Third quarter

Toyota operating profit plunges (-20%). First time in two years

Profit slump in Japan, down 28% after safety testing scandals. And rapid loss of market share in China

by Finance Review

6 November 2024

Aggiungi Il Sole 24 Ore
ai preferiti su Google

Pedoni davanti a una concessionaria della casa automobilistica Toyota a Tokyo. (Foto di Yuichi YAMAZAKI / AFP) (Photo by Yuichi YAMAZAKI / AFP)

3' min read

Key points

Manufacturing challenges and targets filed down
Impact of Chinese competition and pressure on margins
Long-term strategy and outlook for the global market

3' min read

Toyota Motor, the world's leading automaker by volume, posted its first drop in operating profit in two years in the third quarter of 2024, a sign of a slowdown for the Japanese giant. The company suffered a 20 per cent drop in profit to ¥1.16 trillion (about $7.6 billion) from ¥1.44 trillion in the same period a year earlier, mainly due to production and market difficulties in two key regions - Japan and the US.

Toyota has enjoyed a long period of growth supported by strong demand for hybrid vehicles, which are particularly popular in a context of high inflation due to their greater affordability compared to expensive battery-electric cars. However, in recent months, its record run has been held back by a number of obstacles: the safety test scandals involving some models (other Japanese manufacturers were also involved: Honda, Suzuki, Yamaha and Mazda), quality problems in the truck and bus sector with Hino Motors, growing competition in China and a production halt in the US, which has now been resolved.

Production challenges and targets filed down

In response to the difficulties, Toyota promised to reduce incentives and improve production in the second half of the fiscal year, which ends in March 2025. Chief financial officer, Yoichi Miyazaki announced that the plant in Indiana, which had suffered a partial suspension of operations, was back in operation and global annual production is expected to reach 10 million units in the second half of the fiscal year.

Nevertheless, Toyota slightly lowered its production forecast for the current fiscal year, reducing it by 1% to 10.85 million vehicles, 240,000 fewer than the previous year. This adjustment reflects production difficulties in the first half of the year, including safety inspections that led to temporary suspensions. Toyota kept its full-year profit forecast unchanged at 4.3 trillion yen ($28 billion), which helped support the stock on the stock market (+1.72%).

Impact of Chinese competition and pressure on margins

Strong competition from Chinese brands has put Toyota under pressure, particularly in the Dragon market, the world's largest. In China, electric vehicles and software-driven models from manufacturers such as BYD are rapidly eroding the market share of traditional car manufacturers. Toyota has increased investment in marketing in China in an attempt to counter local competition, but high costs are affecting operating profit in the region.

Overall, Toyota suffered a drop in profit in Japan, its most profitable market, with a drop of 28% due to lower sales. North America also contributed negatively with a drop in sales volume and an increase in labour costs. These results highlight the challenges Toyota faces in a globalised and highly competitive market environment.

Long-term strategy and outlook for the global market

Despite the difficulties, Toyota has no intention of abandoning its hybrid strategy, which has proven to be a strong point for the group. In July-September, sales of hybrid models by Toyota and the luxury brand Lexus accounted for more than 40% of global sales, an increase over the third of the previous year. This demonstrates consumers' continued interest in a technology that enables lower fuel costs and access to low-emission vehicles.

At the same time, CEO Koji Sato, reiterated the goal of selling 1.5 million battery electric vehicles per year by 2026 and 3.5 million by 2030, although the carmaker has recently moderated its expectations, giving more room for growth in hybrid vehicles.

Effects of global trade policies

Competition with Chinese manufacturers could evolve further as the European Union and the United States increase tariffs on Chinese electric cars. While BYD does not yet have a solid presence in Japan, these duties could push Chinese brands to strengthen their presence in emerging markets, which have historically been dominated by Japanese brands.

Industry analysts believe that Chinese carmakers, in particular BYD, could accelerate their expansion into South East Asia and Africa, building on their strength in the electric vehicle segments. However, for Toyota, maintaining a strong presence in non-Chinese markets will be crucial to balancing the increasing pressure within the Chinese market.