Truck, SUV sales weigh down profit at Toyota

By Ken Bensinger

Aug. 8, 2008 12 AM PT

Times Staff Writer

High gas prices are proving to be the kryptonite of the car world: Even mighty Toyota Motor Corp. has succumbed.

Burdened by a crashing market for big trucks and SUVs, the Japanese carmaker reported a 28% earnings decline for the first fiscal quarter Thursday, its worst profit decline in five years.

Toyota, once a small-car specialist, has in recent years taken on the look of a General Motors Corp., making all types of vehicles and getting footholds in all markets. And while that strategy has helped it grow immensely -- through June it was outpacing GM in global sales by more than 275,000 vehicles -- it has also left it more exposed to market fluctuations.

In the last few years, Toyota bet big on SUVs and pickups in the U.S., building new factories here to produce the highly profitable machines, including the Tundra full-size pickup, which debuted in 2007. But with gas soaring past $4 this year, consumer interest in the once-popular vehicles has fallen off a cliff. That has driven down both new sales and used prices, a one-two punch that has hurt both Toyota’s sales and leasing business.

Honda Motor Co., by comparison, reported first-fiscal-quarter earnings growth of 8.1% last month. Unlike Toyota, Honda never ventured into the largest vehicles, sticking instead to fuel-efficient cars.

“It’s a risk and reward thing,” said Jim Hossack, industry analyst at Tustin-based AutoPacific.

“Toyota sought the reward of going after high profits in trucks. Now they’re facing the risk of having gone after a collapsing market.”

Through July, Toyota’s U.S. sales are down 7.6%, but its truck and SUV sales here are down 15.1%. Rival Nissan Motor Co., which also entered the U.S. truck market in the last few years, has seen its truck segment sales fall 9.5% on the year, and in the first quarter reported a 42% slide in net income.

GM, Ford Motor Co. and Chrysler have been hit even harder on trucks, with U.S. sales in the category falling 23%, 18% and 26%, respectively. Last week, GM reported a $15.5-billion second-quarter loss, and last month Ford said it lost $8.7 billion on the quarter, its worst-ever return.

Toyota remains profitable, having earned 353.7 billion yen ($3.2 billion) for the quarter. That compares with 491.5 billion yen ($4.5 billion) a year earlier; its revenue declined by 4.7%.

Last month, Toyota lowered its 2009 sales target to 9.5 million vehicles worldwide, a 350,000 reduction from previous estimates.

Toyota’s U.S.-traded shares fell 55 cents, to $85.90, on Thursday. It has a market capitalization of $135.3 billion, more than 24 times the size of GM.

“The financial results for the quarter were severe, due to our rapidly changing business environment,” said Mitsuo Kinoshita, executive vice president for Toyota, who also pointed to rising commodities cost and a weak dollar as factors in the results.

In reaction to the weakening truck market, Toyota has moved to sharply cut production of its Tundra pickups and Sequoia large SUVs, closing its U.S.-based truck plants for three months starting in August. It’s also moving to increase production of its most popular smaller cars, including a plan to begin producing the hybrid Prius in the United States.

Currently, Toyota has less than a two-day supply of the Prius in the U.S., far below the industry benchmark of about 60 days’ worth of inventory for most vehicles.

The company’s small-car shortage also contributed to its difficulties in the U.S. for the period, where operating profit declined 57%.

The relatively bad quarter notwithstanding, counting Toyota out may not be a wise move, analysts say.

Toyota is poised to make huge headway in emerging markets such as Brazil and India, where it traditionally has not had a presence. It employs low-cost production, giving it a leg up on competition in many markets.

“I look at this as more of a speed bump in the road for Toyota,” said Efraim Levy, equity analyst at Standard & Poor’s. “Though it will face challenges in mature markets like the U.S. and Western Europe, they’ll make up for it in emerging markets.”

In addition, said Levy, Toyota’s expensive bet on trucks could pay off in the long run. Though nobody expects sales to return to 2005 levels, when light trucks peaked at 1.1 million sold per month, Levy says there is reason to believe that a big portion of that market will return once the economy, and in particular the construction industry, rebounds.

“They still get to be part of a market they hadn’t been in, and they’ll be a big part of it when commercial buyers return,” Levy said.

That may be crucial for Toyota, which still counts the U.S. as its most important market, by far.

ken.bensinger@latimes.com

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Bumps in the road

Toyota’s U.S. sales year to date by segments

(In thousands)

Cars

Medium: 388

Small: 380

Luxury: 122

Light trucks