Toyota: A Turbocharged Profit Machine
There was plenty of excitement Apr. 24 when news broke that Toyota (TM) had overtaken General Motors (GM) as the world's largest automaker, at least for the first quarter. Well, the Toyota mystique is about to deepen even more when the Japanese automaker reports some simply mind-blowing earnings results on May 9: Think big, really big.
In what's expected to be the best-ever profit results of any Japanese company in history, Toyota is anticipated to announce operating profits of about $18.4 billion for its fiscal year that ended in March. That's up 17% from a year earlier, while net earnings could rise 13% to $12.9 billion. Sales, meanwhile, are expected to grow 10% to $193 billon.
These figures are Toyota projections, and the company does have a history of ultra-conservative forecasting followed by surprises on the upside. Even so, Toyota's projections suggest an operating profit margin of 9.5%, compared to 8.9% last year. That of course is the kind of earnings strength for which executives at GM, Ford (F), and Chrysler (DCX) would die.
No End in Sight
More important, Toyota will dethrone Nissan (NSANY) as the industry's most profitable major automaker measured by operating profit market. Nissan has been struggling of late, and only posted margins of 7.4% in its most recent results, compared to 9.2% last year. Just as dispiriting for rivals, there are few real signs that Toyota's astonishing growth is likely to be derailed anytime soon (see BusinessWeek.com, 4/24/07, "Toyota; A Carmaker Wired to Win").
Sure, the recent surge in profits is expected to slow somewhat over the next few years, but midterm sales and profit projections remain robust. Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo, reckons Toyota's sales will increase to $220 billon by 2009 while net earnings should surpass $15 billion. Meanwhile, a 10% operating profit margin, an aspiration of Toyota President Katsuaki Watanabe, is likely to be achieved a year earlier, in 2008.
Yoshida adds that, even now, Toyota retains a sense of caution that dates back to financial woes in the early 1950s. "Toyota's strength is their balance between the short term and long term," Yoshida says. "They do everything to minimize risk."
Winning at Home
Of course, even Toyota has had its fair share of trials and tribulations. One issue is that, despite a well-honed green image, Toyota's big vehicles are getting bigger, heavier, and not a great deal more fuel efficient. The new Tundra, for instance, is Toyota's biggest-ever truck, while the new Highlander and Sequoia SUVs will also be larger than predecessors. That has led to criticism that Toyota isn't as clean as it makes out. Then there are concerns over quality and whether Toyota's status as No. 1 automaker will bring with it greater scrutiny and even a potential backlash.
Yet you wouldn't sense trouble in Toyota's sales numbers. The company's U.S. sales increased 6.7% through April, compared to falls of 6.5% at GM, 13.6% at Ford, and 2.9% at Chrysler. Among Japanese rivals, sales at Nissan are flat while Honda is up 1.5%. For the four months, Toyota's U.S. market share was 15.7%, compared to Ford's 16.3% and GM's 23.2%.
Why does Toyota keep on growing? One important reason, says Andrew Phillips, an analyst at Nikko Citigroup (C) in Tokyo, is that Toyota isn't just adding big vehicles, but new models in almost every segment.
Sure, the new Sequoia might be bigger than the current model, but Toyota has sold the RAV4 compact crossover SUV for more than a decade. The Yaris subcompact is popular and the new Corolla will soon be added to its U.S. lineup. "Their big vehicles keep getting bigger, but then they launch smaller products as well," says Phillips. "Toyota keeps all its bases covered."
Better Hybrid Coming
Problems with quality also seem to be in hand. Between 2004 and 2006, Toyota had to recall 9.3 million vehicles in the U.S. and Japan—its two biggest markets—up from 2.5 million in the previous three years. But over the last year Watanabe has been at great pains to create a sense of urgency within Toyota and its suppliers regarding caliber, installing a new quality chief and adding initiatives such as asking suppliers to share information and use common parts (see BusinessWeek.com, 1/22/07, "Even Toyota Isn't Perfect"). Now, he says the worst of the problems are over.
As for ensuring Toyota's lead in environmentally friendly autos, the next-generation Prius is now fewer than two years away. Watanabe confirmed in February that the new Prius will include lithium-ion batteries, which will improve performance and fuel efficiency and help take hybrids to new levels (see BusinessWeek.com, 3/5/07, "Toyota's Bid for a Better Battery").
Made in the USA?
One area where Toyota still has some work to do is transferring Japanese production overseas. Last year, Toyota's exports from Japan rose 23.6% to 2.7 million, while only 54% of Toyota's sold in the U.S. were built locally, compared to more than 70% at Honda and Nissan. That attracts criticism in the U.S., which generates about 60% of Toyota's profits, and is putting a strain on Japanese operations.
New plants, such as the Tundra plant in Texas, the recent startup of Camry production at Subaru Indiana Automotive, and the announcement in February of a new plant in Blue Springs, Miss., will help. But if Toyota is to avoid a backlash, more new plants will be needed. Of course, when your net profits are nearly $13 billion, you've got investment options.
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