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Monday, February 10, 2014

Toyota's Profits, Nissan's Lack

One year ago – 2012Q4 that is – Toyota lost money in North America, and made only modest amounts of money in Japan. Today is much different, in contrast to Nissan. Bloomberg nails the source: the yen boom.

Yes, the Japanese economy and the US economy are both doing better, and so therefore should Toyota. But others were profitable in the US in late 2012, and Toyota has not gained market share. My scan of Toyota's financial statements (with glances at those of Ford and GM) suggest the entire gain is due to a more favorable exchange rate. (I have yet to look at the reports of stock analysts to see their take.)

From Toyota's perspective this should be a cautionary tale. They now are rolling in profits, and have the opportunity to continue a restructuring pushed by Akio Toyoda, the firm's near-eponymous chairman. But it does suggest two big problems.

The first is that Toyota is not making substantial money on its North American operations – otherwise it would not have lost money last year. Yes, they have a good market share, but they face competition in key segments and are weak in light trucks (and then there's the failure of their full-sized pickup to gain sales commensurate with investment). Their lack of profits suggests these are major, not minor issues.

Do Toyota's vaunted cost controls no long provide them a competitive advantage?

The second is that Lexus remains their cash cow – which is primarily a US story – but the vehicles themselves come from Japan. When the yen was strong, Lexus lost money. With the weaker yen, that shifted dramatically (though not immediately since Toyota hedges their dollar receipts).

So Toyota needs to improve the bottom line on their US operations. That's surprising, suggesting that their vaunted cost controls are no long providing them a competitive advantage. Second, they need to move away from the yen cost basis on their most profitable products. Otherwise when the yen next strengthens profitability will again collapse. Given that the "cycle time" in the auto industry for realigning what is made where is measured in 4-6 year increments, they had better get moving.

Mike Smitka

Oh, and I did put Nissan in the title, but haven't looked at their financials. But as a quick cut, reverse the above logic: they're not booming because they've successfully aligned their cost base with their revenue base. Instead Nissan's profits will reflect markets strengths, not forex swings.