By on November 5, 2010

When GM was in its final throes (about 2000 onwards) it was quite easy to see that GM would go under. Even though they were posting records profits, anyone but the shills knew that these profits came from the SUV boom and not from any long term sustainable plan. That’s fair to say, right? So now let’s move to Toyota. The cry I hear, these days, is “Toyota is the new GM! Toyota is the new GM!” (Why people have to say things twice, I’ve no idea. I’m not deaf, just stupid.) And there is certainly some evidence to suggest that. Piling on the incentives, suspect quality, etc. But then something comes along which, seemingly, blows that theory out of the water.

The BBC reports that Toyota is announcing massive profits for the second quarter (about the height of the witch-hunt). Toyota earned for the period of July to September (Toyota’s fiscal year goes from the beginning of April to the end of March) 98.7b Yen. That’s about $1.222b. Toyota was so bullish about this profit that they raised their profits forecast (again) to 380b Yen, which is about $4.7b.Toyota’s executive vice president, Mr Satoshi Ozawa, did give the customary warnings about the strong yen and also said of a “very tough business environment, characterized by the radically and seriously appreciated yen in recent months, the risk of slowdown in demand recovery in the United States and Europe and falling demand following the end of the eco-car subsidies in Japan.”  The only area he didn’t mention was India and China, the two markets which Toyota were weak in.

When I read this story, I just couldn’t believe it. Where did those profits come from? So I went to Toyota’s official website to dig a little deeper.  On it, it gives a breakdown of where the profits came from.

In Japan, operating loss improved by 205.7 billion yen, to a loss of 52.0 billion yen.”

Ok, so the profits didn’t come from Japan.

In North America, operating income increased by 119.0 billion yen to 145.9 billion yen, including 9.8 billion yen of valuation losses on interest rate swaps. Operating income, excluding the impact of valuation losses from interest rate swaps, increased by 143.7 billion yen to 155.7 billion yen. The increase was due to improved earnings from the financial services segment.

OK, some of the profits came from North America.

In Europe, operating loss improved by 9.7 billion yen, to a loss of 8.9 billion yen.
Operating income in Asia increased by 98.8 billion yen, to 164.2 billion yen.
In Central and South America, Oceania and Africa, operating income increased by 32.3 billion yen to 72.9 billion yen..

So, losses in Europe, unsurprisingly, and increased income from Asia and the rest of world is good news. But where did the majority of their profits come from? Then the answer comes in the next paragraph.

In the financial services segment, operating income increased by 59.3 billion yen, to 183.7 billion yen compared to the same period last fiscal year, including 0.4 billion yen of valuation losses from interest rate swaps. Excluding these valuation losses, operating income increased by 76.6 billion yen to 184.1 billion yen. This was thanks to our better-than-expected used car pricing that resulted in a decrease in our loan-loss and residual-loss related expenses, partially through reversal of the relevant provisions as reported for the first quarter as well as an increase in our lending balance following reinforcement of our financing programs.

Toyota’s financial services are going great guns! Just like another company, before its bankruptcy… Now, as long as you don’t write mortgages for houses, financial services always have been like printing money for a car company.

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21 Comments on “Toyota’s Profits. Whodunnit?...”

  • avatar

    It’s kinda sad when a car company makes its profits from financial wheeler dealing, not from making vehicles.

  • avatar

    Cammy, I’m not worried about Toyota, yet.  GM had massive legacy costs of keeping open old plants and supporting a large population of retirees.

    Over here at least, they still have time and cash to update their products before the US economy turns around.  China will be touch and go due to local politics.  Southeast Asia should provide some growth. India may provide some room for growth. The Euro-zone not so much.
    If they go the GM route, it will be because they wait too long provide fresh new product.  Witness the growth of Hyundai in the US, some of which is coming out of Toyota’s market share.

  • avatar

    I read previously that Toyota had the highest credit rating of any auto manufacturer, BMW being very close AAA rating.  Ford, GM and Chrysler were rated BBB or lower.  One thing that gets me is that the U.S economy is in tatters, so many foreclosures, repossesions etc.. and you’re still able to buy a car 6 months down the road.  Not in Canada. You have a car repossessed and its 7 years before anyone looks at you.  You can’t walk away from Mortgages here either.  A good friend of mine sells Ford very close to the Oakville plant, he basically said Ford won’t turn away anyone these days, so… it seems that Ford, maybe others are taking on credit risks repeatedly to move sheet metal. 
    P.S Hyundai is growing exceptionally lets not be fooled,  But Toyota sells more Camrys than what Hyundai sells combined in the U.S.

  • avatar

    The strong yen helps Toyota in its financial department, they have good credit and they have cash, and more importantly cash denominated in yen.  Lending in dollars is cheaper for Toyota.
    A lot of the gains would be lost by exporting Japanese-made cars, but Toyota builds most of the cars sold in North America in North America, same deal in Europe, and Asia.  They are built near the region it is sold.  So Toyota can lend in yen, build in dollars.  The issue for Toyota becomes profit-taking of dollar denominated currency, and its timing.  But the fact that their Japanese sales are profitable, and is a consistent revenue in yen, it gives them a lot of flexibility.

    • 0 avatar

      Just another argument to kill Scion.  It’s a dead brand walking as it stands and all of the models are built in Japan.  With the Yen right around 80, and margin on the Scion lineup thin as it is, this has to be a huge money suck.  Never mind the advertising and branding money spent, LEAN company or not.

