Toyota looks solid but potential bumps in the road remain

Investors are encouraged by its tight-fistedness; yet expenses remain an issue with no clear indication that they’ll fall

Toyota's RAV4. Japanese firm is in a healthy position but there are issues to bear in mind. Courtesy Toyota
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By the looks of it, Toyota Motor s holding steady, even as other carmakers flail.

But some caution is warranted.

Toyota has consistently outperformed its rivals over the last year as the industry struggles with everything from technology adoption to tariffs. Its shares are down just 5 per cent in the past year, compared with its peers’ average of almost 10 per cent. Some have slumped more than 20 per cent.

On Wednesday, Toyota announced that its automotive division’s operating income rose 1.4 per cent for the 2019 fiscal year, mainly thanks to cost cuts. Still, in an earnings press conference, executives said that the company didn't reach its targets for such reductions this year, and what was accomplished didn’t offset the costs of improving their products. That means the company will continue to find new ways to lower spending – even if that means changing its choice of stationery and pencils, they said. Toyota raised capital and R&D expenditure forecasts for the next fiscal year.

Toyota has maintained a fine balance. Investors are encouraged by its tight-fistedness; yet the company has maintained its expenses at around 80 per cent of net sales for the better part of the last decade, with no clear indication that they’ll fall further. Meanwhile, the costs of its products have risen steadily, albeit at a slower pace in recent quarters.

As conviction about the future of electric and autonomous cars wanes, investors are going back to basics: rewarding cost control and restructurings. Despite General Motors' dismal performance and dearth of future models, the stock is up 6 per cent over the past year – an auto outlier –after it announced big restructuring plans.

Toyota is by no means in as precarious a position as Nissan or others that have announced multibillion-dollar overhauls. Honda on Wednesday reported profits for the year fell and margins shrank, as it reined in and re-jigged car production. But spending is bound to rise and there are no obvious catalysts for future growth to offset them.

The company’s challenges are on full display in the US, where it’s pulling back on buyer incentives and battling Americans’ soft spot for gas guzzlers over bread-and-butter saloons. After dropping every month since November, Toyota’s sales in the US fell another 4.4 per cent, steeper than the overall market’s 1.7 per cent. With buyers flinching at higher prices and interest rates, Toyota may need to start dangling more sweeteners. Rising inventory levels and falling sales could be the catalyst, according to Brad Korner from Cox Automotive.

Competition in China, where the company is doubling down after its late entry to the market, is also rising. Over the past year, Toyota and its Japanese peers have gained some market share  – and executives said sales there will provide a boost. But the world’s largest car market is going through a step change. As it matures and slows, foreign luxury car makers have been offering incentives and lowering prices. If they fall too close to Toyota’s range, that’ll be bad news.

There are signs this is already happening: In China, an Audi A3 is now in the same price range as a Toyota Camry, and Volkswagen’s Tiguan could cost as much as an Audi Q2L, according to Morgan Stanley. That means either prices are being lowered or the company is offering other benefits, like zero-interest loans or replacement subsidies, the analysts note.

Then there are the costs of keeping up: with its joint-venture partner Guangzhou Automobile, Toyota is investing $1.64 billion to expand new-energy car capacity. It has set up a JV with Panasonic to produce batteries.

All of these are good endeavors, but returns aren’t imminent. As Toyota flings money at ventures with Uber Technologies Inc., it seems outlays will outweigh growth drivers for a while.

At its press conference, Toyota executives conceded that they needed to find new ways to cut costs. Even if optimistic investors aren’t banging the table for growth drivers just yet, it may be prudent for the company to have a couple of ideas up its sleeve.