Introduction

Introduction

There are both long-term and immediate concerns.

'All Chinese automakers combined still can't match Toyota!'

This statement first appeared in early May of this year. On May 8, Toyota Motor Corporation released its financial report for fiscal year 2024 (April 1, 2023, to March 31, 2024).

In terms of financial data alone, it was a glowing report—

The company's total profit reached 5.35 trillion yen, with a net profit of 4.945 trillion yen; year-on-year growth rates were 96.4% and 101.7%, respectively. The overall operating profit margin was as high as 11.9%. Converted into RMB at the average exchange rate in May, the net profit amounted to 226.7 billion RMB.

Usually, such positive financial reports from a brand or automaker wouldn't trigger widespread criticism. However, comparison is always a concern in the world. After all, late April to early May is also the period when major automakers concentrated release their previous year's financial reports.

So, when someone compiled the financial reports of China's 18 major automakers from last year and found that their combined profits were less than 50 billion RMB, this kind of comparison was used by many people for various purposes, becoming a 'password' for attracting online traffic.

However, 2024 is unique in that it is recognized as the 'first year of the boomerang effect.' Therefore, when Toyota released its financial data for the second quarter of fiscal year 2025 (July to September 2024, or Q3 2024 by domestic standards) earlier this month, people couldn't help but feel like the boomerang they had thrown half a year ago was coming back in time, straight towards them...

While it's fine to watch the drama unfold, it's childish to get worked up about it. Given the need to analyze and understand the broader trends in the automotive industry today, it is crucial to understand the 'why' behind such anomalies in the financial reports of a company the size of Toyota.

A cliff-like drop in profit margins

Posting lengthy financial reports would be suspected of padding word count, and the clutter of tables and data can be confusing for readers. Therefore, we will focus on the essentials and summaries. Here are the key points—

Toyota's total sales for Q3 2024 were 11.44 trillion yen, equivalent to approximately 535.8 billion RMB based on the exchange rate on November 22, the date this article was written (same below). Notably, this represents an increase of less than 10 billion yen compared to the same period last fiscal year, which can be described as a 'slight increase.'

Toyota's operating profit (profit earned from production and business activities) for this quarter was 1.155 trillion yen, with a profit margin slightly below 10.1%, equivalent to approximately 54.1 billion RMB. It's worth noting that the operating profit margin for the same period last year was 12.6%, a decrease of about 2.5%.

The third part is somewhat perplexing. Toyota reported a net profit after tax of 573.77 billion yen for this quarter, equivalent to approximately 26.937 billion RMB, with a net profit margin slightly exceeding 5%. In contrast, this net profit margin was still 11.2% for the same period last year.

Comparing the two, Toyota's net profit margin in this quarter's financial report dropped by more than 55% compared to the same period last year. In summary, the latest Toyota financial report gives the impression that everything seems fine at first glance when looking only at sales volume and total numbers, but a closer look at profits reveals a sharp decline. This contrast is particularly evident when compared to the data for the second quarter of fiscal year 2025 (Q2 2024) released by Toyota in early August.

After observing the clear phenomenon of a sharp drop in profit margins, let's try to clarify the root of the problem by examining data feedback from different regional markets. In Q3 2024, Toyota's global sales figure for the 'second quarter of fiscal year 2025' was 2.538 million vehicles. This represented a year-on-year decrease of 3.6%, which can be considered a fluctuation rather than a significant drop. The performances in key markets were as follows:

In the Japanese market, sales were 517,000 vehicles, down 4.2% year-on-year, with an operating profit of 639.2 billion yen and a profit margin of 12.0%;

In the Asian market, sales were 469,000 vehicles, down 2.0% year-on-year, with an operating profit of 242.3 billion yen and a profit margin of 10.8%;

In the European market, sales were 256,000 vehicles, down 5.4% year-on-year, with an operating profit of 99.7 billion yen and a profit margin of 7.2%;

In the North American market, sales were 643,000 vehicles, down 8.5% year-on-year, with an operating profit of 27.3 billion yen and a profit margin of 0.6%;

In the 'Other' markets (Latin America, Oceania, Africa, the Middle East, etc.), sales were 420,000 vehicles, with an operating profit of 91.6 billion yen and a profit margin of 8.6%.

Those who have read my previous articles would have a basic understanding of the 'golden days' that Toyota and other Japanese automakers have enjoyed in the US market. Based on the above data, it's evident where the problem lies. Of course, in today's global economy, the issue isn't limited to North America alone.

A 'universal decline' trend in the global market

As we all know, for Toyota, the 'Asian market,' excluding Japan, is essentially the Chinese market. Markets in Southeast Asia and South Asia, regardless of how rapidly they claim to be growing or how deeply they have been cultivated over decades, combined still pale in comparison to the Chinese market.

Within the Chinese market, despite the rise of local brands and the ensuing fierce price wars in recent years, Japanese brands, especially Toyota, have been shouting about the 'wolf coming.' However, due to the active response of Toyota's joint venture automakers and dealers to the price wars, with constant price reductions, their market share loss has actually been minimal.

