Trump Tax Cut, RAV4 Sales Help Toyota Lift Forecast to RecordBy , , and
Lower taxes added about $2.7 billion to carmaker’s bottom line
Softening U.S. market, stronger yen cloud the picture
Toyota Motor Corp. announced a surprise earnings boost on Tuesday, forecasting record profit, on the popularity of its RAV4 sport utility vehicle in the U.S and thanks to several billion dollars from President Donald Trump’s corporate tax cuts.
But with market turmoil threatening to add more pressure on the Japanese currency and American consumers already showing signs of fatigue when it comes to auto purchases, Asia’s biggest carmaker may struggle to keep the momentum.
Toyota said Tuesday it sees profit rising to 2.4 trillion yen ($22 billion) in the year through March, up from the 1.8 trillion yen it forecast in November. Tax cuts added about 290 billion yen to the bottom line, Toyota Senior Managing Officer Masayoshi Shirayanagi said at a briefing in Tokyo.
It was just 13 months ago that Trump was berating Toyota on Twitter for planning to build a plant in Mexico. Now though, after the U.S. corporate tax rate was reduced to 21 percent from 35 percent, the automaker joins hundreds of other companies in raising profit guidance. General Motors Co. is also likely to boost its projections when it reports earnings Tuesday.
America’s love of SUVs buoyed Toyota’s earnings, but the rest of the company’s lineup has suffered as the U.S. market, its biggest, softens. After seven years of growth, auto sales in the U.S. declined in 2017 by about 400,000 vehicles to 17.1 million, according to data compiled by Bloomberg.
“There are a lot of reasons to be conservative,” said Koji Endo, an auto analyst at SBI Securities Co. in Tokyo. “The exchange rate seems to be moving substantially. Another factor is the U.S. market, where volumes are down and incentives are up.”
A weaker Japanese currency gave the single biggest boost to Toyota’s third quarter profit, adding about 195 billion yen to operating income, according to a presentation by the carmaker Tuesday. The dollar averaged about 113 yen in the third quarter, weaker than the 109 yen average in the year-earlier period.
A global sell-off of stocks and other risk assets caused the yen to appreciate to around 109 yen to the dollar as of Tuesday, and the currency could move toward 105 by the end of March, according to Daisuke Karakama, Mizuho Bank chief market economist.
Toyota “had quite a bit of benefit from the yen, and that’s running out of steam,” said Steve Man, an analyst at Bloomberg Intelligence in Hong Kong.
Toyota’s U.S. truck sales, including the RAV4 SUV, rose 9 percent in 2017 compared with the previous year, the company said. Still, total sales for the automaker fell 0.6 percent in the market, dragged down by a 23 percent drop in Lexus cars and a 21 percent decline for the Prius.
To try to entice consumers, Toyota is offering more rebates and other sweeteners that cut into profitability. Incentive spending per unit was $2,585 in January, according to a Feb. 2 report from investment bank Jefferies LLC. While that’s less than the $5,193 General Motors is dangling in front of buyers, or the $4,182 being offered by Ford Motor Co., it’s still a 17 percent increase from a year ago.
A faltering U.S. market leaves Toyota especially vulnerable because of its laggard status in the world’s biggest car market, China, where the Japanese automaker was in a dismal eighth place in terms of market share during the last three months of 2017. That puts more pressure on Toyota to avoid slipping in the U.S., a task that will be more challenging as demand slows and rivals offer steeper discounts.
“The whole market is quite soft,” said Man at Bloomberg Intelligence. “Everybody is going to come to the table and cut prices.”
— With assistance by Jason Clenfield