TOKYO Japan’s Toyota Motor predicts it will bounce back from the previous fiscal year’s profit drop — but that depends on whether it can tackle bruising competition in the U.S. market.
On Nov. 7, Toyota upgraded its current fiscal year’s net profit forecast by 200 billion yen ($1.76 billion), to 1.95 trillion yen, reversing what was once an expected profit decrease to a gain. During the previous fiscal year, the automaker’s bottom line plunged by some 20%. This upgrade is largely due to the weaker-than-anticipated yen. Take away the currency effect and the operating profit would actually shrink by 185 billion yen.
“Excluding the impact of the foreign exchange fluctuation exposes a situation where our true capabilities still amount to a decrease in profit,” Osamu Nagata, executive vice president at Toyota, told reporters on Nov. 7 while presenting earnings. “We must raise our profitability.”
Sales in Japan and Europe are set to beat expectations. But the big reason Toyota struggles to boost earnings lies in the harshly competitive U.S. market. Aggregate new unit sales sank below year-earlier figures for each of the first eight months of the year. This battle to capture market share has raised average sales incentives in the U.S. to historically high levels.
Ballooning American sales incentives and similar factors will erode Toyota’s profit by roughly 160 billion yen, or 10 billion yen worse than originally projected. North America accounts for about 30% of Toyota’s global sales. The region effectively generates 40% of operating profit once Japanese exports are added to the mix.
Lower gas prices are driving customers to sport utility vehicles and pickup trucks. But passenger cars are still a large part of Toyota’s sales mix, and it has been unable to modify its production structure to meet shifting demand.
Toyota is stepping up output of the RAV4 SUV among other large vehicles. In Mexico, the Japanese automaker is injecting funds into its Tijuana plant to make more Tacoma pickup trucks next year. A new plant being built in Guanajuato is scheduled to open in 2019 and will make the Tacoma instead of the Corolla sedan as originally planned.
Large vehicles now make up around 60% of Toyota’s American unit sales. In September, monthly new vehicle sales in the U.S. topped year-earlier figures for the first time in nine months.
While the U.S. market remains uncertain, emerging markets will be key to growth. Compact autos dominate in those regions, but they also present issues regarding cost competitiveness. Toyota organized its group into internal companies last year. Company-specific financial figures show that the compact car segment is in the red, according to a Toyota executive. Toyota’s original compact car company stands parallel with the Emerging-market Compact Car Company, led by subsidiary Daihatsu Motor.
The Toyota group kept in place its sales outlook of 10.25 million vehicles for the year ending March 2018, matching the previous fiscal year. But to secure long-term growth, the company has to shell out around 2 trillion yen a year in combined research and development and capital spending.
“We must commercialize the latest in technological development,” Nagata said. “Development costs, capital expenditures and the costs of the products themselves will turn out to be extremely significant burdens,” he added.
Toyota is spending 1.06 trillion yen on R&D, ranked among the largest amounts in the company’s history.