Global Economics

Toyota's Engine Vrooms On


With an eye on No. 1 GM, the Japanese carmaker isn't taking its foot off the gas, posting remarkable quarterly figures as others stall

For confirmation of the ugly business conditions now facing automakers, look no further than the latest round of financial results. General Motors (GM) and Chrysler (DCX) are still to post their results for the three months ending Dec. 31, but Ford (F) posted a $5.8 billion loss on Jan. 25 and Hyundai and Nissan (NSANY) have also disappointed investors with lower-than-expected profits.

Then there is Toyota (TM). It seems to be reading from a different script altogether. On Feb. 6, the Japanese automaker posted yet another set of stellar quarterly figures at a Tokyo press conference. Reconfirming its status as the world's most profitable automaker, Toyota showed why it's on the fast track to overtake GM as the world's biggest automaker, perhaps as soon as 2007.

Through the three months to Dec. 31, 2006, sales increased by 15.2%, compared to the same period last year, to $51.1 billion. Operating income increased 19.2% to $4.8 billion. Both were records for the quarter and above analyst expectations. For the same three-month period, vehicle unit sales increased 175,000 to 2.155 million.

Going Against the Grain

For the full year—which for Toyota ends in March—the company projects unit sales of 8.47 million, a rise of 496,000 over a year earlier, and operating profits of $18.3 billion, up 17.1% on a year earlier. Toyota didn't change its full-year sales or profit forecasts today, but Senior Managing Director Takeshi Suzuki hinted it was a possibility. "I don't think the trend of higher profits through the third quarter will change," Suzuki said. "We aim to beat our forecast if we can."

Toyota's performance is all the more remarkable given that its growth comes at a time when many of the world's biggest auto markets are stagnating. According to Goldman Sachs (GS), the Japanese and U.S. auto markets shrank, by 2% and 3%, respectively, in 2006 while Europe's grew by 1%.

In Japan, where Toyota's share is about 45% of the market, the company's sales dipped just 30,000 for quarter, while the introduction of the upscale Lexus LS helped margins. "The profitability of our Japanese business is improving," says Suzuki.

Taking Yen to Texas

In North America, where Toyota makes the lion's share of its profits, sales growth was spectacular. Boosted by new versions of the Camry sedan, RAV4 sport-utility vehicle, and Yaris compact, unit sales reached 764,000, a rise of 121,000 for the quarter. In Europe, sales rose by almost 20% to 306,000 units, although sales slipped slightly in Asia outside Japan and China due to weakened market conditions in Indonesia and Taiwan.

Toyota also benefited from increasing profits at group companies, its joint ventures in China, and currency fluctuations. The latter, at a time when a weak yen is causing alarm in Detroit (although seemingly not Washington), helped Toyota gain $249 million during the quarter (see BusinessWeek.com, 2/1/07, "Who's Cashing In on the Weak Yen").

Yet, for all that, Toyota isn't taking its foot off the gas. During 2007, Toyota will release 10 new models in the U.S., including the redesigned Tundra pickup built at a new plant in Texas. A Subaru plant in Indiana will also begin producing Camrys for Toyota in the spring. In China and Europe, the company will begin producing the new Corolla, already on sale in Japan.

Feeling the Pinch

So there's no respite for the rest of the field. Among U.S. rivals, GM, at least, expects to be profitable in the fourth quarter, but has delayed publishing its results due to accounting issues.

Chrysler, though, is widely expected to announce a job cut of 10,000 when it posts its numbers on Feb. 14 (see BusinessWeek.com, 2/6/07, "Chrysler: After the Cuts, What Next?").

Some foreign automakers are also feeling the pinch. Profits at Hyundai—whose chairman, Chung Mong-koo, received a jail sentence this week—were down 22% and were hurt by a strong Korean currency, labor unrest, and share-price weakness at affiliate Kia Motors (see BusinessWeek.com, 2/5/07, "Hyundai's True Trial: Better Performance").

Meanwhile, Nissan, which had expected to bounce back following the introduction of several new models in the U.S. late last year, saw $4.7 billion wiped off its market cap Feb. 5 after downgrading its full-year profit forecast (see BusinessWeek.com, 2/5/07, "Nissan's Stock Gets Blindsided"). "Against an environment of high raw material and energy prices, no pricing power, and continuing weakness in mature markets, our industry faced many headwinds," CEO Carlos Ghosn said in a statement when Nissan announced its results on Feb. 2.

Judging by its latest numbers, Toyota seems to be causing the biggest headwind of all.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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