that incentives for its Tundra full-size pickups are higher than anticipated.

Nevertheless, it's not all gloom and doom. Toyota expects to meet a sales-increase target of 5.5%, to 2.99 million in North America this year, a rise of 48,000 from last year. "Although U.S. demand for new vehicles has been dwindling due to higher crude oil prices and the subprime loan problem's impact on consumer confidence, our sales are more or less in line," noted Suzuki.

Struggling at Home

Then there's Japan, where Toyota controls over 45% of the market. The automaker managed to maintain sales in 2006, despite wider industry sales' reaching a 20-year low. But this year even Toyota is struggling at home. Domestic sales dipped 67,000, to 1.06 million, during the six months ended Sept. 30. One crumb of comfort is that they rose for the first time in 26 months in October—largely because the company has launched a new vehicle every month since May.

But today's results show it's Toyota's global strength, in almost every region, that will ultimately send it past GM.

Rowley is a correspondent in BusinessWeek's Tokyo bureau .

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