TM Toyota Motor Corporation

By Sean McLain 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 10, 2018).

TOKYO -- Toyota Motor Corp. faces a rough road ahead in the U.S. with declining sales of sedans and rising expenses threatening its already razor-thin margin there.

The car maker said Wednesday its operating income in North America in the year ended March 31 fell by more than half to Yen139 billion ($1.3 billion), largely owing to spending on incentives to lure car buyers such as low-interest loans. That left it with an operating margin of just 1.3%, compared with 8.2% for Toyota globally.

A rapid shift in the U.S. car market toward trucks and sport-utility vehicles has hammered Japanese car makers, forcing them to choose between losing sales on less-popular sedans or boosting incentives.

Chief Financial Officer Koji Kobayashi said Toyota was racing to boost production of more-profitable trucks and SUVs such as the RAV4.

"We are working hard to re-establish the earnings structure in North America," Mr. Kobayashi said. "What we are aiming at is hitting 8% by 2020" in operating-profit margin.

For the current fiscal year, ending March 2019, Toyota expects sales in North America to remain almost flat at 2.8 million vehicles.

The company's new Camry sedan is an example of the challenge. Sales of the vehicle grew while those of its main competitors shrank, but the growth was fueled in part by spending more than $2,000 in incentives on every one it sold.

Incentive spending will still be needed to maintain sales, said Mr. Kobayashi. And other costs continue to weigh down earnings in the U.S.

Cheap leases fueled by years of low interest rates provided a boost to U.S. car sales. Those vehicles are being returned as the U.S. car market plateaus, driving down their value. Many of these vehicles are worth less than Toyota anticipated, forcing it to book a loss, the company said.

To match production with demand, Toyota plans to spend nearly $1 billion upgrading its RAV4 factories in Canada. It is introducing the latest version of its most popular vehicle later this year. A plant in Mexico is slated to begin producing Tacoma pickup trucks in 2019.

Elsewhere, Mr. Kobayashi said Toyota wanted to narrow the gap with Japanese rivals in China. Honda Motor Co. and Nissan Motor Co. now sell nearly as many cars in China in the U.S. By comparison, Toyota sold more than twice as many cars in the U.S. as in China.

The company recently said it would introduce 10 plug-in hybrid and electric vehicles in China in the next several years, including a battery-powered version of its compact C-HR sport-utility vehicle.

Outside North America, Toyota is in good health. It recorded a net profit of nearly Yen2.5 trillion ($22.7 billion) in the year ended in March, partly helped by one-time gains connected to U.S. tax changes. For the current fiscal year, net income is projected to decline 15% to Yen2.1 trillion.

To insulate itself from the risks of a stronger yen, Toyota is looking for Yen300 billion to Yen400 billion in annual savings, Mr. Kobayashi said.

It aims to apply lessons from the factory floor to the head office. Just as Toyota's fabled production system is designed to continuously reduce costs, white-collar workers are being told to cut back on paperwork and meetings, said Shigeki Terashi, a Toyota executive vice president.

One measure of progress: Executives are no longer handed large stacks of briefing materials ahead of weekly strategy meetings. Instead, they receive a sheet of paper with the key talking points, said Mr. Kobayashi.

Write to Sean McLain at sean.mclain@wsj.com

(END) Dow Jones Newswires

May 10, 2018 02:47 ET (06:47 GMT)

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