Global Economics

Toyota: Another Home-Run Quarter


Strong sales outside Japan and a weak yen propel the automaker to a record-breaking quarter

After General Motors (GM) and Ford (F) posted better-than-expected quarterly profits through June 30 (see BusinessWeek.com, 7/31/07, "GM's U.S. Blues") it was perhaps inevitable that Toyota Motor (TM) would announce similarly strong gains. After all, when it comes to beating expectations, few companies can match Toyota, the world's most profitable automaker.

Yet even by Toyota's high standards, the company's quarterly results, revealed Aug. 3 in Tokyo, were impressive. Despite weak sales in Japan, overall revenues increased 15.7%, to a record $55.7 billion. Earnings grew even faster. Operating profits surged 31.8%, to $5.7 billion yen, while net earnings increased 32.3%, to $4.1 billion. "We posted substantial increases in both revenues and profits, our highest quarterly results," Chief Finance Officer Takeshi Suzuki told reporters.

Outgunning Detroit at Home

Just as headline-worthy were Toyota's operating margins, which rose to 10.4%, from 9.1%, for the same period last year. That's the highest of any major automaker—Honda Motor (HMC) is next best at 7.6% for the same period—and Toyota even beat its long-term goal of 10%, a target outlined last year by President Katsuaki Watanabe. "Their profitability improvement is amazing," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. Like many analysts, Matsumoto expected sales to grow around 15%, but hadn't foreseen a near one-third increase in profits.

The weak yen partly explains Toyota's stellar performance. Compared to the same period a year earlier, the yen depreciated 6% and 13% against the dollar and the euro, respectively. That helped add $840 million to Toyota's bottom line when earnings overseas were translated back into yen.

But currency swings weren't the only factor. Rising sales in all regions, save Japan, also show why Toyota's growth remains relentless. In North America, which accounts for about 60% of Toyota's profit, sales rose 15,000, to 762,000 units. That's slower growth than in recent years, but comes at a time when rivals in Detroit are suffering sales losses at home. From January to July, the Big Three's sales fell 8.7%, compared to a 6.2% rise at Toyota.

Downplaying the Subprime Factor

Some analysts have pointed to the subprime mortgage sector's impact on equity markets as a possible negative for car sales in the U.S. But Toyota downplayed the significance. "We have to be vigilant, but judging from the overall economic conditions any substantial downturn in the U.S. auto market doesn't seem warranted," says Suzuki. "We expect the market to be more or less on a par with last year."

Suzuki also highlighted the success of the Tundra, its full-size pickup truck. He notes that despite big sales incentives the truck also aided profitability because sales volumes are gathering steam. Toyota sold 23,000 Tundras in July and expects to meet a full-year forecast for 200,000 units.

It's a similar story elsewhere. In Asia, outside of Japan, quarterly sales rose 29,000, to 222,000, thanks to higher demand in China—where Toyota is poised to overtake Honda this year as the best-selling Japanese brand—and a sales recovery in Southeast Asian markets, such as Indonesia. And in Europe, sales increased 25,000, to 333,000 units, aided by strong sales of the new Auris sedan.

Japan, though, remains one of Toyota's few concerns. Sales dipped 43,000, to 500,000 units, and have yet to show signs of bottoming out (see BusinessWeek.com, 7/23/07, "Japan: Here Kid, Take the Wheel"). Toyota hopes new model launches later this year and publicity from the Tokyo Motor Show in October will make a difference. Still, even if sluggish sales at home persist, don't rule out more record earnings.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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