Why We Expect Toyota’s Gross Margin To Keep Increasing

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TM: Toyota Motor logo
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Toyota Motor

Toyota Motors (NYSE:TM) has grown its gross margin over the last five year period (2011-2015) from 22.0% to 29.6%. There are two main reasons behind this:

  1. Toyota’s production process is extremely efficient at managing inventory costs. Since stocking inventory is highly expensive, the company avoids doing so until needed to avoid unnecessary costs. This has traditionally been called “just-in-time” inventory management, a technique long associated with the company.  Given its focus on responsiveness to customers and its emphasis on avoiding waste, it has managed to grow its gross margin even when its revenue declined.
  2. Toyota’s increasing presence in the higher unit price segments of the lucrative North American market. The U.S. is the world’s biggest light truck market and the biggest luxury car market. Toyota has strong presence in both these markets with its SUVs RAV4 and Highlander, and its luxury brand Lexus.

As a result, we expect the company to keep increasing its gross margin in the near term. By the end of 2017, we forecast, its gross margin to cross 30%.

tm gr margin

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Toyota Motor

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