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MAY 23, 2005
Toyota's Risky Ride In The Incentive Lane Juicy deals help win U.S. market share, but they're cutting into profits It was another banner year for Toyota Motor Corp. (TM ) On May 10 the world's No. 2 carmaker said profits for fiscal 2004 climbed 7.3%, to a record $10.8 billion, on sales of $171.8 billion. Then came the bad news. During the fourth quarter that ended Mar. 31, Toyota's earnings sank 17%, to $2.7 billion. What went wrong? Toyota says a strong yen and stepped-up spending on new products and plants hurt profits. But its headlong grab for U.S. share is starting to take a toll. Over the past year, Toyota has boosted incentives on a range of vehicles. Some industry watchers believe Toyota is playing a dangerous game that could hurt it down the road even as it ups the pressure on rivals. "It's troubling," says UBS (UBS ) analyst Robert Hinchliffe. "If Toyota is having to boost incentives, how will GM (GM ) and Ford (F ) ever pull back?" For years the Japanese resisted incentives because they were loath to give up profits and damage their brands. A weak yen and strong models enabled them to gain market share without making big deals. But over the past couple of years, some high-volume models have gotten old. Ever stiffer price competition from Detroit has brought them to the table as well. Moreover, the yen's recent strength against the dollar and an uptick in interest rates have forced them to raise incentives to keep monthly payments low. At the same time, Toyota is clearly eager to take advantage of General Motors Corp.'s and Ford Motor Co.'s problems. Over the past year, Toyota has gained 1.5 points of share, to hit 13.3% through April. Dealers say the company is pulling ahead by one year its target of selling 2 million Toyota-brand vehicles in the U.S. -- which would be a 13% rise over last year -- to 2007. Toyota insists its discounting is tamer than analysts suggest. True, the nearly $2,900 a vehicle it spent on incentives in April is a third less than what GM spent. But that's an 11% hike from last year, says CNW Marketing Research Inc. Toyota's incentives are forcing Nissan, and to a degree Honda, to discount more heavily, too. Nissan's incentive spending has surged 35% in the past 12 months, to an average $2,100 a vehicle. LOSING STEAM Even as they add capacity in big pickups and sport-utility vehicles, the Japanese are piling on hefty discounts in those segments. That's not surprising: High gas prices and the popularity of car-based SUVs are turning buyers away from big SUVs, Japanese and domestic alike. With Detroit's once-popular models sporting rebates of up to $5,000, Toyota has slapped an average $3,387 incentive on its Tundra truck, says Edmunds.com. "We have to play the game as defined by the major players," says John E. "Jed" Connelly, Nissan North America's senior vice-president for sales and marketing. It's not just the gas-guzzlers that are losing traction. Some aging Japanese car models increasingly need incentives to sell, too. The Toyota Corolla requires about $1,000 in discounts. Some analysts suspect buyers are being lured away by Toyota's youth brand, Scion. The Nissan Sentra and Honda Civic also require deals. The incentive treadmill can be risky. Hefty discounts reduce the amount a car is worth when the owner tries to trade it in a few years later, so ever bigger rebates are needed to close a sale. "Toyota's residual values have not been hurt yet, but will it have an impact? You bet," says Raj Sundaram, president of Automotive Leasing Guide, the industry's standard for setting resale values. And car buyers learn to wait for big discounts before closing a deal. Will Toyota and Nissan get hooked on incentives the way GM and Ford have? The Japanese seem to play the pricing game with more restraint. Rather than add more rebate cash on the Sienna minivan, for example, Toyota gave consumers a $1,000 boost by combining a small price cut with free options. And the cash-rich company has more room to fight a price war than its rivals. But if Toyota's profits continue to slip, the auto maker may have to rethink its strategy.  By David Welch in Detroit Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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