Moreover, even with such intense price wars, the Asian market (excluding Japan) still has a profit margin of 10.8%. This shows how high the premium of joint venture automakers used to be. However, it also indicates that Toyota faces even greater challenges in its Japanese and European markets, as well as in the North American market, which has long been its main 'cash cow.' It is evident that Toyota's troubles extend beyond the stereotypical impressions of being 'bogged down in the Chinese market' and insufficient efforts in electrification (new energy).

The decline in the domestic market is understandable.

From late 2022 to the entire year of 2023, the Japanese economy was in a rebound cycle following the COVID-19 pandemic. The accumulated demand for car replacements and purchases from 2020 to 2022 was released within about a year. Therefore, this trend could not be sustained after entering 2024.",As for the European market, due to the Russian-Ukrainian war, which has now lasted for more than two and a half years, the resulting surge in European energy prices has exceeded the limit of government economic subsidies for businesses, severely impacting the economy of the entire European Union. The overall weakness of the automotive market is thus entirely understandable.",But what truly stands out is the North American market, which has contributed to the halving of Toyota's financial report profits.

The dual impact of the macro environment and anxiety

Regardless of whether the situation is good or bad, it must comply with the overall economic laws.

The current round of Fed rate hikes, which began in March 2022, continued for two and a half years until the announcement of a rate cut in September 2024. There were six rate hikes in 2022, four in 2023, and one this year, amounting to a cumulative increase of 525 basis points.

Although there was an unusual phenomenon of 'rate hikes stimulating the economy' in the US in 2022 and 2023, everything finally 'normalized' in 2024. The economic overheating trend caused by the US government's money printing and consumption since the COVID-19 pandemic was finally contained. After entering the second half of the year, overall social consumption tended to shrink, and signs of recession became apparent.",Therefore, the decline in Toyota's sales in the US since the second half of this year is simply a reflection of the overall economic trend on sales performance. However, accompanying the significant decline in sales is a simultaneous plunge in profit margins. After all, the North American market has been considered a cash cow for Toyota due to its consistently high profit margins in recent years.",It's worth noting that as of the second half of 2024, it was commonly known among domestic car owners that the 9th-generation Camry Hybrid 2.5HQ Flagship model, with a guide price of 259,800 RMB, could still receive an additional discount of 20,000 RMB upon arrival at the dealership. In contrast, in the San Francisco Bay Area of California until the end of 2023, customers had to pay an additional 3,000 USD (totaling 39,000 USD) to immediately take delivery of the lower-end model of the previous-generation Camry, which came with steel wheels, a plastic steering wheel, and halogen taillights.",However, starting from the first half of this year, as the economic cooling caused by rate hikes began to be reflected in the automotive market, Toyota and its North American dealers also started to take action. They first adopted the successful experience gained in the Chinese market—price reductions and promotions.

Starting from the second half of the year, Toyota changed its sales strategy in North America from its previous model. With support from the brand, dealers at all levels took the initiative to provide more and more promotional measures and offered sales staff higher bonuses and commissions than before.",The basic logic is that, with one of the two traditional pillar markets (China and the US) severely shaken, Toyota hopes to maintain sales volume amidst the economic cooling. This can also be interpreted as trying to grab market share from other brands when the total market is inevitably declining.

As the saying goes, when traveling in a group and encountering a bear in the forest, what should you do if you can't outrun it? The answer is simple—you just need to outrun your companions. The dark humor here is that, due to the high profit margins maintained over the years, Toyota has ample ammunition to engage in price wars in the North American market. Furthermore, with rich experience in price wars gained from the Chinese market, Toyota is adept at this strategy of trading profits for market share...

We have reason to believe that, from the perspective of the overall economic environment, Toyota's profit margin in the North American market will rebound significantly within one to two financial quarters, thereby driving the recovery of its global overall profit margin.

On September 18, 2024, the Federal Reserve announced a 50-basis-point cut in the target range for the federal funds rate to 4.75-5%. This was its first rate cut since March 2022. Then, on the 7th of this month (local time), the target range for the federal funds rate was further reduced to 4.5-4.75%. The two consecutive 50-basis-point cuts mean that the US dollar has officially exited the two-and-a-half-year rate hike cycle.",According to past cyclical patterns, the US consumer goods and retail markets should gradually regain vitality after four rate cuts. Currently, financial markets generally predict that the Federal Reserve may conduct two more 25-basis-point rate cuts in the current month and the last month of this year.",This seems to suggest that Toyota's fiscal year 2025 financial report, to be released in early May next year, should not be very bleak. This is also likely the reason why Toyota only reduced its global total sales forecast for fiscal year 2025 (April 1, 2024, to March 31, 2025) by 100,000 units.",However, the relief brought about by interest rate cuts may be offset by another political risk. After a four-year hiatus, the 'Twitter King' is set to 'return like lightning.' Although this 'new' president has always supported low-interest-rate policies for the US dollar and may even force the Federal Reserve to shorten the interest rate cut cycle after taking office, his 'America First' economic policy and appointment of the CEO of Tesla, a competitor of Toyota, as a senior government official make it difficult to be optimistic about Toyota's business fundamentals in the US over the next four years.

As we stand at the end of this tumultuous year of 2024, even for a global company like Toyota, the difficulty of navigating its future is on the rise.

However, one thing is certain. No matter how difficult the road ahead is, this Japanese auto giant still has to overcome all difficulties and make up for its shortcomings in the field of new energy vehicles.

But there is not much time left for Toyota.