Toyota Motor Corporation (ADR) (NYSE:TM) posted solid first quarter 2014 results with net profit up 94% from last year, though it sold fewer cars during the current period. How did the world’s top automaker record such an incredible rise? The Japanese automaker benefitted from the cost-cutting measures that it undertook. However, the primary reason behind the enormous profit hike was the weakening yen.
Gaining from domestic production
Toyota Motor Corporation (ADR) (NYSE:TM)’s decision to manufacture more vehicles domestically compared to its other Japanese counterparts is paying off as the yen continues to depreciate. About 21% of the vehicles sold in the last fiscal year were domestically produced, compared to Honda Motor Co Ltd (ADR) (NYSE:HMC)’s 4% and Nissan Motor Co., Ltd. (ADR) (PINK:NSANY)’s 13%. This implies that Toyota is enjoying a much higher cost advantage, relative to its fellow players.
This is precisely why the automaker benefitted more than its domestic peers, from the currency fluctuation. Other auto giants are experiencing mixed results. Honda Motor Co Ltd (ADR) (NYSE:HMC) recorded a rise of 5.1% in its operating profit, while Nissan reported an increase of 23%. In fact, Honda’s net income slipped 7% as the company is investing hugely in its expansion program, while Nissan’s earnings climbed 14%.
If a weaker yen is the top reason why earnings got such a boost, there could be a problem once the currency stabilizes. However, Toyota Motor Corporation (ADR) (NYSE:TM) highlighted other efforts that also played an essential role in boosting profits. The company implemented cost-reduction techniques to improve margins and help the automaker gain efficiency. This made exports more lucrative, enabling Toyota to earn higher margins due to the cost advantage at home.
But, there are questions that arise here. Is the company able to tap the right market? Is it fully able to take advantage of emerging markets or the rebounding U.S. economy?
Tapping the right market
If the company produces and sells domestically, it doesn’t get the benefit of the fluctuating currency. A quarter of the company’s sales in June were made in Japan. On the other hand, 16% of Honda Motor Co Ltd (ADR) (NYSE:HMC)’s sales and 12% of Nissan’s sales came from Japan during the same month. This means that Japan forms a higher chunk of Toyota Motor Corporation (ADR) (NYSE:TM)’s revenue compared to Honda or Nissan. The bad news for the world’s lead automaker is that demand for cars in Japan has softened. As per Japan Auto Dealers Association, total vehicles sales through July fell 12% against last year.
On the other hand, demand in the U.S. is rebounding, where total vehicle sales jumped 8.5% for the first seven months of the year, as per Autodata Corp. Nissan’s sales for the June quarter in North America were impressive at 34% of total revenue. For Honda Motor Co Ltd (ADR) (NYSE:HMC), 53% of its sales came from North America in June. Toyota Motor Corporation (ADR) (NYSE:TM), in comparison to its domestic peers, saw 31% of its quarter revenue coming from the U.S.
Detroit Three troubling the automaker
Toyota Motor Corporation (ADR) (NYSE:TM) is also witnessing fierce competition from the Detroit Three as the demand for pickups soars. General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) and Chrysler are much stronger than Toyota in the SUV and pickup segments. These U.S. automakers benefit from the resurgence in the housing and construction sector, which is boosting the demand for pickup trucks.
General Motors Company (NYSE:GM) plans to introduce 18 revamped models in the second half of the year to keep sales momentum going. The automaker is working to increase its operating profit margin to 10%. The largest U.S. automaker saw a sales jump of 16.3% by selling 234,071 in July as deliveries of its Impala went up 38% to 12,915 units.
In fact, General Motors Company (NYSE:GM), the largest foreign automaker in China, is giving tough competition to Toyota Motor Corporation (ADR) (NYSE:TM) on the mainland as well. China, which is the fastest-growing auto market, is still not showing enough demand for Japanese cars, resulting in lower than usual sales in the emerging economy. Toyota is recovering in China, but sales have not come back to previous levels. On the other hand, arch rival, General Motors, reported a solid sales increase of 11.1% in China on account of massive demand for its Buick vehicles.
My takeaway
Toyota Motor Corporation (ADR) (NYSE:TM)’s first quarter results are phenomenal and the company is pumped up to manufacture over 10 million vehicles this year. Toyota is expected to benefit from the weaker yen in the near future, as it will be able to produce cars at a more competitive cost. However, its largest overseas market, the U.S., remains more advantageous to its domestic Detroit players, as demand is primarily driven by pickups, which is not an area of strength for Toyota. But, the Japanese auto giant can bank on the retail segment in the U.S., which is seeing some growth now.
China is a tough market, where General Motors Company (NYSE:GM) is gaining ground while Toyota Motor Corporation (ADR) (NYSE:TM) is struggling to regain its position, which was dampened by political unrest. Despite the difficulty, there is slow but steady progress in China, and the company plans to sell 900,000 units this year. Another noteworthy point is that Toyota may have had far fewer deliveries than General Motors, but it made more money. Toyota is known for weathering the storm, from fighting tsunamis to reclaiming the crown as top automaker.
Rahul Chattaraj has no position in any stocks mentioned. The Motley Fool recommends General Motors.
The article This Automaker Finishes First Despite Road Bumps originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
