Toyota Leaving Hollywood Roots to Boost American Profits

A closer look at Toyota Motor Corp. (7203)’s record profit shows why the world’s largest automaker is leaving behind its Hollywood beginnings.

While Toyota reported yesterday it earned more money in last quarter than any automaker on the planet, profit from North America trailed behind the region’s industry leader, Ford Motor Co. (F) Within Toyota itself, Japanese operations contributed more than double the income North America did.

President Akio Toyoda, whose grandfather founded the company that opened its first U.S. office 57 years ago in a defunct Hollywood dealership, is starting to address that. Toyota this month opens an office in Texas that marks the beginning of a shift of almost all of its non-manufacturing operations -- which are mostly in high-cost California now -- to one of the cheapest states.

“It’s starting over,” said Jim Press, a former Toyota board member who now consults for the Renault-Nissan alliance. The Japanese company is “planting the seeds of Toyota City in a different country. It’s a natural progression from the standpoint of being cost-competitive and efficient,” he said.

With Japan’s car market in structural decline, getting more earnings out of North America becomes more crucial. The value of its assets in the region, which the company updates on an annual basis, climbed to 13.72 trillion yen in the fiscal year ending in March, passing Japan’s 13.23 trillion yen.

Photographer: Yuriko Nakao/Bloomberg

Akio Toyoda, president of Toyota Motor Corp. Close

Akio Toyoda, president of Toyota Motor Corp.

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Photographer: Yuriko Nakao/Bloomberg

Akio Toyoda, president of Toyota Motor Corp.

‘Separate Nature’

“We’ve done well in growing our business in North America, yet the separate nature of our affiliates -- both operationally and physically –- slows our decision-making processes and our time to market,” Toyota said on a website set up for employees about its plans to move into Plano, Texas, by 2017. “Our operating costs are higher than those of our competitors.”

The shift to Plano affects about 2,000 people at Toyota’s U.S. sales headquarters in Torrance, California, half coming from its Kentucky engineering and manufacturing unit, and the rest from its finance company and some staff from its holding company in New York.

California can be expensive. The average annual wage for all occupations in the state was $53,030 last year, compared with $44,400 in Texas, the Bureau of Labor Statistics said in April. California ranked 48th in the country in The Tax Foundation’s State Business Tax Climate Index released in October, ahead of only New Jersey and New York. Texas ranked 11th, the non-partisan researcher said.

‘Lofty Talk’

“For all of the lofty talk about streamlining and faster decision making, this move is all about costs,” Maryann Keller, an industry consultant, wrote in a blog post after Toyota announced the Texas move. “Leaving behind thousands of highly paid workers will give the company the chance to employ fewer, lower paid employees while reducing operating costs and taxes.”

Toyota is pursuing the U.S. move as a stable yen enabled it to earn an unprecedented 587.8 billion yen ($5.7 billion) in the April-to-June quarter, beating the 497.3 billion yen average of 12 analyst estimates compiled by Bloomberg. Toyota maintained its 1.78 trillion yen profit forecast for the fiscal year ending in March 2015.

While Japan’s first sales-tax increase in 17 years dragged down Toyota’s operating income there by 20 percent from a year earlier to 365.9 billion yen, that still was enough to eclipse North American earnings, which got a boost from rising demand for sport utility vehicles such as the Toyota Highlander and Lexus GX.

When compared with Ford’s $2.6 billion in pretax profit for North America, Toyota still fell short even after doubling regional operating income -- excluding valuation gains from financial instruments -- to 165.5 billion yen.

Ford, GM

Ford has been the most profitable automaker in North America since 2010, when the industry began its recovery from the worst year for U.S. auto sales in almost three decades. The automaker earned more than $8 billion from its home region in each of the last two years.

Toyota also trailed General Motors Co. (GM)’s $2.4 billion in adjusted earnings before interest and taxes in North America for the quarter, excluding costs of record recalls.

Part of the reason for Toyota’s shortfall is a matter of accounting.

In its Japan operating income, Toyota counts earnings from models it builds at home that are then exported to North America. That includes most of its high-end Lexus luxury models.

The relative strength of Toyota’s earnings in Japan, even in the face of the consumer levy increase that went into effect April 1, also reflects its dominant position in the country, where it holds more than 40 percent market share.

Dominant Position

“Anytime you get dominant market share like Toyota has in Japan, in virtually any business, you get a dominant portion of the profits,” Mark Yockey, a New York-based managing director at Artisan Partners, which oversees $31.3 billion in equities including Toyota, said by telephone “The profit pool in Japan is virtually all Toyota’s.”

The roles between Japanese carmakers led by Toyota and U.S. automakers including Ford used to be reversed in North America.

In the years leading up to the U.S. market collapse that forced Ford into a self-financed restructuring and GM and Chrysler Group LLC’s predecessors into bankruptcy, the Detroit Three racked up losses as Toyota steadily boosted North American operating income. The automaker made 495.6 billion yen in fiscal year 2006.

GM, Ford and Chrysler struggled to field competitive passenger cars as contracts with the United Auto Workers union raised labor costs with less productivity. The Detroit carmakers now are selling their best sedans in a generation.

Labor Union

In the last decade, labor-union agreement deals have also allowed the companies to boost output, pay new hires less and introduce profit-sharing bonus systems rather than fixed raises in wages.

Toyota’s workforce, on the other hand, is aging and reaping the benefits of seniority, according to Keller, the industry consultant.

The move to Plano will unify Toyota on one campus the way Lee Iacocca envisioned for Chrysler’s headquarters complex in Auburn Hills, Michigan, said Press, the industry consultant. He left Toyota after a 37-year career to join Chrysler in 2007.

“One of the things that I reflect on was when the move to Chrysler occurred, I could see the synergy and the efficiency of everybody being in the one Auburn Hills complex,” he said. “The advantages of that are tremendous.”

To contact the reporter on this story: Craig Trudell in Tokyo at ctrudell1@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net Chua Kong Ho

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