How Toyota Makes Money (TM)

To hear American car makers and the United Auto Workers tell it, government assistance is non-negotiable. Cash infusions courtesy of the taxpayer are necessary to protect a vital industry, keep people employed, and maintain Detroit’s place as one of commerce’s shining beacons or some such. Yet the world’s largest car company manages to not only survive without help but turn a handsome $14.35 billion profit while doing so. The automaker forecasted a 31% profit increase for this year to $22 billion, according to Reuters. How do they manage? (For more, see: What is the Automotive Sector?)

Toyota Motor Corp. (TM) produces 10 million vehicles annually, 2.8 million of those in North America. And that latter number is expected to grow thanks to economies of scale. The Japanese automaker recently consolidated its United States operations in Plano, Texas, where it will move the production capacity of 11 manufacturing outlets and 3 distribution networks, along with the company’s North American sales, marketing, and financing headquarters.

Toyota has four distinct business units, each a paean to streamlined Japanese efficiency. The first and most profitable of those is Lexus, the automaker’s renowned luxury brand. The company feels strongly enough about Lexus that the unit is under the direct supervision of the company president.

In 2017, Toyota sold approximately 305,132 Lexus units in the United States, including both coupes and sport-utility vehicles. And as of May 2018, Lexus has sold 111,250 vehicles this year. Despite being a Japanese brand, one that technically sells worldwide, Lexus sells a hugely disproportionate share of its vehicles in the United States. In January of 2016, Lexus unveiled its highest-margin model – the LC500, retails just over $100,000. (For more, see: Are Automakers Getting in Gear?)

The Lexus brand originated in the early 1990s as a competitor to other mass-market Japanese automakers’ new luxury brands; Honda’s Acura and Nissan’s Infiniti. A generation later, Lexus has surpassed those brands to compete directly with the heavyweights of the luxury division, BMW, and Mercedes-Benz. So far, success for Lexus at the next level has been less than forthcoming.

The corporation’s next two divisions, the starkly named Toyota No. 1 and Toyota No. 2, refer to different geographical regions.

Toyota No. 1 sells the company’s non-Lexus vehicles in North America, Europe, and Japan. That includes annual production of three million vehicles in the Home Islands (a stated company goal). Stateside, Toyota is the proud manufacturer of the Camry, America’s best-selling car, with the Corolla, Highlander, Tundra and RAV4 following respectively.

Toyota No. 2 sells cars in the remainder of the world. Sales predictably there lag behind those of Toyota No. 1, given that the latter includes the richest parts of the planet. One of the fastest-growing nations in Toyota No. 2’s area is Indonesia, where production has almost tripled in the last 3 years and now sits at over a quarter-million vehicles annually. Slightly less than half those vehicles are exported to 70 countries. 

The company’s fourth and final sector is called the Unit Center, which is to say, the technological development department. If Toyota has any uranium-powered engines or lighter-than-air chassis designs in the works, this is where they’re accounted for. The Unit Center isn’t a hugely profitable business for Toyota, at least not in the short-term, but then it’s not really supposed to be. This is where Toyota spends research dollars that offer return years, even decades, down the road. (For more, see: The Best Cars for Investors)

With worldwide currency markets so unusually volatile in this decade, many international companies’ fortunes can ride on exchange-rate movements. Fortunately for yen-based Toyota, the currencies moved in the appropriate way last year to enable the company to finish with $16.44 billion in net income. Management also acknowledges that leading the growth were Japanese sales of already existing, established vehicles: including the Harrier, the Voxy, and the Noah (a crossover SUV and 2 different styles of minivan, respectively.) Meanwhile, the “emerging” markets of Thailand and India seem to be contracting, with fewer people buying vehicles and more competitors taking Toyota’s market share. North America and Europe are doing as well as ever, while the rest of Toyota’s world (outside of Japan) attempts to play catch-up. 

Unlike some other major car makers, Toyota derives a relatively small portion of its revenue from its financial operations. While Toyota’s financial services division is growing faster than automotive sales are, the company is still a manufacturer first and a lender second. Automotive activities accounted for 93% of worldwide revenue last year, financial services barely 6%. In fact, operating income from financing actually decreased in 2017, mostly thanks to credit losses.

Looking at profit geographically, the company makes more money (on more sales) in Japan than anywhere else. The company made $10.7 billion at home in 2017, $3.9 billion in the rest of Asia, and $2.7 billion in North America. 

Toyota’s presence in the United States, and pretty much anywhere else it does business, has improved the industry as a whole by forcing competition and setting new standards for everything from stylishness to safety. While running into eventual demographic troubles in Japan (the population is aging and shrinking), Toyota will have to focus elsewhere to maintain its dominance. Fortunately, the company has already figured out how to give customers what they want, time and again.