Troubles Can't Stop Toyota's Growth

Lawsuits, recalls, and rival alliances prove no match for the Japanese auto powerhouse. Sales are on track to exceed goals

A company that has long been a stellar performer in the global auto industry, Toyota (TM) experienced more than its share of high-profile missteps in 2006. In May, the company's U.S. chief Hideaki Otaka became front-page news after his former executive assistant Sayaka Kobayashi launched a $196 million sexual harassment lawsuit against him (see, 5/22/06, "Trouble at Toyota").

Then, in June, Toyota announced it was recalling 986,000 cars, including 170,000 Prius hybrids sold in the U.S. due to a faulty steering component (see, 7/19/2006, "The Most Recalled Cars 2006 "). And 10 days ago, just after Nissan (NSANY) and Renault began seeking alliance talks with GM (GM), police in Japan filed a complaint against three Toyota execs, accusing them of delaying the recall of faulty Hilux SUVs for eight years after discovering a problem with defective relay rods in 1996.

"We take all these matters very seriously," noted a contrite Katsuaki Watanabe, Toyota's president, before bowing at press conference in Tokyo on July 20 and apologizing over the Hilux issue. "I take this seriously and see it as a crisis."


 Yet despite these public relations setbacks, Toyota remains a very profitable company with killer competitive instincts. The lawsuits and recalls have certainly been a distraction for Watanabe since he succeeded Fujio Cho as Toyota president last June, but few would argue that Toyota's fundamentals are anything but sound.

In the U.S., Toyota's relentless grabbing of the Big Three's market share, if anything, is intensifying. In the first half of 2006, Toyota sales were up 9.8% compared to a year ago. That compares to declines of 12% at GM, 3.9% at Ford (F), and 5.7% at Nissan.

Toyota executive vice-president and board member Tokuichi Uranishi said the company is actually ahead of its planned sales target to raise sales by 10% in 2006, to 2.46 million units. It may finish the year "tens of thousands" ahead of the goal. He also said the sexual harassment scandal concerning Otaka, meanwhile, is expected to have "no direct impact on sales."


 While less impressive, the outlook in Japan is also relatively healthy. Toyota's passenger car sales were down 4% during the first half of the year, but in a shrinking market. By comparison, during the same period Nissan's sales slipped 18%. By the end of the year, Toyota expects to grow sales by 3%, to 1.78 million. One big factor will be the launch of a new Corolla—the 10 iteration since its debut in 1966—and the addition of the LS series to the Lexus luxury lineup in Japan.

Add rising sales and production in emerging markets, particularly China where Toyota began building Camry sedans in May, and the company says it should hit goals to produce 9.06 million units this year, an increase of 10%, with sales of 8.85 million. "We will make the utmost effort," says Watanabe.

Profitability is also holding up. In May, Toyota posted annual profits of $12.5 billion—the highest in the industry—and healthy operating margins of 8.9%. For fiscal 2006, margins are slated to fall slightly to 8.5%, but that could be enough to overtake Carlos Ghosn's famed industry-high margins at Nissan.


  Last week, J.P. Morgan analyst Takaki Nakanishi slashed his earnings target for Nissan from $4.5 billion to $4.1 billion, which would take operating margins from 9.2% in fiscal 2006 to just below 8.5% in the year ending March, 2007. Nakanishi, in a note to clients, blamed lower than expected production volumes and a rise in quality control costs after Nissan was forced to recall 87,000 Altima sedans.

Is Toyota nervous about a possible alliance between Renault, Nissan, and GM? If Toyota execs are, they aren't showing it. Watanabe knocked down reports by and others that Toyota is considering a possible tie-up with GM to derail the Renault-Nissan talks. "With regard to the prospect of forging capital relationships with other firms, it is unlikely," says Watanabe (see, 7/14/06, "Will Toyota Make a Play for GM?").

Staying away from a deal with GM could be smart, given the lukewarm reaction in Tokyo to Nissan's alliance talks. J.P. Morgan's Nakanishi says he is "less than enthusiastic" about the possibilities for synergies. What is clearer, though, is that for all this year's headaches, Toyota's rapid growth remains on course.

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