TOKYO -- Japan's Toyota Motor now predicts it will bounce back from the previous fiscal year's profit drop -- but that will depend on whether it can get a handle on the bruising competition in the U.S. market.
Behind the numbers
Toyota upgraded Tuesday the current fiscal year's net profit forecast by 200 billion yen ($1.75 billion) to 1.95 trillion yen, reversing what was once an expected profit decrease to a gain. During the previous fiscal year, the automaker's bottom line plunged by some 20%.
But the current outlook is largely made possible by the weaker-than-anticipated yen. Take away the currency effect, and the operating profit would actually shrink by 185 billion yen.
"Excluding the impact of the foreign exchange fluctuation exposes a situation where our true capabilities still amount to a decrease in profit," Osamu Nagata, executive vice president at Toyota, told reporters Tuesday while presenting earnings. "We must raise our profitability."
Winning with gas guzzlers
Sales in Japan and Europe are set to beat expectations. But the big reason Toyota struggles to boost earnings lies in the harshly competitive U.S. market. Aggregate new unit sales sank below year-earlier figures for each of the first eight months of the year.
As a result of the battle to capture market share, average sales incentives in the U.S. auto industry rose to roughly $3,900 per vehicle in September, reaching historically high levels.
Ballooning American sales incentives and similar factors will erode Toyota's profit by roughly 160 billion yen, or 10 billion yen worse than originally projected.
North America accounts for about 30% of Toyota's global sales. The region effectively generates 40% of operating profit once Japanese exports are added to the mix.
However, lower gas prices are driving customers to sports utility vehicles and pickup trucks. But the Camry and other passenger vehicles occupied large portions of Toyota's sales mix. The company had been unable to modify its production structure to meet shifting demand.
Toyota is stepping up output of the RAV4 SUV among other large vehicles. In Mexico, the Japanese automaker is injecting funds into a Tijuana plant so it can produce more Tacoma pickup trucks starting next year. This would be in addition to the new plant being built in Guanajuato, scheduled to begin operation in 2019. That site will also put out the Tacoma instead of the Corolla sedan as originally planned.
Large vehicles now make up around 60% of Toyota's American unit sales. In September, monthly new vehicle sales in the U.S. topped year-earlier figures for the first time in nine months. Toyota's margin of increase bested all other leading automakers.
Two-pronged compact strategy
Even so, the American market "will pose a challenging situation for the next two to three years," said Nagata. Used-vehicle prices are showing signs of declining, meaning automakers will be forced to offer more sales incentives for new vehicles.
While the U.S. market remains uncertain, emerging markets will be key to growth. Compact autos dominate in those regions, but present issues concerning cost competitiveness. Toyota organized its group into internal companies last year. Company-specific financial figures show that the compact car segment is in the red, according to a Toyota executive.
Toyota's original compact car company stands parallel with the Emerging-market Compact Car Company, which is led by subsidiary Daihatsu Motor. Because of its cost competitiveness, Daihatsu will lead the way in developing compacts for emerging nations.
Preparing for the next war
The Toyota group kept in place the sales outlook of 10.25 million vehicles for the full year ending March 2018, on par with the previous fiscal year. But to secure long-term growth, the company has to shell out around 2 trillion yen a year in combined research and development costs and capital spending.
If Toyota lags behind in structural reforms, it risks being battered by rivals investing in electric vehicles and self-driving autos.
"We must commercialize the latest in technological development," said Nagata. "Development costs, capital expenditures and the costs of the products themselves will turn out to be extremely significant burdens," he added, saying the company will intensify cost improvement efforts.
Toyota is spending 1.06 trillion yen on research and development, ranked among the largest amount in the company's history. The company is developing fuel cell vehicles, electric vehicles and hybrids along with gasoline-powered vehicles.