With gas prices low in U.S., buyers there cut sedan demand and opt for larger vehicles
Continue Reading Below
TOKYO -- Japanese car makers such as Toyota Motor Corp. are painting a bleak picture for the current financial year as they find themselves on the wrong end of a shift in U.S. car-buyer demand away from the sedan market they have long dominated.
Toyota, which last year relinquished the title of the world's top-selling auto maker to Volkswagen AG, reported on Wednesday a 21% drop in profit for the year ended in March and predicted net profit would fall by one-fifth to Yen1.5 trillion ($13.2 billion) in the current fiscal year. That would be the second straight drop after three years of record profits buoyed by a weak yen.
Toyota President Akio Toyoda made it clear that he wasn't happy. "In sports, booking two consecutive years of losses means you are failing. I hate to lose," Mr. Toyoda told reporters.
Profits slid in every major region last fiscal year, and in the most recent quarter Toyota posted its first operating loss in North America in five years. The company, which has been slow to adapt to a shift away from sedans and toward crossovers and sport-utility vehicles, incurred a Yen71 billion loss in North America for the three months to March.
One reason is higher spending to lure car buyers. Toyota increased U.S. incentives by an average of $250 a vehicle last year, Tetsuya Otake, a senior managing director, told analysts in a conference call. Auto industry incentives now average $4,000 per vehicle, according to J.D. Power.
Continue Reading Below
Mr. Otake said Toyota is working to boost production of crossovers, SUVs and pickup trucks, and is optimistic a new version of its stalwart Camry sedan due out later this year in the U.S. will help stem the profit slide. "The [sedan] segment is shrinking, but we think this will be a super-competitive model," he said.
Japanese car makers have historically relied more heavily on sedan sales than their U.S. rivals. But last year, Toyota sold more light trucks than cars in the U.S. for the first time, and that trend will likely continue. In the year to date, overall U.S. sales of midsize sedans like the Camry fell 15% compared with a year earlier, while crossover and SUV sales rose 8.1%, according to Autodata Corp.
That comes amid a cooling of demand for new vehicles in the U.S. market after record sales last year. Toyota's woes in the U.S. contrast with the mood in Detroit. General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV are better positioned than many of their foreign rivals to meet demand toward larger vehicles, which is being fueled by low gasoline prices and rising income levels.
Toyota said it plans to retool production lines to make fewer sedans and more crossovers, such as its new C-HR compact. Subaru Corp., which earlier this week posted lower full-year earnings results, is considering production cuts to deal with an erosion in profit margins in the U.S. Honda Motor Co., which makes the Accord sedan, last month forecast a 16% drop in operating profit for the current fiscal year and said it is also adjusting production and increasing incentives.
Japanese car makers must contend with a stronger yen, which they predict will near an exchange rate of Yen100 to the dollar this year, affecting bottom lines. Yen exchange rates weighed down Toyota's operating profit by Yen940 billion for the year ended in March.
While it expects a softer impact in the current year, Toyota will have to take a hard look at how it does business, Mr. Toyoda said. That means getting better at building cars outside of Japan.
The company has long been committed to building at least three million vehicles a year in Japan, in part out of a desire to provide jobs in the country, Toyota has said. That was an easier decision when a dollar bought Yen120 two years ago. It is a harder commitment to uphold when the currency is of equivalent value. Toyota says that its goal is to improve the competitiveness of factories located outside its home market.
But increased trade tensions between Washington and Tokyo might make it more difficult for Toyota and other Japanese car makers to cut back production in the U.S. President Donald Trump has blamed a trade imbalance with Japan on car imports and singled out Toyota's plans to build a new factory in Mexico for criticism. Mr. Toyoda has vowed to continue building the plant in Mexico, and Mr. Trump has praised Toyota for its multibillion-dollar U.S. investment plans.
For now, the Toyota president said his company will provide a lift to sales by allowing incentives to rise. Toyota's incentives are a little over half the market average, which might partly explain why it is getting beat by rivals in the hot crossover market in the U.S. Both Honda's CRV and Nissan Motor Co.'s Rogue outsold Toyota's RAV4 in the first four months of the year.
Toyota's efforts will be complicated by the glut of lease vehicles hitting the used-car market, causing prices to crater. These low-mileage used cars are a drag on new-car demand and sticker prices. Even Nissan, the only large-volume car maker to post sales growth this year, recorded fewer sales in April. Nissan is scheduled to report its full-year results on Thursday.
Corrections & Amplifications Toyota Motor Corp.'s net profit declined 21% in the year ended in March. An earlier version of this article incorrectly stated net profit declined 20%(May 10, 2017)
Write to Sean McLain at firstname.lastname@example.org and Chester Dawson at email@example.com
(END) Dow Jones Newswires
May 11, 2017 02:48 ET (06:48 GMT)