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High-flying Toyota still faces bumpy road as America sputters

Discounts chip away at Japanese carmaker's US profit amid heavy research burdens

Toyota wants larger offerings like sport utility vehicles and pickup trucks, including the Tacoma, to contribute a higher proportion of its U.S. sales.

NAGOYA, Japan -- Despite an impressive profit upgrade, Toyota Motor has no intention of dropping its guard as a sluggish American market and rising investment in future technologies continue to weigh on earnings.

The automaker Tuesday lifted its operating income forecast to 2.2 trillion yen ($20.1 billion) for the year ending March 31 for a 10% year-on-year gain. But profit would have slid about 55 billion yen if not for a favorable yen exchange rate.

Toyota "aims for an earnings model that is not prone to exchange rates but missed that goal for the full year," Executive Vice President and CFO Koji Kobayashi told reporters Tuesday.

Toyota sells about 2.4 million units a year, or roughly a quarter of worldwide unit sales, in the U.S. But growing sales incentives are taking a bite out of profit.

Discounts offered to spur sales were raised in light of rising interest rates, denting earnings. That Toyota temporarily built the new generation of its mainstay Camry sedan, released last summer, in Japan also hurt its performance in the second-largest auto market. North American operating profit fell 70% on the year for the October-December quarter.

New-auto sales in the U.S. shrank to about 17.2 million units in 2017, the first contraction in eight years. Toyota sees the market shrinking

Favorable exchange rates have helped power Toyota's operating profit this fiscal year, Chief Financial Officer Koji Kobayashi said.

to about 16.8 million in 2018 but aims to sustain its own unit sales at about the same level as last year's.

New offerings will be key to this effort. Toyota has 15 models slated for release, including sedans like the Avalon and the upscale Lexus brand's LS. The automaker also intends to continue increasing production of the larger vehicles now popular in the U.S., aiming to have them account for about 60% of overall sales. Its supply was slow to build up but has nearly caught up with the market average. But with its discounts per vehicle falling to about $2,780 from last summer's heights of nearly $2,900, maintaining sales may be a challenge.

Streamlining production and upfront investments is becoming more important as the focal point of automobile competition shifts. Automakers branching into self-driving technology, electrification and car-sharing find themselves up against information technology companies including Google and Apple. There is "no guarantee whatsoever" that Toyota "will play a leading role in the mobility world for the next hundred years," President Akio Toyoda cautioned.

Toyota's combined capital expenditures and research and development spending this fiscal year are seen reaching 2.34 trillion yen, marking 40% growth in five years. The proportion allotted to developing next-generation technologies apparently rose 5 percentage points on the year to 25%.

At present, Toyota's price competitiveness is critical to earning funds for such future initiatives. "Being a strong manufacturing group is the most critical factor for sustained growth," said Executive Vice President Mitsuru Kawai, who supervises production.

Toyota continues to explore partnerships. Last fall, it joined with peer Mazda Motor and parts maker Denso in a joint venture for developing electric vehicles, with other automakers including Suzuki Motor and Subaru later hopping aboard. Toyota is also partnering with compatriot Panasonic in the battery field and is weighing procuring electric vehicles from Chinese joint venture partners in 2019.

By 2030, the automaker aims to nearly quadruple sales of electric and hybrid cars to 5.5 million units. This would require 1.5 trillion yen in battery-related investments alone. Toyota aims to continue borrowing other companies' strengths and to preserve its own competitive muscle.

Toyota also upgraded its full-year net profit target by 450 billion yen to 2.4 trillion yen, up 31% on the year. Aside from favorable foreign exchange rates, the American corporate tax cut figured in heavily, and unit sales the world over also climbed, albeit gently.

The lower U.S. corporate tax rate reduced Toyota's deferred tax liabilities set aside for future tax burdens, lifting profit by nearly 300 billion yen this fiscal year. 

The automaker's core business remains strong. Tuesday's upgrade to its profit outlook marked the third this year. It initially projected net profit to slide 18% to 1.5 trillion yen but lifted its expectations every quarter.

Toyota also raised its forecast of total worldwide unit sales throughout the group to 10.3 million, including a 20,000 boost for North America, driven by successes including the Camry's full makeover. Groupwide sales are expected to grow 5% on the year to 29 trillion yen.

Though it was the world's No. 3 automaker in 2017 unit sales, Toyota finished first worldwide in profit terms, beating the likes of Volkswagen or German compatriot Daimler by nearly 60% in yen terms.

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