The light at the end of a dark tunnel for Toyota Motor Corp. is not as bright today as Goldman Sachs Japan analysts found it last February.

A recent 28-page study summing up the auto maker’s current plight is headlined “A sleeping giant – Toyota re-rating delayed; Nissan still top pick” and underscores the difficulties the company is having to recover lost ground and raise lower rankings.

Although the former global automotive leader has shown signs of some profit improvement, the GSJ analysts report Toyota “is lagging domestic and foreign peers in recovery.”

Their expectations for a return to better times for the auto maker any time soon have been dimmed.

For example, they foresee global automotive sales expanding at a much faster pace in the future than the 2.6% average annual growth rate of the past 20 years, estimating year-on-year gains of 9% to 69.2 million units in calendar 2010, 8% to 75 million in 2011 and 8% to 80.7 million in 2012.

Yet Toyota’s global sales, down 15% year-on-year to 7.567 million units in the fiscal year ending March 2009 and off 4% to 7.237 million in fiscal 2010, are expected to be far behind the overall industry pace, rising only 3% to 7.451 million in the current fiscal year.

GSJ predicts another 3% gain to 7.684 million in fiscal 2012 and a 5% increase to 8.039 million in the year ending March 2013.

The pattern varies, with continued softness in the company’s three main markets, the U.S., Japan and Europe, traditionally the main source of sales and profits.

Conversely, GSJ analysts report “Toyota has preserved robust earnings in Asia” (excluding Japan) and say “the region will continue to be a driver of Toyota’s consolidated earnings.”

They note the company has dominant market shares in Thailand and Indonesia, “but still faces many challenges in India, including upgrading its sales network.”

In the slowly shrinking home market, Toyota is expected to remain firmly in place as the sales leader, yet operating losses in Japan in fiscal 2009 and fiscal 2010 are expected to continue, with the company’s operating margin estimated at -5% from now through fiscal 2013.

Europe is another black hole for Toyota. Sales sank from 1.284 million units in fiscal 2008 to 858,000 in fiscal 2010 ended last March and are predicted to bottom out at 723,000 in fiscal 2012 before edging up to 741,000 the following year.





Toyota Outlook
2008 2009 2010 2011* 2012* 2013*
Unit Sales 8,913 7,567 7,237 7,451 7,684 8,039
Operating Profit ¥2,270 -¥461 ¥147 ¥430 ¥430 ¥670
Note: Shown are fiscal years ending March 31 of year indicated. Unit sales are worldwide in thousands. Operating profit in billions. *Forecast Source: Goldman Sachs Japan

Toyota’s operating profits in this area ceased in fiscal 2008, replaced by operating losses in the next two years, and Goldman Sachs analysts estimate continued red ink this year through fiscal 2013.

They believe a Toyota sales revival hinges on product strategy in North America and China, identifying the catalysts as the mid-2011 North American Camry launch and an entry-level family car for China in 2012-2013.

Sales in North America, mainly the U.S., were 2.098 million units in fiscal 2010, 30% (860,000 units) below those two years before, but the analysts foresee a rise from this bottom to 2.544 million vehicles by fiscal 2013.

“One of the most serious issues for Toyota at present is the mismatch between the production and sales mix, with its North American production ratio at only 50% versus 90% for Honda (Motor Co. Ltd.) and 80% for Nissan (Motor Co. Ltd.),” the report says.

The authors add that “the strong yen eroded margins on models imported from Japan, and stepped up sales incentives offered since the recalls have also dented sales’ profits.”

  • Operating profit sensitivity to a one yen movement against the U.S. dollar is estimated at ¥30 billion ($375 million) for Toyota, ¥15 billion ($187.5 million) for Honda and ¥14 billion ($175 million) for Nissan.
  • Toyota’s under-performance in profit margin stems from weak sales volume rather than foreign exchange or costs.
  • ;Sales mix/incentives are a key factor in the difference between Toyota and Honda profits. Likely explanations include an increase in incentives prompted by the North American recalls, deterioration in the regional and product mix due to weak sales in the high-margin North American market, and sluggish Lexus sales.
  • Toyota is pursuing a variety of cost-cutting measures to maintain domestic production (about 3.2 million units) and turn a profit at an exchange rate of ¥80/$1 but seems to be still affected by recalls as sales continue to slump, especially in North America.
  • Operating profits in the current fiscal year from financing will be ¥290 billion ($3.62 billion), twice those from automotive and other company business and two-thirds of Toyota’s global total, a dramatic shift from 3% of that total in fiscal 2008.

In China, Toyota’s market share hovers modestly between 6% and 8%. Part of the reason, according to the study, is that “sales of the Yaris, originally designed for developed markets, are running well below original plans.”

Although the company’s product strategy for emerging markets, especially for high-growth potential China, has trailed that of rivals, the analysts expect “the full-fledged start-up of entry family car models there may well mark a turning point” for the company’s emerging markets sales strategy.

Other pertinent points in the GSJ study:

GSJ analysts “do not expect any near-term recovery” for Toyota but believe the company’s earning power gradually will recover from the second half of fiscal 2012 “when it has won back enough U.S. market share to move the needle and further trimmed the cost of goods sold.”

Yet, estimated operating profits in fiscal 2013 will remain a shadow of performance five years earlier.