    • 0 avatar

      Scion doesn’t necessarily require the cars to be built in Japan.  In fact, cars like the xB have little resemblance to their Japanese bB cousin, and the tC has no JDM equivalent.  Scion’s aren’t built in the US due to their low-volume that doesn’t justify US production.  Toyota has major expansion plans in Mexico and Thailand, in the future we may see Scion’s being imported from there.
      But Scion as it stands is a quirky brand where Toyota dumps lower volume cars.  Scion, existing completely within the Toyota dealer network, doesn’t need to be an independent brand like a classic Detroit sub-brand (Pontiac, GMC, Saturn, etc.).  The pressure for it to be self-sufficient is minimal.

  • avatar
    John Horner

    “The increase was due to improved lending margins as a result of a declining funding cost and decreased expenses relating to loan losses and residual losses mainly in North America.”
    In other words, the absurdly low interest rates that the US’ Federal Reserve has mandated in the US continues to mean that savers get nothing in return for their savings while lenders continue to make huge profits from lending that money back out to borrowers. Toyota is making money for the same reason the big banks are. Savings accounts pay 0.1% to 0.25% while auto loans cost customers 6% to 16% depending on their credit rating.

    • 0 avatar

      Exactly why I paid cash for my wife’s Lexus a year ago. Auto financing is just robbery. However, once inflation comes down in earnest, borrowing is going be a very good deal again… if you can finance anything at that point.

    • 0 avatar

      On the flip side… it costs manufacturer’s financial services a “boatload’ of money to subsidize rates.  Buying down a rate to 0% doesn’t make a manufacturer profitable either.

    • 0 avatar

      @Pete Z,

      What inflation?  At least in the U.S. we’re at a point where inflation is so low to non-existent that the Federal Reserve has embarked on a new round of quantatative easing (i.e., flooding the market with more dollars) in the hope that doing so will 1) cheapen the dollar – thereby enhancing exports – and 2) lower interest rates past their already low, low levels – thus driving up asset prices.  If this works, and inflation goes UP (not down) now is the time to borrow.  You will lock in a low interest rate AND get to pay the loan back with cheaper dollars.  However, if it doesn’t work and we end up with Japanese levels of deflation, now is not such a great time to borrow.  You will still have a low interest rate, but will end up paying back the note with dollars that are worth more than they were at the time the loan was taken out.

    • 0 avatar

      Generally, banks are not lending much, because no one is borrowing much.  The Fed’s low interest policy along with QE is not geared toward consumers per se, one way or another, but is rather an attempt to devalue an already weakened dollar in order to boost whatever exports might be available.   The fact that you can’t get high interest from the bank is simply a side-effect of it all.  Why should a bank pay a saver high interest when it’s sitting on massive (federal) reserves they could (but are not) lending?
      If Toyota’s profit (or lack of operating loss) is due to interest rate derivatives, then selling cars is not part of the formula.

    • 0 avatar

      Give me a 0% car loan or I’ll just give you the cash and call it good; but you basically nailed it.  Toyota can loan from Japan, the United States or anywhere else at incredibly low interest rates and then charge some downright scary terms.

      Scion dealers post the up-to-date finance rates and brackets on their websites, no secret sauce, it’s all there to see.

      They’ve raised the bar recently, Toyota was writing paper earlier this year down to FICO 540; now you need 579 or better.  But Toyota will happily sell you a new 2011 tC, let you finance it for 84 months, and if your credit is in the toilet, charge you 23.26% interest.  I hope they kiss you while you’re getting…well…you know.

    • 0 avatar

      @HoldenSSVSE, That is downright frightening.  “Subprime lending problem?  What subprime lending problem?”

      @mpresley, Banks are sitting on those huge (federally sourced) capital reserves because they still haven’t fully marked down their bad assets and loans.  They’re hoping to ride it out with the cash cushion and slowly mark down the assets against the cash positions and/or hope against hope that the economics turn in their favor and lead the value of the assets to come up to their marks.  Zombie banks are wonderful institutions, eh?

  • avatar
    head clinic

    Cammy, I think you read last years 2nd Qtr earnings report ending in Sept 2009!  You may want to refer to the current earning report which indicates North America actually increased operating income with some help from improved vehicle sales:

  • avatar

    Save for your retirement!!!!!!!!
    If you even have a job.

  • avatar

    I think there’s an error with this story.  For Toyota, FY2010 is the period April 2009 – March 2010.  Therefore, this article is citing last year’s results.  Please refer to FY2011 report for your story!!

  • avatar

    I’m sure they same some on slave labor in other countries too and financial wheeling and dealing just adds frosting to the cake.

  • avatar

    For the record, I do not like Toyota.  While there quality slipped to levels that is still better than many compainies, it slipped non the less.  Toyota has made efforts to improve even more.  If I was an auto company, I would be very afraid.  They are still well managed, and only getting better.  Toyota will be a major car company for the nest fifty years, GM no.  GM has learned little or nothing from there problems.

    • 0 avatar

      If they were well managed, one of the worst corporate PR disasters in modern economic history would have never happened.  They are apparently so well managed that GM will be the top car maker by production for 2010; so Toyota sat on top for all of one year.
      Who was the first importer to sell two-million cars in a single year in China?

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