Autmotive News Europe — 2024-07-30
Automotive Industry
CEO Koji Sato drove Toyota to across-the-board records in profits, sales and production output in the stellar fiscal year that ended March 31.
Now, as the automaker prepares to announce results for the first quarter of a new fiscal period on Aug. 1, Sato's challenge will be sustaining that momentum.
So far, Toyota is facing some strong headwinds.
Primary among them is the spillover of quality and certification lapses from Toyota Group companies to the mother ship itself. Toyota was tripped up in the scandal in June and had to temporarily suspend output of some models, including the popular Yaris Cross.
Yet even before the scandal erupted, Sato was signaling earnings would slow down.
At the previous financial results announcement in May, Toyota executives forecast global retail sales would dip 1.3%to 10.95 m units this fiscal year, from last fiscal year's high.
Operating profit was pegged to slip 20% to ¥4.30 trillion ($26.74 bn) through next March, and net income was expected to fall 39% to ¥3.57 trillion ($22.20 bn).
Here are five flash points to watch when Toyota's official numbers are released this week.
Scandal scars
In early June, Toyota reported that it had conducted improper vehicle safety verification on a handful of nameplates, including three that were still in production, the Corolla Fielder, Corolla Axio and Yaris Cross. Japanese regulators forced the company to suspend output of them.
Three other Japanese automakers were also rapped for similar problems.
But the revelation was especially embarrassing for Toyota, following earlier certification missteps at several Toyota Group companies, including its truck-making unit Hino, its minicar subsidiary Daihatsu and an engine and parts supplier called Toyota Industries Corp.
The misconduct tarnished Toyota's image and distracted it from aggressive growth and product planning as it looked backward to troubleshoot and correct problems.
Observers will be watching for signs that Toyota is digging out from the mire.
Production problems
Output of the three affected affected nameplates remains suspended through August, and Toyota still hasn't finalized a resumption date as it confirms certification conformity with Japan's ministry of transportation. It is still unclear how big the impact has been.
The Yaris Cross is a popular, large-volume subcompact crossover. Domestic production mainly feeds the local Japanese market. But a small number are also exported to Australia and New Zealand, and sales in those markets were briefly suspended during the shutdown.
Toyota hasn't announced how much volume is being lost or what the financial drain has been. It also hasn't disclosed a figure for support it might offer to affected suppliers.
A first glimpse at the damage will likely appear in the first quarter results.
Toyota produced a record 11.21 m vehicles in the fiscal year ended March 31, including output from its Daihatsu mini vehicle subsidiary and Hino truck-making unit.
That total was up 4.5% from the previous fiscal year, for a third straight year of increases. But Toyota has already said it might tap the breaks on output in the coming year.
Forex flux
The ultra-weak Japanese yen has tumbled to its lowest levels against the U.S. dollar since 1990 and is flailing against other global currencies as well.
The foreign exchange rate has been a boon for Japan's exporters, including Toyota, because it makes their products more affordable overseas. The yen's implosion also inflates the value of dollar-denominated sales that are repatriated to headquarters in Japan and converted into yen.
Toyota's exports from Japan in the just-ended fiscal year reached 2.08 m vehicles, the second highest level since 2012. And the weak yen added a whopping ¥685 bn ($4.26 bn) to the company's operating profit through the first three quarters of the fiscal year.
Looking ahead to this year's fiscal year, Toyota expects that tailwind to subside.
For the first five months of the calendar year, exports were up only 8.3% to 748,368 vehicles. In May, Toyota predicted a forex bump of a comparatively meager ¥55 bn ($342.0 m) through next March, predicated on an exchange rate of 145 yen to the dollar.
Since then, however, the yen has weakened further, fueling more windfalls.
Watch for big a bigger currency bump this fiscal year. But also be prepared to see Toyota relinquish some of the gains if the yen strengthens toward historical levels.
China challenge
Toyota has managed to preserve its sales base in China relatively well compared with many international players that are struggling there. But like its global rivals, even the world's biggest automaker faces big challenges in the world's biggest auto market.
Toyota's China sales peaked at 1.94 m vehicles in 2021 and have slid every year since. Deliveries there fell 14% in May and slipped 10% through the first five months.
Toyota's U.S. sales, by contrast, reached their high before the pandemic in 2020 and also have not yet recovered to those levels. But Toyota's overall volume in the U.S. expanded in 2023 and rose 14% through the first half of this calendar year.
To better compete in China, Toyota has partnered with local technology companies, such as Huawei Technologies, to develop software rich electric cars better suited to Chinese tastes.
Yet even as Toyota grapples with how to shore up its business inside China, it must cope with encroachment by Chinese rivals such as BYD in its longtime stronghold of Southeast Asia. The Chinese electric car juggernaut opened its first full-scale overseas assembly plant in Thailand this year, challenging Toyota and other Japanese brands in their traditional backyard.
Watch for whether Toyota continues to slip or find traction in the critical China market.
Wobbly outlook
Toyota's previous earnings guidance for the current fiscal year could be revised, given the fluctuation in foreign exchange rates and the lingering impact of suspended production.
Downgrading the outlook would be a step back from Toyota's conservative forecast. But the carmaker is notorious for setting circumspect goals and then exceeding them.
One positive factor could be surging hybrid vehicle sales. Global deliveries of vehicles with its standard gasoline-electric setup soared 20% to 1.57% vehicles through May.
That helps bolster Toyota's bottom line because hybrids typically generate fatter margins and command higher stickers. They are also in high demand as consumers gravitate toward them as a more affordable, more practical alternative to full electric vehicles.
Toyota's deliveries of pure EVs climbed 65% through May, but to only 59,262 units globally.
Hybrids can help Toyota paper-over any EV red ink. The company sold more than 3.7 m hybrids in the just-ended fiscal year – powering the company's record operating profit.